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This report put the accounting development in China into perspective. Describe the history and changes in the accounting environment of China during the recent economic reforms by using the Grey's (1988) accounting value to analyzing the culture impact on accounting system's development in China, and then, illustrate the institutional and environmental factors which driven China's accounting system made changes, the reasons of those changes and then describes the major problem in China's accounting development as well as to point out whether would be changes in the future.
This report is aim to describe the development of accounting system in China, including the history of China's accounting except Hong Kong, the 'one country, two systems' policy allowed Hong Kong remain its market-led capitalist system. Then, it would describe the traditional use of accounting and the factors that influenced China's accounting development as well as what the changes it has made what the major problems that China has face in developing the accounting system. Then, it would discuss whether China would have further changes of accounting system in the future in my opinion. There has a conclusion in the end.
China had more than 1.34 billion population at the end of 2010. National Bureau of Statistics (NBS) announced China's GDP reaching 39.79 trillion yuan (approximately 6.04 trillion US dollars) over the course of 2010. (Du Xiaodan, 2011 & Paul Pennay, 2011)
2. Brief history of China's accounting
According to Zhang Guohua (2005), China's economy has undergone three periods of change since 1949: 1949- 1978: a socialist, centrally controlled, planned economy. 1979- 1992: socialist commodity economy. 1992- present: socialist market economy. China's accounting system has changed with the economy, almost like the period of the China's economy. Development of accounting systems can generally be divided into the four stages: (more detailed information of China's accounting history can be found in Appendix 1.)
1949-1978 was the first stage which the "uniform accounting system" and the 1978-1992, China's accounting system has during the transition and the construction. Then, from 1992 to 1997, the construction of a new accounting system has issued. The fourth period is from 1997 to present. The ASC was set up in October 1998 by the Ministry of Finance to oversee the development of a complete set of Chinese GAAP. In order to join in the WTO, China's accounting standards made some change to closer to IFRS/IASs. The new Chinese Accounting Standards were adopted by all listed companies from 1 January 2007. Chinese Accounting Standards will continue to be updated in line with IFRS developments. (Gray et al, 1995 & Wang Baozhong et al, 2009 & Zhang Guohua, 2005 & The Institute of Chartered Accountants of Scotland, 2010)
Traditional use in China
The basic function of financial accounting is to accounting and monitoring. With the founding of the PRC in 1949, all resources of production in the country came under State ownership. Accounting was primarily used for establishing information and reporting system for the implementation of national economic policies and resource allocation in the planned economy. (InterChina, 2009) The objectives of financial reporting system have been stated to serves one user primarily, the government, and then it is stated very broadly "to strengthen accounting work of share enterprise, to protect the legitimate interest of investors and creditorsâ€¦" (Ministry of Finance, 1992).The change in industry and ownership specific accounting system is due to the need of macroeconomic planning require a uniform system. (Tang, Qingliang, 2000) During the developing of accounting system, there are a number of users makes use of accounting in different purpose. Such as Shareholders use accounts to examine the health of business, and the dividends that they can expect to make. The bank may use the account to see how much loan they would provide for the company, and government would see the how much tax the company needs to pay. The main use for accounting is to comply with legal and other requirements, to provide information for stakeholders about financial performance and viability, to provide managers with information for decision making and to provide a structure to business activity based on the careful processing of numerical data. (The Times 100, n.d)
The cultural factor that influenced its development
The development of accounting was influenced by both cultural and environmental factors. They shape the accounting system in China. As Merino (cited in Carnegie and Napier, 2002) mentioned, "All source material must be viewed as a reflection of the culture." The transition from a "communist" economy to a "capitalist" market economy can summarize as contributed by the factors as politic, culture, as well as the reform of social and economic or regional and international integration. Before economic reform, China's communist culture (See appendix 2) has strongly influence all the means of accounting control, whether accounting plans, balance sheets, and income statements or, in a wider sense, audit techniques. (Cigdem Solas and Sinan Ayhan, 2008) all the surpluses were owned by the state. A table (See appendix 3) summarizes the information on the difference between capitalist and communist systems, and issues raised for examination regarding their reflection in accounting. The transitions of the culture and economy reform were both influence the accounting system in China. For example, the concept of profit is meaningless under communist culture due to the panned economy which the surplus goes to government. In capitalism culture, the economic entity would need to have a certain type of boundary; the profit is one of its results. Particular rules for payment of the various parties involved would also be required, and monetary assessments of economic flows registered would have to be at least partly based on market mechanisms. Its status as a measurement of a single entity's performance presumes that there is a capacity for free enterprise do not existing in communist economic structures. Grey's (1988) model derived accounting values from studies of societal value dimensions by Hofstede (1984), and Grey's model has been used to analyse the cultural impact on accounting development in China.
4.1 Professionalism V Statutory
China's accounting system is strongly controlled by state rather than professional. The state closely controlled all enterprises by centralized plans. The profession is also still relatively new, small and powerless and it is currently occupied with the problems involved in meeting the new audit requirements. And it is unlikely to give up this power to a professional body so far. (Roberts, Weetman and Gordon, 2008) This is mainly because the strong power distance in China. In China, power is unquestioned, no matter it is right or wrong, the accountants in China cannot rely on their professional view.
4.2 Uniformity V Flexibility
Due to the special circumstances, China has a dual approach which retained a uniform accounting system in the Accounting System for Business Enterprises (ASBE) while also developing accounting standards based on IFRS. Enterprises have no judgment at all on how to account for particular transactions or events according to the uniform system. (Roberts, Weetman and Gordon, 2008) It is just as the same as the statutory in China, the accountants has been regulated by the uniform accounting regulation, they have to do as the regulation told to.
4.3 Conservatism V Optimism
The accounting system in China is conservatism rather than optimism. The Accounting System illustrate that an enterprise should fulfill the requirements of the prudence concept. Including, an enterprise should not overstate assets or revenue, or understate liabilities or expenses. It should not provide for any hidden reserve. (Roberts, Weetman and Gordon, 2008) which means China's accounting system has high level of uncertainly avoidance. Chinese government likes to plan everything in advance just the "five years plan", they do not want to see something happen unexpected due to the complex situation.
4.4 Secrecy V Transparency
China's accounting system has highly secrecy due to the large power distance and strong uncertain avoidance. The collectivist culture of China require the enterprise offer their information to the society but within a range of narrative disclosure which stated in ASBE 2001. (Roberts, Weetman and Gordon, 2008) only related people can see the accounting information such as the managers, shareholders and the government officers. This feature is due to China's prudent culture, it is different as the western country but it is totally consistent with China's situation.
4.5 Problems for using the Grey's model
There have some problems by using either Hofsteade model or Grey's model to analyzing China's situation. Those models has been stated many years ago, in addition, China is rapid development in every aspects those years, therefore, the model may not be 100% appropriate with the situation nowadays. Another problem is China is really big; there has huge gap between west area and east area no matter in economy or culture.
Institutional and Environmental factors
There are several environmental factors which influence accounting system in China.
Economic and enterprise reforms have influence the financial reports by change of the contents, format and uses. Enterprises in China are no longer relying on fund appropriation instead of independence in their operational and financing activities. Banking and financing system has restructured, therefore, the role of the state as a source of funds has been reduced. (Tang, Qingliang, 2000) Furthermore, various forms of business combinations with joint ownership have emerged (Tang et al, 1992). The rigid, fund-orientated and industry/ownership specific financial reporting system and practices are no longer well-matched the changing business environment. As a result, a universal and user-oriented financial reporting system is necessary to meets the needs of the economic reform. Due to the economic factors, the Objectives of Financial Reporting has made some change as well as the Industry and Ownership Specific Accounting System.
Furthermore, foreign investment started to influence China's accounting system since the open-doors policy. The increasing of foreign direct investment and international business transaction driven China change its accounting system close to international accounting and report standard. (Tang, Qingliang, 2000)
The legal factors have been influenced by other factors. The government system is one of the legal factors. The new accounting regulation system (See Appendix 3) is being developed towards a legal one. The National People's Congress issued the first tier accounting law in 1985 and revised in 1993 and 1999. It is the basic law of accounting in China as well as the basis of China's accounting work and other related accounting regulations. The State Council and Ministry of Finance formulated second tier- the executive regulations which form conceptual framework and general principles of accounting. The third tier authorized by the PRC Accounting Law and formulated by the Ministry of Finance. (Zhang Guohua, 2005) The legal framework for China's accounting system and reporting standards have changed step by step to fulfill the need of economy development.
Another driving force for the accounting change is the development of capital market.
In 1990 and 1991, the Shanghai Stock Exchange and Shenzhen Stock Exchange were established. The development of capital market has influenced Chinese accounting change toward to a capital market-oriented system. Therefore, the structure, content, format, and disclosure of financial information have been significantly influenced by the needs of the capital market. (Tang, Qingliang, 2000)
Problems occurred in development
There also appeared some problem during the China's accounting system's development and transition into international accounting standard. First is that Chinese accounting system and IAS requiring different practices; for example, inventory must be valued at historical costs under Chinese GAAP, but at the lower of cost and market (LOCAM) under IAS. Another example is accounting for long-term investment. Chinese GAAP offers companies a free choice between cost and equity methods if their investments in shares do not exceed 50 percent. But in other words, differences between China's accounting system and IAS can be reduced by changing accounting standards. (Charles J. P Chen, Ferdinand A. Gui and Xijia Su, 1999) Second, to implementation of IAS requires professional judgment from management as well as auditors. Professional independence and implement of standards have been identified as the two critical issues in international auditing. (Stamp and Moonitz, 1982) The severe shortage of qualified accountants and auditors in China delay the development of professional auditing (Winkle et al. 1994; & Graham 1996)
The development of China's accounting system needs to fit China's special circumstance. It is impossible to expect independent/professional auditing to be achievable in China in the future. This implies that the proposed accounting standards will have to operate without independent/professional auditing. It is likely that the flexibility in the detailed accounting standards will provide opportunities for managers to engage in aggressive earnings management, reducing, even eliminating the probability of showing "a true and fair view." Therefore, the lack of independent/professional auditing can neutralize the objective of prudence and turn the flexibility into a "land of opportunities" for earnings exploitation. (Bing Xiang, 1998) In my opinion, there has a trend, which the China's accounting system would slightly change towards to the international accounting system in the future, but would never be exactly the same with the international accounting system because of China's special circumstance like one-party policy, different situation in different area, huge power distance and not so easy to managing the big land of China.
In conclusion, China has undergone profound changes in recent years, not only the economic system but also the accounting standards. China has moved from a system of public ownership of all enterprises to a mixed system with increasing private ownership of both small and large companies. There have many factors such as cultural and institutional factors which led to those changes as well as some problem which hold the change back, but China's accounting system would still change towards to the IAS due to the requirement of economic development.
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History of accounting system's development in China
China's accounting history can be traced back 2000 years ago. The word "accounting" first appeared in Western Zhou Dynasty ï¼ˆ11th century BC to 770 BCï¼‰. During the Tang Dynasty (AD 618-907), "Account book" appeared for recording the annual fiscal revenues. The basic traditional Chinese accounting theory such as the scientific bookkeeping method and the four pillars accounts was created in Song Dynasty (AD 960-1279). A new method called "Long Men Zhang" which is similar to the double-entry bookkeeping method has created in Ming Dynasty (AD1369-1644). Single-entry bookkeeping has been used in prior to 1911. (Zhang Guohua, 2005)
Since 1949, Development of accounting systems can generally be divided into the four stages:
First stage is from 1949 to 1978: 1949-1952 a unified accounting system of affiliated enterprises was developed by the central government. 1958-1959, the accounting system has been severely damaged by the "scholasticism" thinking, some people claimed to simplify the accounting system. 1960 to 1966, due to economic development, people realized the importance of accounting. Critical theorists illustrated the error approach of simplify the accounting system, then, the accounting system design work has received attention. Furthermore, the industry-specific regulation has been issued. (Gray et al, 1995 & Wang Baozhong et al, 2009 & Zhang Guohua, 2005)
Second stage is from 1978 to 1992: China's accounting has undergone drastic changes due to the opening-up and beginning of reform. 1979-1922, Enterprises started to issue equity shares in 1984. The number of Sino-foreign joint venture has increased; Ministry of Finance has issued the "Laws on Sino- foreign Joint Venture" to solve the problem of difficult of foreign staff in accounting and use the accounting information. These included a joint venture income tax law and laws on contracts and foreign exchange. 'Accounting Regulations for Sino-Foreign Joint Ventures' and 'Charts of Account and Accounting Statements for Industrial Sino-Foreign Joint Ventures' has issued in 1985 which is the first accounting system reference to international conventions to satisfy the new accounting system in China. (Gray et al, 1995 & Wang Baozhong et al, 2009 & Zhang Guohua, 2005)
Third stage is from 1992 to 1997: Ministry of Finance and the National Committee of Economic Structure Reform jointly promulgated 'Accounting Regulations for Share Enterprises' in 1992. Furthermore, 'Accounting System for Business Enterprises (ASBE) issued in November 1992. The ASBE was a major attempt both to unify the accounting systems used by different industries and to move financial accounting towards international accounting practices. Because of the development of foreign exchange markets, these regulations which made in 1985 were replaced by 'Accounting Regulations for Enterprises with Foreign Investments' and 'Charts of Accounts and Accounting Statements for Industrial Enterprises with Foreign Investments' in 1993. (Gray et al, 1995 & Wang Baozhong et al, 2009 & Zhang Guohua, 2005)
The fourth stage is start from 1997 to present: the Accounting Standard Committee issued to establishing a complete set of accounting standard. The Accounting Law of the PRC which revised in 2000 is the highest level of authority which replaced the pervious law of 1992. (Gray et al, 1995 & Wang Baozhong et al, 2009 & Zhang Guohua, 2005)
(Source from: Cigdem Solas and Sinan Ayhan, 2008)