There are some significant changes in its accounting system since China started its economic reform from a planned to a market-oriented economy in 1978. According to Ding and Su (2008), "before the economic reform that began in 1978, the uniform accounting system in China are consulted the accounting model of Soviet Union and it was mainly designed to assist its planning economy system. "There was no real accounting system of external financial reporting as it is commonly understood" (Roberts et al, 2008).
After 1978, due to the economic reform and the change of demand for an accounting system, there have many other investors and shareholders. And the Stock Exchange was first published and opened in Shanghai in 1990. They prefer having more information for decision-making. Thus, there are some liberalization but selective in its accounting system (Nobes and Parker, 2010).
The year of 1992 was also the historical progress for the reform of accounting in China (Ding and Su, 2008). In this year, Deng Xiaoping allowed market based approach and the Ministry of Finance of China also promulgated the Enterprise Accounting System, basically come from western accounting for reporting to the external users and helping them invest, this is the starting of Chinese accounting regulation (Tang, 2000).
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During the period 1997-2001, new accounting standards were issued and adopted in response to the difficult of market development (Ding and Su, 2008). Nobes and Parker (2010) also believed that the most significant event was its accounting standard keep date and closer to IASs of western accounting by Enterprise Accounting System in 2000 in order to become the membership of the WTO in 2001 and have more opportunity for entering into the international market and practise (Zhu and Ma, 2010).
Furthermore, for attracting the investment and making Chinese companies go into global capital market (Wei, 2012), China has harmonized and revised the New Accounting System for Business Enterprises in 2007 to bring practice largely into line with IFRS and closer to Western accounting even though perceived potential for manipulating profit. The general trend was for gradual convergence with IASs (Tang, 2000).
Institutional/ Other factors
In the global accounting harmonization situation, China aims to at the achievement of closer to IFRS. However, the harmonization in China is not always working successfully. Hu (2010) believed that the characteristic accounting environment, low quality of accountant and the implementation of new accounting standards are three main problems that affect the harmonization. And these problems would cause the distortion of accounting information, the profit manipulation, and the destruction of socialist market economy order and the long-term development of enterprises (Zeng, 2010).
There are numerous studies point that the effect of political and institutional factors in China make its accounting information less reliable (Eccher and Healy, 2000; Chen et al., 2001). As they mentioned that China is a high centralized country with one-party political system and Chinese accounting standards were developed in a high politicized environment and greater control by government, the CICPA is also under government influence and has less independence and enforcement of IAS. Besides, there are over 75% local auditing firms in China are state-owned auditing firm and many listed firms are state-owned or government agency, these make auditor having less incentive to keep independence (Green, 2003) and also cause them overstating earnings to make the financial statement look good, due to government heavily relies on accounting earnings to evaluate the performance of the state-owned listed firms" (Xiao, Zhang. and Xie, 2000). However, Wei (2012) argued that China is a public ownership system country, stated-owned economy as its key role and decides that the state is the major users of accounting and its information. "The accounting standards and policies should meet the need of government and its macroeconomic decision, thus the effective way is the government establishing the accounting standards with the control of accounting profession and the coordination between different ways" (Tang, 2000). And Liu (1997) also argued that practice shows that the accounting form with taking the government as the main body is the most effective way and in line with the national condition in China. Currently, China should keep a powerful and centralized planning system rather than the independence of accounting standards in western countries in order to implement and grow successfully even though it would cause corruption and restrict the liberty and independence.
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And for the economic system, Liu (1997) also suggested that the IFRS/IASs mostly based on the background of the developed and private market economy in western countries, but China until now is still on the initial stage of market economy and it is a developing country. The IFRs/IASs are not all and always suit for the Chinese specific economic environment. For an example, if China imports the "fair value" of the IASs under the imperfect market economy, it would cause the profit manipulation.
Besides, there are some differences of legal system between China and the background of IFRS. According to Zhang (2010), most western countries belong to the common law system and rely more on the flexible professional judgement of accountants. But lacking professional judgement is a problem for China, because they get used to follower the senior and authority and prefer accepting the accounting standard rules (Wright and Cheng, 2002). Ding and Su (2008) also believed that Chinese accountants had less training in making professional judgement. And it could also caused by the educational system. In China, rote Learning is popular rather than critical thinking (Sun, 2010) and Chinese students are expected to be quiet, not to ask questions or interrupt the class as it is considered rude (Watkins, 2002). Therefore, the accounting standards and systems in China are established and controlled by the government, leaving little space for accounting policies and accountant's professional judgement (Zhang, 2010). Chen and Li (2004) also suggested that China belongs to the code law system, and the business accounting standards also having the force of law. And Chinese government prefers moving towards uniform rules for all enterprises in its legal system (Roberts et al, 2008).
In addition, China also wants to set some accounting rules to fit its taxation system, control the accounting profession and satisfy its national policy and planned economy rather than providing financial information for the need of investors in a market-based economy (Wu and Kao, 2006). Many enterprises in China would minimize their profit in their financial report in order to minimize their tax, but most western countries would maximum their profits to attract more investors.
Culture is also a significant factor influencing the international convergence with IFRS in China. Under the model of Hofstede (1984) and Gray (1988), and as Solas and Ayhan (2008) mentioned, Chinese culture is basically characterized by collectivism, statutory control and had a great impact on the development of Chinese accounting. China traditionally closely controlled all enterprises by centralized plans system. It is unlikely to give up this power to a professional body so far (Roberts et al, 2008). Besides, Chinese people are still expected using the uniform rules to conform to the regulations and established norms and authorities rather than flexible principle and guideline of IFRs/IASs. This is because "conformity is achieved by large power distance within hierarchical relationships" (Kirkbride et al, 1991). And Lampert and Sullivan (2008) also suggested that "China cares about catching up to international accounting standards and principles, but it will take time, talent and training to improve its professional judgement". In addition, China's accounting system has high level of uncertainly avoidance, conservatism and secrecy. Chinese government likes to plan everything in advance such as the "five years plan", they do not want to see something happen unexpected due to the complex situation (Roberts et al, 2008).
These factors with a large power distance would have some problems. They may both cause a statutory control system, a weak accounting professional, a weak and imperfect equity market and the inertial effect of accounting tradition and cultural factors (Xiao et al, 2004). And according to the view of Riley and Cai (2009), the conservatism and secrecy cause the problem that and many Chinese enterprises do not want to disclose much information in order to protect their collective profit. A higher power distance and uniformity also can limit the disclosure, professional judgement and make low transparency. And if conflicts rise, the subordinates who possess less power are expected to compromise and to accommodate their superiors' wishes" (Kirkbride et al., 1991).
However, McSweeney (2002) criticized that Hofstede's work on a number of grounds including the tendency to equate cultural groups with countries, while Baskerville (2003) also argues that it is not an effective and good way to think about culture with quantification, measurement and discussion of cultural dimensions (Roberts et al, 2008). More importantly, those models have been stated many years ago, China has a rapid development in every aspect. They may not all suit for the current situation. Besides, China is a big country where has huge gap between different areas by economy and culture (Zhang and Edwards, 2003).
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Furthermore, the Confucianism culture of China is the emphasis on interpersonal relationships (Hwang, 1987). "Guanxi" dominate all business and social activities in China (Hwang and Staley, 2005). Solas and Ayhan (2008b) believed that Guanxi is more significant than formal legal contracts and also reduces the demand for high quality public financial reporting and disclosure, because some firms might have a close ties with the bank, they tend to lower importance of individual shareholders, have a preference for internal funds and bank loans over public equity and debt. "If China follows the general principles of IASB, these would lead to some problems of enforcement, widespread bureaucratic corruption, confusion and a significant influence on the Chinese legal system (Su and Littlefield, 2001). However, Luo and Chen (1997) argued that guanxi-based business variables are 'significantly and positively' related to accounting and marketing performance. For the whole system in China, guanxi can take more positives and benefits than problems. It is easier conducting business and also lowering your cost and bad debt expenses (Fan, 2002).
Nowadays, China has become the second largest economy and has a great development in its accounting system. The internationalisation of Chinese accounting standards and in line with IFRS/IASs is an inevitable result for the gradual growing of socialist market economy system. At the same time, the further changes and how can China overcome its problems are still the controversial issue.
According to the ICAS (2010), some interviewees tend to think that China can follow FASB because of detailed rules. But Some (Wang et al, 2009) believed that "Chinese Accounting Standards will continue to be updated in line with IFRS developments in order to attract more investor". IFRS is the most uses in many major countries rather than US GAAP, China would have more business opportunities and integration with the world economy by IFRS. More importantly, China may prefer IASB rather than FASB due to the political factors. China does not want to see there is a large controlling in the United State of America.
Nevertheless, there is a long way to harmonize with IFRS for China. Liu (2012) also believed that "Follow the IASB directly would have many problems and costly for China". Although Chinese accountant have a dramatic increasing in their professional judgement and becoming increasingly independent, Chinese legal system still cannot change due to other complex factors. This is because the institutional factor and culture in China are more complicated and integrated together. It is difficult to change and overcome. At the same time, the Chinese government would insist and protect its one-party political system and large power in the future. Besides, large power distance, strong uncertainly avoidance, low transparency cannot change in a short time. Therefore, the development of China's accounting system needs to fit its special circumstance,
In conclusion, China cannot overcome these problems easily in a short time. Therefore, China must critical evaluate and consider its real national conditions, also use the opportunity to deep research and absorb the benefits from IFRS in its development. This is probably the effective way for improving the accounting system in China and its economic growth healthy.
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