Question

whar are the problem of accounting practices in China and how the culture affect the accounting practices ?

Answer 1

There is considerable theory and evidence to suggest that culture is an important environmental variable influencing the development of accounting systems internationally. According to the Hofstede (1980) and Gray (1988) cultural models, China's accounting development and practice should be in the cluster that supports statutory control, uniform practices, a conservative measurement approach and secrecy in disclosure. A uniform and rigid system of financial reporting has been practised for decades in the People's Republic of China under the centrally controlled economy. The accounting reforms launched since the 1980s aim to establish a new framework for regulating financial reporting which is adaptable to China's recently emerged socialist market economy. The adoption of accounting standards in the later phases of the reforms marks a dramatic turning point in China's accounting history towards a more international Anglo-Saxon orientation in financial reporting. Based on an analysis of the authority for accounting systems, the accounting profession and accounting measurement and disclosure in China, it is argued that this development will be constrained by the influence of China's culture and its accounting subculture. While financial reporting will be governed by accounting standards, their development and enforcement will remain a governmental and legalistic function. Accountants will continue to rely heavily on detailed technical rules. This mixed orientation will constitute China's unique national identity in terms of its accounting and financial reporting system.

China is now the second largest economy in the world and increasingly plays an influential role in the global economy (World Bank, 2015). More and more foreign investors want to invest in China. At the same time, local Chinese firms look to expand their businesses both inside China and abroad. Thus, it is valuable for both preparers, auditors, investors and creditors to understand Chinese Accounting Standard (CAS). Both foreign investors and Chinese local firms need to understand CAS to gain a better understanding of their businesses. This paper focusses on CAS, during the convergence process with IFRS over the past 25 years.

On November 8, 2005, the China Accounting Standards Committee (CASC) and the IASB signed a joint statement on the convergence of CAS and IFRS (World Bank, 2015). Since that time, the CASC has worked to implement IFRS in China. However, Chinese regulators insisted that China has “unique circumstances” that preclude direct adoption of IFRS. Therefore, despite the 2005 agreement and subsequent convergence efforts, differences between CAS and IFRS remain.. This paper seeks to answer the overall question: did China really complete the convergence process with IFRS? This paper also compares the two sets of accounting standards and addresses whether the convergence process enhanced accounting quality in China, which was the primary goal of the convergence process.

“Convergence” is a dynamic process to ensure consistency of CAS with IFRS in both the letter and substance of accounting principles. Convergence is neither a “direct adoption” of IFRS nor a word-for-word translation of IFRS (Moussa, 2010). However, convergence of accounting standards does not necessarily mean that accounting practices, application of the standards, in China have also converged with application of IFRS in other jurisdictions. Therefore, China may need additional time to achieve actual convergence with IFRS.

Previous research summarized specific differences between CAS and IFRS. However, there has been little research on whether China has fully completed the convergence process. Therefore, this paper fills this gap by testing the factors that impact accounting in China. In addition, this paper discusses the development of new standards and focuses on the impact of the new Chinese Accounting Standards by examining the different requirements in both Chinese and English.

BACKGROUND: THE PEOPLE’S REPUBLIC OF CHINA

In 1949, Chinese accounting practices were originally developed to meet the needs of the country’s non-market, planned economy. These practices relied largely on practices borrowed from the Soviet Union (Ramanna, 2013). In the late 1970s, the process called “reform and opening up” led foreign investors to China. The demands of foreign investors required “a more advanced accounting system that better suited a market-based economy” (Ramanna, 2013). Subsequently, in an effort to improve financial reporting quality and to attract more foreign investment, Chinese government implemented several accounting standards reforms in 1992, 1998, 2001, and 2006 (Chen & Zhang, 2009). These reforms culminated in China mandating adoption of IFRS by all publicly-traded companies in 2007 (MOF, 2006). Chinese regulators claim that use of IFRS reduces information acquisition costs and, therefore, increase the willingness of foreign investors to invest across borders (Tweedie, 2008).

It is not easy to reform an accounting system in a short period of time. Therefore, these rapid reforms created many issues. For example, in 1997, China implemented a guideline on debt restructuring, which required a company to recognize gains from restructured debts in net income. Thus, many companies saw the debt restructuring guideline as a way to inflate profits (Ramanna, 2013). In addition, the skills of Chinese accountants did not keep pace with the change in the accounting system. By 2009, most accountants in large Chinese companies met the high professional standards of accountants in developed countries. However, accountants in small and medium-sized companies were less skilled (Ramanna, 2013). I discuss later in the paper how lack of understanding of IFRS among Chines accountants is a major factor directly affecting accounting quality in China.

Although companies faced many difficulties during reform of Chinese accounting standards, China moved forward and adopted IFRS in 2005. By 2008, many of the companies listed on the major Chinese stock exchanges had begun using the new standards. It is expected that all Chinese companies would have adopted the new standards by 2011 (Ramanna, 2013).

The China’s 5,000-year history means that the country has its own distinct culture. Guanxi, is a word that refers to the informal relationships that affect how business is conducted in China. Both local business people and foreign investors are aware that Guanxi is the key factor that affects business operations. In addition, Guanxi also had and continues to have a huge impact on the accounting standards convergence process in China. Many sceptics consider national culture to be the major obstacle facing businesses seeking to enhance accounting quality (Forsberg & Ojala, 2014, p24).