In some lawsuits, specialized financial and tax issues are directly related to the outcome of the case. Once professional opinions are involved, their conclusions often become the focus of dispute between the parties. Without professional knowledge and corresponding litigation experience, the parties and their attorneys can only talk in generalities, failing to address the key points and making it difficult for the court to accept their arguments. Based on the experience of the financial and tax team in initiating judicial accounting appraisals and cross-examining audit reports in shareholder and partnership dispute cases, the author clarifies the rights and wrongs in combination with judicial precedents, with a view to jointly learning and improving the response skills to financial and tax "professional opinions" in litigation. Due to the limitations of knowledge, please forgive any inappropriate views in the article.

Last time, we learned what "judicial audit," which is often on our lips, actually is and what role it can play in litigation. In this issue, we will analyze with cases why judicial accounting appraisal and audit cannot be confused.

1. The two are professional judgment activities of different nature

Judicial accounting appraisal refers to a judicial litigation activity in which, in order to find out the facts of a case, personnel with professional knowledge are assigned or hired to use specialized knowledge of auditing, accounting, and law to inspect relevant financial accounting materials and related materials in the case, identify and judge relevant financial accounting issues, and provide appraisal opinions.

An audit or special audit is an assurance engagement in which a certified public accountant can obtain reasonable assurance, which refers to the certified public accountant making a conclusion on the subject matter information to enhance the degree of trust of the intended users other than the responsible party in the subject matter information. It is a social economic supervision, attestation and evaluation activity based on the separation of ownership and management rights for the purpose of establishing the relationship of entrusted economic responsibility.

Although both can independently express professional opinions in litigation, judicial accounting appraisal belongs to judicial litigation activities and can only be initiated by judicial organs and act as the client. The judicial accounting appraisal engagement letter is a litigation document, and the appraisal opinion made belongs to the statutory evidence category; while audit or special audit belongs to economic evaluation activities, and the client can be any expected user of accounting information, including judicial organs. The audit engagement letter belongs to the category of economic contracts, and the evidentiary effect of the audit report made in litigation is uncertain.

2. The standards and norms on which they are based have different focuses

The main purpose of an audit is to enhance the degree of trust of the intended users in the relevant information of the audit object. The audit opinion generally involves whether the financial statements are prepared in accordance with the applicable accounting standards and relevant accounting system regulations, and whether they fairly reflect the financial status, operating results, and cash flow of the audited entity in all material respects. Therefore, its basis is relatively concentrated on industry norms and business standards, mainly involving the "Accounting Law of the People's Republic of China", "Auditing Law of the People's Republic of China", "Certified Public Accountant Law of the People's Republic of China", "Enterprise Accounting Standards", "Small Enterprise Accounting Standards", "Basic Standards for Chinese Certified Public Accountants Assurance Engagements", and "Chinese Certified Public Accountants Auditing Standards".

The main purpose of judicial accounting appraisal is to verify, validate, calculate, and judge the accounting data and assets involved in the case, so as to find out the specialized financial accounting issues in economic disputes, administrative litigation, criminal litigation, including disciplinary inspection and supervision cases, and provide financial factual evidence for correct handling and judgment. In addition to implementing relevant financial and accounting laws and regulations and standards, judicial accounting appraisal shall also comply with the "Criminal Procedure Law", "Civil Procedure Law", "Administrative Procedure Law", "Decision of the Standing Committee of the National People's Congress on Issues Concerning the Administration of Judicial Appraisal", "General Rules of Judicial Appraisal Procedures", "Classification Provisions on the Practice of Judicial Appraisal (Trial Implementation)", "Detailed Rules on the Work of Judicial Accounting of the People's Procuratorate (Trial Implementation)", "Provisions on Several Issues Concerning the Review of Entrusted Appraisal in Civil Litigation of the People's Court", "Regulations on the Administration of External Entrusted Judicial Appraisal of the People's Court", "Interim Regulations on the Work of Judicial Appraisal of the People's Court", etc. Compared with audit business, judicial accounting appraisal highlights its judicial litigation attributes more.

3. The rigor of the execution procedures varies

1. From the perspective of the qualifications that should be possessed, being able to do auditing does not necessarily mean being able to do judicial accounting appraisal. According to the "Measures for the Practice Permit and Supervision and Administration of Accounting Firms", two qualified certified public accountants can establish an ordinary partnership accounting firm as partners. When carrying out audit business, one person implements it and the other person reviews it, and the two certified public accountants sign and seal the audit report. According to the "Decision of the Standing Committee of the National People's Congress on Issues Concerning the Administration of Judicial Appraisal", if a legal person or other organization applies to engage in judicial appraisal business, each judicial appraisal business shall have three or more appraisers; the "General Rules of Judicial Appraisal Procedures" clearly stipulates that for the same appraisal matter, two judicial appraisers shall conduct the appraisal, and the judicial appraisal institution shall designate personnel with corresponding qualifications to review the appraisal procedures and appraisal opinions. In addition, audit business does not require professional technical titles, while judicial accounting appraisal requires at least one appraiser to have a relevant senior professional technical title once re-appraisal is involved.

2. From the perspective of the standardization of obtaining test materials, judicial accounting appraisal is more strict. The test materials required for judicial accounting appraisal must be provided by the client. The appraisal institution and the appraiser shall not obtain materials through their own investigation or privately receive materials provided by the parties as the basis for appraisal. With the consent of the client, no less than two judicial appraisers can go to the site to extract appraisal materials, but the personnel designated or entrusted by the client shall be present to witness and sign on the extraction record. The source of audit materials can be provided by the client, the audited entity, or obtained by the auditors themselves. It is only necessary to register and sign for the extraction of relevant materials, and there are no restrictions on the identity of personnel and the witnessing procedures.

3. From the perspective of the methods of carrying out business, judicial accounting appraisal cannot adopt audit methods that reflect the principle of importance. Certified public accountants can widely apply audit sampling techniques to improve efficiency and save audit resources in accordance with the principle of accounting importance. Since the requirements for evidence in judicial accounting appraisal are higher than those for certified public accountant attestation, the methods often used in auditing, such as inventory supervision, correspondence verification, and sampling, cannot be applied in judicial accounting appraisal, but should follow the principle of empirical evidence, and mainly adopt specialized appraisal methods based on detailed investigation, such as the track tracing method, the comparison and identification method, and the balance analysis method.

4. From the perspective of the requirements for the quality of test materials, the acceptance criteria for judicial accounting appraisal are more stringent. Once the conclusion of judicial accounting appraisal is adopted, it becomes litigation evidence, so it must have the characteristics of uniqueness and exclusivity like other litigation evidence, and be sufficient and conclusive. For test materials that are insufficient, incomplete, and cannot be supplemented, the "General Rules of Judicial Appraisal" clearly stipulates that they shall not be accepted or the appraisal shall be terminated; while audits can still be accepted for insufficient and incomplete data, but non-unqualified opinions are issued in the audit report.

4. The ways of making evaluations are different

First of all, The two have different types of conclusions. Judicial accounting appraisal conclusions have two types: affirmative or negative appraisal conclusions, and appraisal conclusions that cannot be affirmative or negative; audit report types are divided into four types: unqualified opinion, qualified opinion, adverse opinion, and disclaimer of opinion.

Secondly, The focus of the conclusion report is different. From the content point of view, the judicial accounting appraisal opinion includes the name of the agency that commissioned the judicial accounting appraisal, the date, content, and number of the appraisal decision, a brief introduction to the case of the appraisal case, and the issues to be resolved and the circumstances to be investigated through the judicial accounting appraisal. The inspection and demonstration content of the provided appraisal materials and the appraisal methods used are more detailed. The appraisal opinion should be stamped with the seal of the appraisal agency, but there is no provision for the signature of the appraiser; while the content of the audit report on the inspection and demonstration is relatively concise, but highlights the responsibilities of the client and the certified public accountant. In addition to being stamped with the seal of the audit agency, the audit report also needs to be stamped with the personal seal of the certified public accountant.

Thirdly, The requirements for fulfilling judicial obligations are different. When the appraisal opinion is to be used as evidence, the appraiser has the obligation to participate in court cross-examination and investigation and explanation. If he fails to appear in court without justified reasons, the appraisal opinion will lose its evidentiary qualifications; while the audit conclusion, as a professional opinion, does not affect the validity of the audit report itself whether the certified public accountant appears in court or not. As for whether the auditor needs to appear in court to respond to questions, whether the audit report can be used as evidence, and how to use it, the court shall judge according to the specific circumstances of the trial.

V. Relevant judicial opinions

In the case of Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun's contract dispute, the main basis for the plaintiff's lawsuit is the 'Audit Report' made by its unilateral commission to an accounting firm to conduct a special audit. This case has gone through initial partial support in the first instance, remand for retrial in the second instance, complete rejection in the first instance after remand, upholding of the original judgment in the second instance, and rejection of the application by the retrial ruling. The attitudes of the courts at all levels towards the evidentiary effect of the 'Audit Report' in the lawsuit have changed by 180 degrees. The relevant comments are as follows:

The court of first instance in the original trial held that: The plaintiff provided an audit report issued by a nationally recognized audit department to support its claim. Although the defendant did not approve it, it did not provide sufficient rebuttal evidence to prove it. The probative force of the audit report provided by the plaintiff was significantly greater than the defendant's rebuttal opinion. Therefore, the court adopted the evidence provided by the plaintiff.

The court of second instance in the original trial held that: Because the parties submitted new evidence in the second instance, which may cause changes in the facts found in the original judgment and affect the substantive handling of the case, but it does not belong to the error of the original judgment, the ruling is remanded for retrial.

The court of first instance in the retrial held that: Shui Yu Zheng Feng Co., Ltd. provided the 'Audit Report' made by a professional audit institution commissioned by it before the lawsuit to support its claim. The financial accounts on which it was based were not verified with Wang Linyun. The professional audit institution also believes that Shui Yu Zheng Feng Co., Ltd. has not strictly implemented the financial system, and there is confusion between the company's account and the legal representative's account, and there are large amounts of funds with its controlled related companies that cannot be verified. Therefore, the company's financial accounts can no longer reflect the true financial status of the disputed project. The 'Audit Report' is not an appraisal conclusion. The audit results made by the 'Audit Report' based on the company's financial accounts cannot be used as evidence to determine the case, either in form or in content. The probative force of the 'Audit Report' will not be adopted in accordance with the law.

The court of second instance in the retrial held that ： The Yichang Changjiang Accounting Firm Co., Ltd. issued the Yichang Changhui Si Cai Zhuan Shen Zi (2015) No. 527 'Audit Report' is a conclusion drawn by Shui Yu Zheng Feng Co., Ltd. commissioning an audit institution before the lawsuit to conduct a special audit for a specific purpose. It is not an appraisal opinion put forward by a qualified appraiser on the specialized issues of ascertaining the facts during the litigation process, and cannot be used as evidence to determine the facts of the case in accordance with the law. Shui Yu Zheng Feng Company believes that the 'Audit Report' is a judicial appraisal opinion. If Wang Linyun has any objection to the appraisal conclusion, he should apply for a re-appraisal. In the case where the court of first instance has already explained this matter to the parties, Shui Yu Zheng Feng Co., Ltd. has not provided other evidence to further prove it, nor has it applied to the people's court to collect evidence or file an appraisal application. Shui Yu Zheng Feng Company's claim that the court of first instance violated the rules of evidence, confused the relationship between the evaluation report and the judicial appraisal, resulting in its loss of judicial relief and the burden of proof has not been completed, lacks factual and legal basis, and this court will not support it.

The retrial court held that: Regarding the issue of the 'Audit Report', the original trial court has already explained to Shui Yu Zheng Feng Company the relevant circumstances under which the 'Audit Report' cannot be directly adopted. Shui Yu Zheng Feng Company did not apply to the court to collect evidence or file an appraisal application, and should bear the corresponding legal consequences.

In the next issue, let's talk about whether the business of judicial accounting appraisal and tax judicial appraisal needs to be approved and registered by the judicial administrative organ. Please pay attention.

1. Civil Judgment of First Instance of Contract Dispute between Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun (2016) E 0502 Minchu No. 617

2. Civil Ruling of Second Instance of Contract Dispute between Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun (2017) E 05 Minzhong No. 2019

3. Civil Judgment of First Instance of Contract Dispute between Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun (2017) E 0502 Minchu No. 2071

4. Civil Judgment of Second Instance of Contract Dispute between Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun (2018) E 05 Minzhong No. 1576

5. Civil Ruling on Retrial Review and Trial Supervision of Contract Dispute between Hubei Shui Yu Zheng Feng Energy-saving Stove Co., Ltd. and Wang Linyun (2018) E Minshen No. 3648