funds, but it is carried out through intentionally providing false financial information in order to obtain loans from banks for the benefit of the enterprise. in such frauds, the agent ’ s statement of the purpose of the loans is true, i. e. the agent does not have the purpose of taking the money for himself, but it intentionally provides the banks with false financial information of the enterprise to misguide banks in decision - making. at present most of the financial frauds are of the second kind. at present, article 193 of the criminal law of china has explicit stipulations against frauds with intended illegal possession of funds. however, as for the second kind of frauds, they are not regarded as financial frauds by law since the purpose of providing false information is not illegal possession of funds but rather to obtain bank loans. criminal charges will only be filed when illegal possession of loans has happened. otherwise, only civil charges can be brought up against the agent under contract law. the lack of legal deterrence will have significant impact on setting up strict financial disciplines and whether banks will accumulate large amounts of npls. according the international comparison done by kpmg, frauds stemmed from false financial information has come to the center of attention in many countries. germany, u. s. and u. k. have made it very clear that financial frauds using falsified financial information is subject to punishment under criminal law rather than civil law. for example, in german criminal code, article 265 b stipulates that using untrue or incomplete documents, submitting untrue or incomplete written statement or giving no references about the true financial situation that is of significance for lending decisions of a bank are financial frauds. the us criminal law also contains similar stipulations with emphasis on the agent ’ s intent rather than whether a purpose was fulfilled. and the credit or loans include all kinds of loans, loan commitments and guarantees and cover not only the application stage but also the credit renewal and rollover stage. the truthfulness requirements of the british law are similar to those in german and us laws, and treat reckless forecast as one of the conditions for criminal charges. 3. accounting standards frauds using falsified financial information have direct connection with accounting standards. false information is either made - up information with no support from actual projects or relates to accounting standards and codes. since the beginning of reform, china has made progress in improving accounting codes. apparently, the designing and implementation of

accounting codes can influence information truthfulness and give rise to the opportunities to produce false information. accounting codes is a very technical issue. many think the accounting codes as a “ steel ruler ” that allows no vagueness. however, the complexity of modern economy has put some areas of accounting subject to discretion and interpretation or even personal preference which result in a ruler with flexibility. the issue of accounting codes did not attract much attention at the beginning of the reform. it was not until 1993 that reforms were witnessed in corporate accounting and regulations. during the asian financial crisis we made more concrete progress in improving the account rules, which we should recognize and value. at the same time, we should also be mindful that more should be done to bring our accounting rules up to the international standards. some people still think in china we have too complicated an accounting system including a corporate accounting system and also distinctive accounting systems for different industries. for instance, some corporate accounting rules require enterprises to build value - loss reserves based on the recoverability of assets. although accounting rules of different industries have similar requirements, they are all inadequate in terms of soundness comparing to corporate accounting rules. another issue is that, since we did not have the luxury of a strong accounting industry and external auditing facilities, when banks assessed the reliability of enterprises ’ financial information, they did not require borrowers to provide external auditing results. in the future, banks may consider require financial information audited by accounting firms and assessment on enterprises ’ compliance and borrowing conditions made by law firms, and valuation of collaterals made by evaluation firms and bond classes given by rating firms. however, it may take years for the above intermediate services to develop, and the expertise, reputation, brand - name, service quality also take tens of years to build. are the audited statements trustworthy? it really depends and relates to the expertise and internal control of the firms. the development of intermediate financial service providers is affected by market liberalization as well. if all of these issues cannot be dealt with effectively, probability of enterprises ’ providing false information and engaging in financial frauds will continue to be high. i would very much like to hear the comments on what i have said from experts and researchers present today. your opinions will be instrumental to our work. iii. impact of legal environment on financial ecology legal environment has a direct impact on financial ecology. to some extent, in the transition from a planned economy to a market economy, one fundamental issue is “ soft financial constraint ”