By Foley, Martin
The China Business Review , Vol. 25, No. 4
Changes are in the works to adapt China's accounting profession to international standards
Few countries in the world have witnessed economic growth and change on a scale as large as China has over the last five years. This growth could not have taken place without fundamental economic changes that began in 1979 and are continuing. At the 15th Communist Party Congress held last September, PRC President Jiang Zemin identified a range of initiatives of the new five-year government. Among these goals are lifting troubled large- and medium-sized Stateowned enterprises (SOEs) out of difficulty and developing a modern corporate system for them; transforming the financial sector by strengthening central bank supervision and commercializing State banks; and reforming the systems of taxation, investment, and fundraising.
Underlying all of these reforms are planned improvements in accounting regulations and enterprise transparency, particularly as they relate to the recording or transfer of reliable financial information. Efforts, in the form of undergraduate accounting programs and on-the-job training with international and domestic accounting firms, also are under way to increase the number of PRC accountants qualified to prepare internationally standardized financial statements.
Government institutions and domestic and foreign firms support these efforts and agree that a strong PRC accounting profession would encourage capital investment in China. Meeting the needs of these investors is important, especially if they are to provide the capital that will aid SOE restructuring, strengthen domestic companies to compete globally, help reform the banking system, and expand the country's infrastructure. In the past, much of this capital has been in the form of foreign direct investment and government subsidies. But for domestic and international equity markets to become significant providers of capital in China in the future, the country will have to continue its move toward implementing a sophisticated, transparent accounting system.
A TRANSFORMATION IN THE WORKS
For the first 30-odd years of the PRC's existence, all of the country's productive resources were owned by the State. In effect, the only economic entity was the SOE. The accounting framework used during this era, known as fund accounting, was intended primarily to establish an information and reporting system for State economic policies and maintain administrative control over State assets. To a great extent, these rigid and uniform accounting rules also served as a tool to strengthen the financial discipline of enterprises and safeguard State property.
Accounting in China has shifted significantly in recent years, away from a system that facilitated central planning, to one better suited for a market economy. In the early 1980s, the government inaugurated changes to the PRC accounting profession that are ongoing. The first Chinese certified public accountant (CPA) firm was formed in 1981, at which time international accounting firms received permission to open representative offices in China. Such moves reflected a growing awareness that the PRC should align its practices more closely with internationally accepted standards.
The PRC accounting system has continued in the 1990s to take on a more cosmopolitan form. Early in the decade, an accounting system for Sino-foreign joint ventures was developed and implemented, marking the country's first step away from the fund accounting concept. To enable PRC enterprises to attract foreign investment or list stocks on overseas markets, the Ministry of Finance (MOF) issued in January 1992 a separate set of accounting regulations for selected joint stock companies that conform more closely to international accounting and disclosure practices than the general PRC standards. In 1994 the PRC Company Law took effect, providing a regulatory framework on which new accounting and auditing standards could be based. …