Improving China’s Accounting Standards: Progress Report

Financial and accounting standards in China need to converge with global practices as the country becomes increasingly integrated with the world economy. Regulatory agencies are working on just that but there is mighty long way to go, both in bringing China’s accounting standards more in line with international financial reporting standards and with management practices for internal company controls and financial reporting. China’s version of generally accepted accounting principles (GAAP, but not the same as U.S. GAAP) is being replaced by a new code, known as CAS, based on international principle-based standards, and a version of America’s Sarbanes-Oxley internal financial controls for companies, known as C-Sox, being introduced.

The work, a massive undertaking, was started formally with new accounting standards legislation in 2007, although that, in the nature of Chinese legislation, was mostly an outline of the new system. A new report, Opportunities to improve financial reporting and internal controls in China CAS and C-SOX, by the management consultancy PricewaterhouseCoopers reviews progress so far on both fronts, with a look at the impact on the car industry in particular.

China’s old accounting rules and practices were a hangover from the days of a centrally planned economy, not fit for the country’s more mixed market economy and certainly not useful as a management tool for corporations involved in world trade and international capital markets. And, as we have seen with a succession of U.S. listed Chinese companies, they have embedded bad habits, such as not having to account for debt, that makes accounting fraud too easily become second nature.

One important caveat from the PwC report:

It is…important to recognize that these actions taken by the Chinese government are not intended to provide immediate and complete alignment with their equivalent global standards. Rather, they should be viewed as steps by the Chinese government to gradually establish a high quality financial management infrastructure that can support its rapidly growing economy—with consideration of its own unique set of circumstances.

Footnote: The U.S. Securities and Exchange Commission is investigating some accounting firms over their audits of Chinese companies whose shares trade in the U.S., and the inquiry is expected to lead to enforcement cases, the Wall Street Journal reports. Since February, about 40 Chinese companies have either acknowledged accounting problems or seen the SEC or U.S. exchanges halt trading in their stocks because of accounting questions.

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