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. In the previous issue, we introduced the specific differences between auditing and forensic accounting. This issue focuses on the implementing entities of forensic accounting and tax forensic identification. If they are not within the scope of the 'National List of Judicial Appraisers and Judicial Appraisal Institutions' published by the judicial administrative organs, and have not obtained the 'Judicial Appraiser Practice Certificate' and 'Judicial Appraisal License', can they be used as valid defenses to shake the legality of the appraisal opinion? Let's explore this with a case.

The 'Decision on Issues Concerning the Administration of Judicial Appraisal' (referred to as the 'Decision'), passed by the Fourteenth Meeting of the Standing Committee of the Tenth National People's Congress, officially came into effect on October 1, 2005, and was revised after deliberation at the Fourteenth Meeting of the Standing Committee of the Twelfth National People's Congress on April 24, 2015. As a guiding document in the field of judicial appraisal, the promulgation and implementation of the 'Decision' is of great significance for standardizing judicial appraisal work towards orderly, legal, and scientific development, ensuring judicial fairness, and improving litigation efficiency.

I. The 'Decision' unifies the understanding of the nature of judicial appraisal activities

China's judicial appraisal system has gradually formed in more than 50 years of judicial practice after the founding of the country. For a long time, there have been different understandings of the nature of judicial appraisal, both in the practical and theoretical circles. Some believe that appraisal is an important means of investigation and detection and is part of the investigation work; others believe that appraisal is part of the court's trial function, and courts at all levels should establish appraisal institutions.

In order to clearly define the nature of judicial appraisal, Article 1 of the 'Decision' stipulates that: Judicial appraisal refers to the activity in which appraisers use science and technology or specialized knowledge to identify and judge specialized issues involved in litigation activities and provide appraisal opinions. China's three major procedural laws all stipulate that appraisal opinions are one type of evidence. The independent appraisal conducted by the investigation authority in criminal proceedings to discover crimes and verify crimes, the appraisal applied for by criminal suspects, defendants, and defenders, or the appraisal entrusted by the parties in civil and administrative proceedings, all aim to obtain relevant evidence, and are all activities in which appraisers use science and technology or specialized knowledge to inspect, identify, and judge a specific specialized issue. This activity is neither an administrative act nor within the scope of prosecutorial and trial powers. The 'Decision' stipulates that except for the appraisal departments established internally by the investigation authority to provide technical appraisal support for investigating crimes, other institutions engaged in judicial appraisal business should be independent of the trial organs and judicial administrative departments. The scope adjusted by the 'Decision' is the appraisal in 'litigation activities', including appraisal in criminal, civil, and administrative proceedings, while the appraisal of arbitration cases and other daily life appraisals do not fall within the scope of judicial appraisal and do not need to apply the provisions of the 'Decision'.

II. Financial and tax judicial appraisals should also meet the subject conditions stipulated in the 'Decision'

As mentioned above, participating in the appraisal business in 'litigation activities' should comply with the provisions of the 'Decision'. Therefore, personnel and institutions engaged in forensic accounting and tax forensic identification should, on the one hand, comply with the relevant regulations and industry norms of the Ministry of Finance, the State Administration of Taxation, and the Chinese Institute of Certified Public Accountants and Certified Tax Agents, and on the other hand, should also meet the basic conditions for personnel and institutions for judicial appraisal.

Personnel engaged in judicial appraisal business must meet one of the following conditions: have a senior professional technical title related to the judicial appraisal business they are applying for; have a professional qualification related to the judicial appraisal business they are applying for or a bachelor's degree or above in a related major from a higher education institution and have been engaged in related work for more than five years; have more than ten years of experience in related work related to the judicial appraisal business they are applying for and have strong professional skills. However, those who have been subject to criminal punishment for intentional crimes or crimes of dereliction of duty, or who have been subject to dismissal from public office, shall not engage in judicial appraisal business.

Legal persons or other organizations engaged in judicial appraisal business shall meet the following conditions: have a clear business scope; have the necessary instruments and equipment for judicial appraisal within the business scope; have a testing laboratory that has passed measurement certification or laboratory accreditation in accordance with the law, which is necessary for judicial appraisal within the business scope; and have three or more appraisers for each judicial appraisal business.

III. Appraisal categories other than the 'Four Types of Appraisal' are not included in the registration management of judicial administrative organs

Before the introduction of the 'Decision', the administration of judicial appraisal in China was under multiple authorities. The Ministry of Justice once stipulated that judicial appraisal institutions providing services to the public should be approved and managed by the judicial administrative organs, and issued the 'Judicial Appraiser Practice Certificate' and 'Judicial Appraisal License'; the Supreme People's Court also stipulated that for cases requiring judicial appraisal, they should be appraised by the judicial appraisal institution of the people's court, or the appraisal should be uniformly entrusted to external parties by the judicial appraisal institution of the people's court.

In response to the above problems, the 'Decision' stipulates that the state implements a registration management system for appraisers and appraisal institutions engaged in judicial appraisal business, and the provincial judicial administrative department shall register individuals, legal persons or other organizations that meet the conditions for applying to engage in judicial appraisal business within its administrative region, and include them in the 'National List of Judicial Appraisers and Judicial Appraisal Institutions' and announce it. Considering that the scope of appraisal matters in litigation activities is very broad, and some current laws and regulations in China have already standardized the establishment, supervision and management of appraisal institutions, it is impossible to include all institutions and personnel involved in litigation appraisal into the unified registration management of judicial administrative departments. The 'Decision' limits the appraisal matters for which appraisers and appraisal institutions are subject to unified registration management to several types commonly seen in litigation activities. That is, forensic appraisal; physical evidence appraisal; audio-visual material appraisal; and other appraisal matters determined by the judicial administrative department of the State Council in consultation with the Supreme People's Court and the Supreme People's Procuratorate according to litigation needs. In 2015, with the consent of the Supreme People's Court and the Supreme People's Procuratorate after consultation with the Ministry of Justice, environmental damage judicial appraisal was included in the unified registration management scope of judicial administrative departments. So far, forensic, physical evidence, audio-visual materials and environmental damage four types of appraisal (referred to as four types of appraisal) are uniformly registered and managed by the judicial administrative department. Other appraisal categories with strong social versatility, such as product quality appraisal, accounting audit, project cost, and construction project quality appraisal, only need to be implemented in accordance with the provisions of relevant laws and regulations, and are not included in the registration management scope of judicial administrative departments.

The Legislative Affairs Commission of the National People's Congress proposed in the 'Report on the Work of Filing and Review in 2018': According to the review suggestions of citizens, the 'Notice of the Hunan Provincial Department of Justice on Issues Related to the Management of Judicial Appraisal Matters Outside the 'Four Major Categories'' regarding the registration management of judicial appraisal matters outside the 'Four Major Categories' conflicts with the 'Decision of the Standing Committee of the National People's Congress on Issues Concerning the Administration of Judicial Appraisal'. We urged the Standing Committee of the Hunan Provincial People's Congress to correct it in accordance with the law, and suggested that the Ministry of Justice urge the judicial administrative departments of local governments to immediately stop handling the registration of judicial appraisal institutions outside the 'Four Major Categories'. According to the feedback, the Hunan Provincial Department of Justice has cancelled all judicial appraisal institutions outside the 'Four Major Categories' in the province, and the cleanup is in place; the Ministry of Justice has urged the judicial administrative departments of 28 provinces (autonomous regions, and municipalities) to stop the registration of judicial appraisal institutions outside the 'Four Major Categories', and 19 provinces (autonomous regions, and municipalities) have cancelled the registered institutions. The next step will be to issue a notice to further standardize judicial appraisal registration management activities.

IV. The people's court implements a self-external entrustment roster system for judicial appraisal entities

In order to improve the quality and efficiency of trial enforcement work and reduce the randomness and blindness of external entrustment work, according to the 'Provisions of the Supreme People's Court on the Administration of Judicial Appraisal Entrusted to External Parties' (Fa Shi [2002] No. 8) and the 'Administrative Provisions of the Supreme People's Court on Entrusting External Parties with Appraisal, Evaluation, Auction and Other Work' (Fa Ban Fa [2007] No. 5), the people's court implements an external entrustment register system for appraisal work, that is, through prior centralized review, appraisal institutions and appraisers who voluntarily sign up and meet certain conditions are classified and compiled into a register to facilitate consultation between the parties and random selection by the people's court.

In July 2019, the General Office of the Supreme People's Court mentioned in its 'Reply to the Beijing High People's Court on the Opinions of the Beijing Municipal Bureau of Justice on Appraisal Institutions under Registration Management Entering the Beijing Court Professional Institution Register' (Fa Ban Han [2019] No. 604): The main task of the people's court is to handle cases publicly, fairly and impartially, rather than to provide case sources for various appraisal institutions. In practice, in order to ensure the quality of trial enforcement work, people's courts at all levels should strengthen the review of the professional ability, business level, standardized management, and honest practice of appraisal institutions and appraisers, and select appraisal institutions and appraisers that meet the needs of trial enforcement work. There is no need or obligation to include all professional institutions in the external entrustment register of the people's court. In addition, the external entrustment register is only a list used by the people's court to carry out entrusted appraisal work, and is not an administrative license. Various social intermediary institutions that have not entered the external entrustment register of the people's court can still accept entrustment from public security, procuratorate, administrative organs, parties, and other sectors of society, and does not affect their practice. In the external entrustment register compilation work, your court strictly examines the procedures and selects a group of appraisal institutions with strong professional capabilities, high business levels, and good social reputation to serve the trial enforcement work, which complies with the provisions of litigation laws and the actual work of the people's court. There is no legal basis for the administrative management department to require all social appraisal institutions registered under it to be included in the external entrustment register of the people's court.

V. Relevant Judicial Opinions

In the case of Shenzhen Overseas Chinese Service Center and Mingli Industrial Co., Ltd. regarding other contract disputes, upon the application of Mingli Company and with the consent of both parties during the first instance, the court designated Shenzhen Cai'an Partnership Accounting Firm (hereinafter referred to as Cai'an Firm) to conduct an audit. On August 7, 2003, Cai'an Firm issued Special Audit Report No. Shen Cai'an (2003) Special Audit No. 023. It was found that Cai'an Firm held both the 'Judicial Appraisal License' issued by the Guangdong Provincial Department of Justice to 'Guangdong Cai'an Judicial Accounting Appraisal Institute' and the 'Accounting Firm Practice License' issued by the Shenzhen Municipal Finance Bureau to 'Shenzhen Cai'an Accounting Firm', and also held the 'Partnership Business License' with the name 'Shenzhen Cai'an Partnership Accounting Firm'. The audit report issued in this case used the name 'Shenzhen Cai'an Partnership Accounting Firm'.

Regarding the qualification of the appraisal entity and the validity of the evidence, the first instance, second instance, retrial court, and the protesting People's Procuratorate all had different opinions. Finally, the Supreme People's Court stated its authoritative judicial opinion on the qualification of the appraisal entity and the use of evidence.

The first instance court held that: Because Cai'an Firm does not have judicial appraisal qualifications and has not completed the entrusted audit matters, its audit report should not be used as the basis for determining the facts of the case.

The second instance court held that: The evidence in this case shows that Cai'an Firm does not have judicial audit qualifications, but Cai'an Firm was selected by the first instance court with the consent of both parties, and the entrusted audit matters were also determined with the consent of both parties. After Cai'an Firm issued the audit report, both parties raised objections to the content of the report, and Cai'an Firm made a reply and appeared in court to accept inquiries from the parties. Now, Mingli Company has not provided evidence to prove that the first instance court had illegal circumstances in entrusting the audit or that Cai'an Firm had illegal circumstances in the audit process. Therefore, Cai'an Firm's audit report should be used as one of the bases for determining the facts of the case in accordance with the law.

The retrial court held that: The first instance court selected Cai'an Firm to conduct the audit with the consent of both parties; after the audit report was served, both parties raised objections, and Cai'an Firm also made a reply and appeared in court to accept inquiries from both parties. Mingli Company has no evidence to prove that the court had illegal circumstances in entrusting the audit or that Cai'an Firm had illegal circumstances in the audit process. Therefore, the audit report should be used as one of the bases for determining the facts of the case.

The Supreme People's Procuratorate's protest argued that: Mingli Company refused to accept the retrial judgment and filed an appeal with the procuratorial organ. The Supreme People's Procuratorate believes that the basic facts determined in the original trial judgment lack evidentiary support. The second instance judgment has already determined that 'Cai'an Firm does not have judicial audit qualifications'. Cai'an Firm's audit report should not be used as the basis for determining the facts of this case.

The Supreme People's Court held in the retrial that: When the Shenzhen Intermediate People's Court heard this case in the first instance, the 'Civil Procedure Law of the People's Republic of China' stipulated 'appraisal conclusions' as evidence. In judicial practice, accounting audit conclusions are generally considered to be 'appraisal conclusions'. However, the 'Civil Procedure Law of the People's Republic of China' does not specifically make clear provisions on the issue of accounting audit subject qualifications, nor does it require accounting audit institutions to be registered or obtain a license from relevant departments. The 'Decision of the Standing Committee of the National People's Congress on Issues Concerning the Administration of Judicial Appraisal' came into effect on October 1, 2005. At this time, the first instance judgment in this case had already been made, so the 'Decision' does not apply to this case, and the 'Decision' also does not require accounting audit institutions to be registered or obtain a license. Until now, no other laws or regulations require accounting audit institutions to be registered or obtain a license. In this case, Cai'an Firm issued the audit report using the name 'Shenzhen Cai'an Partnership Accounting Firm'. Although it does not hold a 'Judicial Appraisal License' with the same name, it cannot be concluded that it does not have accounting audit subject qualifications. The second instance judgment in this case that 'Cai'an Firm does not have judicial audit qualifications' is incorrect, and the Guangdong High People's Court has corrected this in its judgment in the retrial of this case. Mingli Company once again raised the claim that Cai'an Firm does not have audit subject qualifications during the retrial of this court, and this court does not support it. Cai'an Firm's audit report should be used as evidence to determine the facts of this case.

In the next issue, let's talk about the topic of 'IOUs' in judicial appraisal, so stay tuned.

'Shenzhen Overseas Chinese Service Center, Mingli Industrial Co., Ltd. Other Contract Dispute Second Instance Civil Judgment' (2013) Min Kang Zi No. 58