CASH is considered among the hardest assets for a company to fake, which is why the disappearance of a combined US$6.1 billion from two Chinese companies has dumbfounded investors and forced regulators to take action.

Drugmaker Kangmei Pharmaceutical Co., a constituent of MSCI’s global indexes, in April said an “accounting error” led it to overstate cash in 2017 by 29.94 billion yuan (US$4.4 billion). This month, Kangde Xin Composite Material Group Co., a producer of high-polymer materials, said its auditor could find no trace of the 12.21 billion yuan that it said it held in a bank deposit.

Regulators are investigating both cases and neither company has offered detailed explanations for the missing billions.

Weak governance has long been a black mark against China’s listed companies. Yet these cases have still stunned many investors as they involve straightforward cash, and because the sheer size of the disappearances is equivalent to more than half the two groups’ combined market capitalization before they disclosed the issues, triggering calls for tougher punishment for any corporate wrongdoing.

“If you tell me fish in a pond disappeared, I probably would buy the story... Tens of billions of deposits missing, that’s a bit unthinkable,” said Liu Enqi, vice head of Bank of Nanjing Co. “If such things happened in the United States, someone would be jailed.”

Pan Jiang, chief executive officer of asset manager Shanghai V-invest Co., said the cases were “beyond description.”

“If regulators just let bad guys walk away, it would be a huge blow to investor confidence,” he said.

Officials appear to be listening. China’s top securities regulator, Yi Huiman, told a conference May 11 that “those who did bad things must pay the price.” The chairman of the China Securities Regulatory Commission (CSRC) also vowed to tighten scrutiny of corporate governance and push for tougher punishment.

Shi Donghui, a senior researcher at the Shanghai Stock Exchange, at a seminar this month said the bourse would “resolutely” delist any companies found to have seriously violated disclosure rules.

Accounting issues take place the world over. When it comes to manipulation, common ploys include inflating asset values, faking customers and overstating money owed. Companies also face more straightforward crimes such as theft.

But cash, sitting in bank accounts, is low on that list. Any big-sum cash fraud would be tough to pull off without help from bankers or auditors, said accounting consultant Ma Junsheng.

Rose Zhang, a partner at Zhong Xi, an accounting firm that audits more than 25 China-listed firms, said collusion was likely in cases of disappearing cash because “it is impossible for deposits to vanish out of the blue.”

Kangmei disclosed its issue April 30 and has said almost nothing beyond its initial diagnosis of “accounting error.” It said China’s securities watchdog was investigating the matter. Kangmei’s auditor GP Certified Public Accountants was also put under investigation, according to media reports and the auditor.

Kangde Xin also disclosed a CSRC probe. In a series of statements this month, it said it did not exclude the possibility that its cash was appropriated by controlling shareholder Kangde Group. It also said it was seeking to sue deposit holder Bank of Beijing Co. Kangde Group’s chairman, Zhong Yu, has been detained, the police said in a separate statement.

The scale of the incidents has sparked calls for China to crack down on corporate wrongdoing.

Under securities law, a listed company that makes false disclosure can be fined up to 600,000 yuan, while the criminal law states those who conceal or intentionally destroy accounting records can be imprisoned for up to five years and fined up to 200,000 yuan.

“The amount of the fine cannot adequately compensate investor losses caused by corporate fraud,” said Xie Lianjie, a partner with Beijing Yingke Law Firm Shanghai Office. His team was contacted by more than 100 investors who lost money in the two stocks following the missing money disclosures. (SD-Agencies)