A report on Auditing and Ethical Practices in China and Australia

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Australia had experienced major collapse of two big companies that is HIH and One Tel due to inadequate audit quality. This has brought attention of the regularity authorities for the importance of audit quality. Emphasis has put on professional ethics and auditing standards to improve the audit quality. China and Australia had different experiences due to audit failure cause by lack in audit quality. This discussion put light on current regulatory, ethical and quality environment for auditors in China and its comparison with the scenario in Australia. Firstly, the discussion focuses on comparison of regulatory environment such as Corporations Law and stock exchanges listing rules, auditing standards and internationalisation of auditing standards in China and Australia. Secondly, discussion compares the ethical and professional environment in both countries by comparing Code of Ethics. Last but not least overall scenario of audit quality and experiences has been discussed and compare for China and Australia.

Legal and Regulatory Comparsion

DeFond et al (2000), suggest that Ministry of Finance (MOF) and National People's Congress (NPC) are responsible issuing authority for Chinese auditing standards. According to Lin and Hung Chan (2000), Company Law of China came into existence into 1993, and it regulates the auditing standards. Chinese auditing standards are known as General Auditing Standards and these are controlled by CPA's Law as well. Also, auditing standards regulations are in line with accounting standards which are controlled by accounting law in China. DeFond et al (2000) propose that stock exchange regulations in China are based on two stock exchanges that are Shanghai Stock Exchange and Shenzen Stock exchange, with different types of shares which are A shares and B shares. These shares can be classified as state-owned, state institution owned and individuals owned. SSE and SZSE have Listing rules related to corporate governance. Basically there is political touch in the regulations of listing rules. Hence state-owned enterprises do not need to meet the criteria and they do not require independent auditor to audit them. According to Schipan and Junhai (2001) China has got another law known as Securities Law which works with Corporations Law. This law is formed basically for the share holder to protect them and to give them rights. Rights such as voting right, legal rights such claim for the loss and sue the management for false information, misappropriation of assets and misleading information provides some base to regulate the quality of the audit.

Comparing with Australia it can be found as cited by Arens et al (2010), that Australia has Corporations Law 2001 and ASX that is Australia Stock Exchange Listing rules. Corporations Law 2001 provides and regulations for the auditing standards issuing authority that is AuASB in Australia. Under the direction of FRC, CLERP 9 reforms resulted in reconstitution of AuASB as statutory body. It gave force of law under the Corporations Act to the auditing standards. Auditors are required to conduct audits and reviews of financial reports according to auditing standards under S 307A of Corporations Act 2001, which should be prepared under Part 2M. 3. All auditing standards must comply with these regulations. ASX listing rule are responsible for proper corporate governance for the listed companies. In 2003, Principles of Good Corporate Governance and Best Practices Recommendations came into existence when ASX's Corporate Governance Council issued these principles. These principles apply to all listed companies with ASX and it is mandatory for them to comply with these principles, failing to do so require explanation. These principles were incorporated with CLERP 9 reforms too. These principles help in maintain audit quality by safeguarding the integrity of financial reporting. (Arens et al, 2010)

Comparison of Auditing Standards

According to Hua et al (2010), Chinese auditing standards are known as General Auditing Standards. China adopted these standards in 1995 based in International Standards of Accounting. Lin and Hung Chan (2000), suggest that General Auditing Standards in China has divided into three sub sets and these are (i) Specific Standards (ii) Practice pronouncements and (iii) Implementation Guidelines. First sub set is all about audit planning, audit sampling, engagement letter, audit evidences internal controls, working papers, fraud and error, audit procedures using work of others and related parties. Practice pronouncements have the guideline for the verification of capital contribution, management letters, small businesses audit, special purpose audit reports and examination of profit forecast. Implementation guidelines provide guidelines for application above twp sub sets that is specific standards and practice pronouncements and Chinese Institute of Certified Public Accountants (CICPA) is responsible for issuing these guidelines.

According to Arens et al (2010), Australian auditing standards that are ASA are issued bu AuASB. These are based to review engagements, assurance engagements and related service. ASA are divided into 7 categories which are ASA 100-199, ASA 200-299, ASA 300-399, ASA 400-499, ASA 500-599, ASA 600-699, ASA 700-799 and ASA 800-899. These standards are concerned with introductory matters, general principles and responsibilities, risk assessment and response to assesses risk, auditing evidences, using the work of others. Audit conclusion and reporting and specialised areas respectively. AuASB adopted these standards in 2006 and all these are based on ISAA issued by IFA. Also in July 2004 CLERP 9 resulted in reinstitution of AuASB.

Comparison of ethical and professional regulations

Ethical standards are meant to ensure the quality of the audit and refer to CPA's competency, professional integrity, responsibility etc. Professional accountants are supposed to meet the ethical standards those are objectivity, competence confidentiality and conservatism of the audit while the audit period. In China these ethical standards are enforced by MOF that is Ministry of Finance and CICPA is responsible for adoption of Code of Ethics. Moreover these standards are enforced by law in China. Failing to comply with these standards can result in penalties and even imprisonment too. (Lin and Hung Chan, 2000)

In Australia there is APES 110 Code of Ethics for Professional Accountants. This is enforceable by law and by some professional bodies such as Institute's Supplement Royal Charter 1988 and CPA Australia. APES 110 gives five fundamental principles of professional ethics to maintain the quality of the audit and these principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Auditor is supposed to comply with these standards at the time of audit engagement and during the engagement period. The purpose of the APES 110 is to provide safeguards from unacceptable threats, conflict resolution and to maintain the independence of the auditor during the engagement period, so that unbiased opinion should be issued. This helps in maintaining the audit quality. Also ASA 220 refers to the quality control for auditors by following procedures while engagement period. (Gay and Simnett, 2007 & Arens et al 2010)

Overall Comparison of Audit Quality and Experience

As discussed above in China Ministry of Finance is responsible for issuance of General Auditing Standards and National People's Congress is responsible for issuance and regulation of Company Law, CPA's Law in China, which controls and regulates the General Auditing Standards as stated by DeFond, Wong and Li (2000). Overall it has been commented by Lin and Hung (2000), which China is comparatively new in adopting auditing standards based on international auditing standards. There is need of improvements in the Chinese auditing standards regulations. China lacks in professional education for CPA's which result in less competitive professionals. Though China has Code of Ethics for professionals, yet it is not applicable as desired. Hua et al (2010) state this is because China has strong sense of belonging to each other. For most of the corporations it is compulsory to follow the Guanxi Code of conduct. The reason for this is most of the credit decisions are based on Guanxi Code rather on other facts. For Chinese firms profit statements play more important role. That why they are least concerned about quality of audit reports. Simultaneously this creates a problem in low quality of audit. MOF has enforced code of ethics by law. All professional accountants need to comply with this code of ethics. If they fail to do so, they can be penalised and even can result in imprisonment too. Still independence of auditor has been scarified in China resulted in low quality audit reports. According to Lin and Hung Chan 2000, this has resulted in closing down of many CPA firms. Data shows that in 1998 344 CPA firms closed down and more than 1500 were penalised and many other had cancellation of their licenses. According to Chow et al (1995), audit reports in China do not provide much information about details on qualifications, which reflects a conservative culture. Hence it becomes bit difficult to understand the company's position which ultimately affects the quality of the audit. Hatherly and Skuse (1991) suggest that wording used in Chinese audit reports is not standardised. It creates problem in understanding and can creates confusion in the audit reports. Also Lin and Hung Chan 2000 suggest that political interference in audit in China has also affected the quality of the audit for example it is not mandatory to have a independent auditor for state-owned enterprises.

Situation is opposite in Australia. According to Arens et al, (2010) Australian auditing standards are issued by AuASB and Corporations Law 2001 and ASX Listing Rules take care of regulation of these standards. APES 110 Code of Ethics for Professional Accountants provides principles for professional ethical behaviour. According to Robins (2007), Australia had bad experience of big corporate failures that are HIH and One Tel due to audit failure. After this there corrective measure were taken place to improve the quality of the audit in Australia. CLERP 9 reforms, which made the amendments in Corporations Law 2001, came into picture after these corporate failures. Also, enforcement of the ethical standards in Australia is more crucial. Auditor need to comply with the ethical principles while engagement period to maintain the audit quality. AuASB has put much emphasis on auditor independence too after the collapses. To maintain the auditor independence AuASB has put some aids such as audit committee, auditor rotation and protection of working papers by making them confidential. If auditor is not complying with these standards, can result into termination of the license and even imprisonment. Auditor can be held criminally liable in worst cases.

Hence Australia is doing better than china in maintaining the audit quality and enforcement of the regulation. China needs to make improvements in its regulatory environment and enforcement of the regulation.


In short, it can be summarised that Chinese and Australian auditing standards are based on International Standards on Auditing. China has Company Law, CPA's Law and Accounting Law to regulate the auditing standards, where Australia has Corporations Act 2001. Stock exchange listing rules in China are not much strong as compared to Australia. Unlike Australia's ASX Listing Rules provides principles for good practices for corporate governance, Chinese listing rules do not provide such principles. They only provide basis for corporate governance structure. Also implementation of ethical standards in China is not up to the mark as compared to Australia. Though China has Code of Ethics for Professional Accountants similar to ISA 220, but there are faults in enforcement of this code because of Chinese culture. There is a major problem of auditor independence in China creating low quality audit. This is basically because of guanxi code and political interference. China has less competent professionals because of lack in quality education. All these factors contribute to lack in quality of audit in china. Situation is different in Australia as Australia has taken major steps to maintain the quality of audit by bringing CLERP 9 reforms, APES 110 and auditor independence clause in engagement letter. China is still improving its regulatory, ethical and professional environment for auditors.