JC Master · Listed Company Securities Compliance Column | What Signal Does the Audit Committee’s Unanimous Rejection of the Annual Report Send?

The high-quality development of the capital market hinges on the compliance foundation of listed companies. As the registration-based system is fully implemented and regulatory frameworks are iteratively refined, securities compliance has become a central pillar for the stable operation of listed offices. Accurately aligning with regulatory guidance and fortifying compliance safeguards are critical enablers for enterprises to navigate market cycles.

To this end, we have established this dedicated column, focusing on the core areas of securities compliance for listed companies: summarizing the key points of new regulatory rules, deconstructing the rationale behind typical enforcement actions, dissecting the essence of court rulings, and thoroughly examining the practical challenges of compliance. Adopting a legal‑professional perspective, we employ clear, pragmatic language and scenario‑based analysis to interpret compliance requirements, map out risk pathways, and offer actionable guidance, helping companies strengthen their internal control systems, mitigate compliance risks, and enhance the effectiveness of their compliance management.
 

When compliance thrives, enterprises thrive; when compliance is stable, development is stable. We hope this column will serve as a trusted professional partner for listed companies—helping them discern regulatory trends, address compliance challenges, mitigate compliance risks, and strengthen the foundations of sustainable growth—so that together we can foster the sound and healthy development of the capital market.

On April 29, 2026, STAR Market–listed company ZRGF announced: The Audit Committee of the Board of Directors All votes against The 2025 Annual Report could not be submitted to the board of directors for review, nor could it be disclosed on time. This marks the first instance in the A-share market since the new Company Law abolished the supervisory board and transferred its oversight functions to the audit committee, where an annual report was not disclosed as scheduled due to the audit committee’s rejection. This indicates that… The audit committee is able to effectively prevent irregular financial reporting. 。
 

I. How the Audit Committee Can Serve as a Pre‑Review Stage for the Annual Report
 

In December 2023, the newly revised Company Law introduced the audit committee system, allowing it to exercise the functions and powers of the supervisory board. Subsequently, the China Securities Regulatory Commission issued a series of transitional arrangements and revised provisions of… Guidelines for the Articles of Association of Listed Companies 》， which sets out the specific rules governing the Audit Committee’s exercise of the supervisory board’s powers. The transitional period will conclude on January 1, 2026, at which point the Audit Committee’s authority will be fully implemented.

 

At the level of authority, the Audit Committee assumes all oversight functions previously performed by the Supervisory Board, including ensuring the truthfulness and completeness of financial and accounting reports, overseeing the effective implementation of internal controls, and coordinating the conduct of both internal and external audits. Pursuant to the Guidelines on the Articles of Association of Listed Companies (revised in 2025), Financial information in periodic reports may be submitted to the Board of Directors only upon approval by a majority of all members of the Audit Committee. ; When members have reservations about the “authenticity, accuracy, and completeness” of the report, they shall vote against it or abstain.

 

Once the Audit Committee rejects it, the Board’s deliberation is legally suspended, and the annual report cannot proceed to the subsequent disclosure process.
 

II. Reconstruction of the ZRGF Incident
 

(1) Risk Accumulation
 

In December 2025, ZRGF and its controlling shareholder were placed under investigation by the China Securities Regulatory Commission for alleged violations of information disclosure requirements. At the same time, the company was ordered by the Shanghai Securities Regulatory Bureau to make corrections, and relevant personnel received warning letters. The investigation revealed that from 2021 to 2024, ZRGF improperly transferred a portion of its raised funds through suppliers controlled by its controlling shareholder or via designated funding channels. External Funds Pool , not disclosed truthfully.
 

In terms of performance, net profit attributable to shareholders for the first half of 2025 was RMB –219,000, down 100.62% year over year. At the beginning of 2026, the company’s 2025 annual audit office was changed from… ShinWing Certified Public Accountants Changed to Tianzhi International.
 

(II) Threefold Basis for the Vote Against
 

The Audit Committee’s objections are clear and grounded in sound legal principles:

1. There are significant concerns regarding the substance of related-party relationships, related-party transactions, and certain business activities, making it impossible to ensure the financial statements are true, accurate, and complete.

2. It is impossible to determine the specific impact of the initiation of an investigation on going‑concern viability and legal risks;
 

3. The requested due diligence report from the engaged intermediary has not yet been submitted, leaving a lack of basis for making a judgment.

(III) Market Response and Regulatory Follow-Up
 

Following the issuance of the veto notice, the company’s stock hit the daily lower limit the next day, and over three consecutive trading days, the cumulative deviation of its closing price decline exceeded 30%. The Shanghai Stock Exchange issued a regulatory inquiry letter, and the China Securities Regulatory Commission initiated an investigation into the company.
 

The stock has been suspended from trading as of May 6, 2026. If the annual report is not disclosed within two months after the suspension, the stock will be designated as *ST; if it remains undisclosed for another two months thereafter, the listing will be terminated.
 

III. Compliance Implications for Listed Companies
 

As can be seen from the events and the institutional context, the audit committee possesses Substantive veto power , which may lead to the suspension of annual report disclosure and trigger trading halts or delisting risks. Management should not view the audit committee as a mere “endorsement” step in the compliance process, but rather as Checks and balances mechanism 。
 

Drawing on the ZRGF case, listed companies can ensure the audit committee’s effective performance of its duties by addressing the following aspects:
 

(1) Strengthen coordination with external auditors
 

Committee members should request written responses from management on matters of concern and retain the corresponding working papers. When significant disagreements arise between management and the annual audit accountant, the Audit Committee shall proactively convene a tripartite meeting involving management, the accountant, and the Audit Committee, and, if necessary, require the accountant to provide a written explanation of the basis for its audit conclusions. A direct communication channel with the accountant should be established, and the accountant’s views should be sought separately at key stages of the annual report audit.
 

(II) Pre-approval of Annual Report Preparation
 

The Audit Committee convenes at least once per quarter, with a primary focus on significant accounting and auditing matters. It conducts semi-annual reviews of the company’s use of raised funds, external guarantees, related-party transactions, substantial fund transfers, and financial dealings with the controlling shareholder, the actual controller, and their affiliates—issues that could give rise to audit concerns. For any matters deemed questionable, the Committee proactively formulates remediation plans and allocates sufficient time for review, thereby preventing backlogs that might necessitate the exercise of a veto during the annual report approval process due to insufficient information.
 

(3) Timely Reporting and Follow-up Investigation of Material Matters
 

Listed companies shall establish a reporting mechanism, similar to the receipt of a notice of initiation of an investigation, Regulatory Warning Letter Following significant events such as an inquiry letter, the decision to change the annual audit office, or a substantial quarter‑over‑quarter decline in financial performance, the company must submit a written report to the Audit Committee within the prescribed timeframe, accompanied by preliminary response measures. The Audit Committee shall, within the same timeframe, assess whether additional documentation is required, whether an ad hoc meeting should be convened, or whether third‑party verification should be engaged. For material risks, the Committee shall initiate ongoing monitoring and investigation, requiring management to submit regular progress reports on remediation efforts until the underlying issues are fully resolved.
 

(4) Ensuring the Right to Independent Verification
 

Company policies should explicitly stipulate that the Audit Committee has the authority to directly engage third-party independent auditors, with all associated costs borne by the company, and that management may not obstruct such engagement. This ensures that the Audit Committee obtains an independent third-party assessment prior to the review of the annual report, thereby preventing it from being placed in a reactive position where “the audit report has not yet been finalized.”
 

(5) Emergency Response Following a Veto
 

At the outset of the annual report process, a contingency plan for rejecting the report should be finalized concurrently: internally, dissenting reasons must be documented in writing; the matter must be reported to the stock exchange and the securities regulatory authority; and management must provide item-by-item responses, formulating a remediation plan along with a list of responsible parties. If management fails to cooperate substantially or if the company’s risks become uncontrollable, the audit committee may, in accordance with the law, report the issue to the relevant regulatory authorities.
 

(This article reflects the author’s personal views and is intended solely for informational purposes; it does not constitute legal advice or an interpretation of the law by JC Master Law Office. This disclaimer is hereby made.)

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