China Needs More Than a Few Good Accountants

By Maria Trombly | Securities Industry News | December 5, 2005

The frustratingly poor performance of China's financial markets has prompted calls for Western-style market regulation and infrastructure, not least the checks and balances that can be provided by a strong accounting component. Despite progress in drafting new accounting rules and standards, however, the country still lacks the capacity--and personnel--to enforce them, undermining both foreign and local investors' confidence in Chinese companies and, in turn, depressing stock prices.

"It's very common that financial information is bad in Chinese companies," said Jianxiong Wu, an analyst at Guotai & Junan Securities Co. Though he acknowledged a bit of progress, he said listed companies readily downgrade their performance in advance of management buyouts, for example, and otherwise fiddle with their books.

There is little downside for violators, he added, as punishments are much less severe than they would be in the U.S. and other developed markets.

"Shareholders or professional institutional investors cannot easily discover the truth about a company," he said.

More independent accounting oversight would help address some of these problems. "We need senior accountants, not only those with expertise in handling business, but also with high professional ethics," Weiguo Zhang, chief accountant at the China Securities Regulatory Commission, told Securities Industry News.

Ironically, the country's accounting problems may be exacerbated by an oversupply of low-level accountants. According to the Ministry of Finance, there are 12 million accountants in China, which is more than in any other nation. The glut drives down the prices that accounting firms can charge, said Jun Wang, a manager at Shanghai Wanlong, a 180-person firm that provides auditing and consulting services. "Limited by the fees, accounting firms cannot provide fair and high-quality auditing reports," he stated.

"We aren't lacking in accountants generally, but rather high-level senior accountants," confirmed Ruoshan Li, chair of the finance department at Fudan University's School of Management in Shanghai.

According to Li, there are a large number of low-level bookkeepers in China, but senior accountants who can master international and domestic accounting standards and help enterprises with tax planning are rare.

One problem is the lack of ongoing education for accountants in China, said Lulu Ma, a financial manager with Oxford Instruments, a U.K. equipment repair company with a factory in Shanghai and offices around China.

The general level of accounting education is poor, and "further education is quite loose," confirmed Wang. "Most accountants who attend courses organized by the Ministry of Finance don't take it seriously, and absence is quite normal."

Foreign firms are starting to step in to fill the gap, however. Two years ago, the U.K.'s Chartered Institute of Management Accountants (CIMA) began certifying Chinese accountants; it now has about 100 members in China.

"We are very happy to bring CIMA qualification here because we've found a huge potential," said Charles Tilley, chief executive of the institute. "The Chinese economy has seen phenomenal progress in the last 25 years, and there is every sign of this growth continuing. I have witnessed a strong acceptance of the need for management accounting to drive businesses forward here."

The Chinese government has put accounting and auditing standards on the agenda as well. At a CFO forum this month hosted by the Shanghai National Institute of Accounting, Yuting Liu, director of the Chinese Ministry of Finance's accounting department, announced new government measures aimed at raising the quality of accountants: a system of examinations and assessments combined with stricter standards.

Jun Wang, deputy finance minister, said that the basic steps to raise the international compliance level of Chinese auditing and accounting should be completed by the end of this year. This convergence isn't merely a matter of reforming the Chinese accounting industry, he added. "It is also urgently needed for China's economy to operate within the global market."

"It's true that a lot of irrational standards are still in use," said the other Jun Wang, who works at the Wanlong accounting firm. "Taking fixed-assets investment as an example, according to the caution principle' of Chinese accounting, the accelerated-depreciation method isn't advocated, which makes taxation remittance impossible. This is totally different from abroad."

Not everyone thinks that China should completely scrap its accounting conventions in favor of international rules. Some experts believe that the country should formulate its own code to assure it is suitable to local practices and customs.

For example, Fudan's Li said that principles-based accounting, a well-developed concept in the West, depends on subjective judgments to a great extent and would not be easily applied today in China. "System-oriented accounting standards, which clearly tell accountants what is and is not allowed, are more applicable," he said.

Wendy Yu contributed to this report.