chinese accounting system

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Table of Contents

Introduction .................................................................................................................................................. 2

Population ................................................................................................................................................. 2

Economic Structure and Major Industries ................................................................................................ 2

Major Firms ............................................................................................................................................... 4

Chinas Stock Market .................................................................................................................................... 6

China Securities Regulatory Commission ...................................................................................................... 7

Legal Enforcement of IFRS ............................................................................................................................ 8

Summary of contents of financial statements .............................................................................................. 9Transition Process of Accounting Standards............................................................................................... 10

Auditing Standards ...................................................................................................................................... 11

Full convergence with International Standards ...................................................................................... 11

Verification of Capital Contribution ........................................................................................................ 13

Comparison of Chinas old GAAP and IFRS ................................................................................................. 14

Accounting Education in China ................................................................................................................... 15

The Chinese Institute of Certified Public Accountants ............................................................................... 16

The CICPA Overview ................................................................................................................................ 16

The CICPA Examination ........................................................................................................................... 16

Accounting Student..................................................................................................................................... 19

Chinas Cultural Influences on Accounting ................................................................................................. 20

Appendix 1. Comparison of CASs and ISAs (As of 2006) ............................................................................. 23

Appendix 2. Accounting Firms in China ...................................................................................................... 25


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Introduction

Population

In 2012, China's population amounts to 1.3 billionan increase of 365 million since

1980. Yet, population is growing at a decelerating pace and should reach its peak in less than two

decades. Current methods of population control will be relaxed as the growth of population

slows. The fertility rate is presently 1.6 births per female (below replacement level) and is

expected to remain at that level in the medium term.

The median age is steadily rising and by 2011 it was 35.5years16.9 years greater than

the figure for 1980. In fact, population aging is occurring more quickly in China than in most

other countries. The country's working age population will begin to fall by 2017. By 2040, there

could well be 100 million Chinese over 80 years oldmore than the current worldwide total.

This demographic imbalance will have dramatic and fundamental consequences for the country's

economic and social character. Improvements in social security and healthcare are essential. In

recognition of the extent of China's population ageing, Beijing plans to spend RMB890 billion in

2009-2012 to improve healthcare.

Economic Structure and Major Industries

Industry accounts for about 46.8% of China's GDP (2010 est.). Major industries are

mining and ore processing; iron; steel; aluminum; coal; machinery; textiles and apparel;

armaments; petroleum; cement; chemicals; fertilizers; consumer products including footwear,

toys, and electronics; automobiles and other transportation equipment including rail cars and

locomotives, ships, and aircraft; telecommunications equipment; commercial space launch

vehicles; and satellites. China has become a preferred destination for the relocation of global

manufacturing facilities. Its strength as an export platform has contributed to incomes and


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employment in China. The state-owned sector still accounts for about 40% of GDP (2010 est.).

In recent years, authorities have been giving greater attention to the management of state assets--

both in the financial market as well as among state-owned enterprises--and progress has been

noteworthy. (http://www.state.gov/r/pa/ei/bgn/18902.htm)

Agriculture employs 33.8% of the workforce. Farm output grew by 4.6% in 2011. Rice is

the main food crop, but tea, sugar and fibre crops are also important cash earners. In addition,

China is the world's biggest producer and consumer of cotton. Farm output is expected to rise (in

real terms) by more than 25% during the decade but looming water shortages could prove to be a

serious bottleneck. Nationally, the agriculture sector consumes about 70% of China's surface

water but more than one-fifth of water resources are unfit even for farming. The area sown for

grain should increase in 2011 and output will rise by 2.5 billion kg.

Manufacturing accounts for 30.0% of GDP and employs 14.2% of the workforce. In

2009, China became the world's largest car market but annual sales are expected to grow by 8-

10% in 2012. Car penetration in China is still modest, even when compared with countries such

as Brazil or Russia. Beijing announced that in 2012 it will withdraw support for foreign capital in

auto manufacturing in an effort to support the development of domestic auto makers. Many other

manufacturers are trying to move up the value added chain but China's shady reputation on

intellectual property makes foreigners hesitant to transfer technology to Chinese partners.

Domestically, state-owned firms continue to dominate the economy, accounting for an estimated

40% of non-agricultural output.

Services make up 38.6% of GDP. Banks are now more commercially oriented and non-

performing loans remain at modest levels. The regulatory infrastructure of the banking system
http://www.state.gov/r/pa/ei/bgn/18902.htmhttp://www.state.gov/r/pa/ei/bgn/18902.htm


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has been significantly improved. The real value of tourist receipts is expected to have risen by

7.4% in 2011

Major Firms

PetroChina-PetroChina Company Limited (PetroChina) is the largest oil and gas producerand distributor, playing a dominant role in the oil and gas industry in China. It is not only one of

the companies with the biggest sales revenue in China, but also one of the largest oil companies

in the world. PetroChina was established as a joint stock company with limited liabilities by

China National Petroleum Corporation under the Company Law and the Special Regulations on

the Overseas Offering and Listing of Shares by Joint Stock Limited Companies on November

5th, 1999. The American Depositary Shares (ADS) and H shares of PetroChina were listed on

the New York Stock Exchange on April 6, 2000 (stock code: PTR) and the Stock Exchange of

Hong Kong Limited on April 7, 2000 (stock code: 857) respectively. It was listed on Shanghai

Stock Exchange on November 5, 2007 (stock code: 601857)

China Construction Bank is a leading commercial bank in China providing a comprehensive

range of commercial banking products and services. Their business consists of three principal

business segments: corporate banking, personal banking, and treasury operations. They are

among the market leaders in China in a number of products and services, including infrastructure

loans, residential mortgage, and bank cards.

They have an extensive customer base, with established banking relationships with many

of the largest business groups and leading companies in industries which are strategically

important to China's economy. They have an extensive network of approximately 13629 branch


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outlets. In addition, we maintain overseas branches in Hong Kong, Singapore, Frankfurt,

Johannesburg, Tokyo, Seoul, New York, Ho Chi Minh City and Sydney.

China Petrochemical Corporation (Sinopec Group) is a super-large petroleum and

petrochemical enterprise group established in July 1998 on the basis of the former China

Petrochemical Corporation. Sinopec Group is a state-owned company solely invested by the

State, functioning as a state-authorized investment organization in which the state holds the

controlling share. Headquartered in Beijing, Sinopec Group has a registered capital of RMB 182

billion. China Petroleum & Chemical Company (Sinopec Corp.), controlled by Sinopec Group,

issued H-shares and A-shares at overseas and home respectively in October 2000 and August

2001 and was listed on stock markets in Hong Kong, New York, London and Shanghai.

China Railway Group is a super-large integrated construction group that encompasses

infrastructure construction, survey, design and consulting services, engineering equipment and

component manufacturing, property development and other businesses.

China Railway Group Limited has 46 subsidiaries, including 28 wholly owned

subsidiaries, 15 holding subsidiaries, 4 branch companies and 3 joint venture subsidiaries. In the

year of 2005 and 2006, China Railway was the fourth and third largest construction company in

the world, respectively. In 2007, it was ranked 342nd in the Fortune Global 500 companies, and

listed the 417th in the Worlds 500 Most Influential Brands and the 13th in Chinas Top 500

Enterprises.


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Chinas Stock Market

The Chinese stock market was established in 1980s. Chinas two stock exchanges, the

Shanghai Stock Exchange and Shenzhen Stock Exchange, were established in November 1990

and December 1990, respectively. Chinese listed firms have multiple classes of shares

outstanding: shares listed in mainland China and traded in RMB (A shares), shares listed in

mainland China and traded in foreign currencies (B shares), and shares listed or cross-listed

overseas (for example, H shares listed on the Hong Kong stock exchange; ADRs if listed in the

US). Since 1996, the stock market has been playing an important role in the national economy as

it was defined as a major source of refinancing the state-owned enterprises (SOEs) sector.

Despite stricter regulations and some improvement in operational efficiency, the Chinese

stock market continues to be tarnished by problems of mismanagement. A Code of Corporate

Governance for Listed Companies was enacted by the China Securities Regulatory Commission

in 2002 as part of an initiative to improve the reporting of inflated profits and the delisting of

loss-making companies. Listed companies are required to undergo supplementary audits by the

major international auditing firms. In general, opportunities for domestic firms and individuals to

hold foreign-currency denominated stocks and bonds (the B share market) remain heavily

circumscribed. Although still constrained, opportunities for foreign firms and individuals to

purchase Chinese-currency denominated assets (the A share market) are gradually increasing.

More than 100 of Chinas 500 largest companies, including China Telecom, Anshan Iron and

Steel Company, and Handan Iron and Steel Company, have been publicly listed, although state

institutions still hold around 60% of shares in such enterprises. Big state corporations, including

the four SOCBs (see above), have also listed their shares in international markets. Chinas other

capital markets remain underdeveloped, although the countrys WTO accession is one factor that


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will help enhance bond, insurance and securities markets. Diversification within the interbank

market has strengthened its role as a source of capital for domestic banks. Meanwhile, although

the corporate bond market remains small, the National Financial Work Conference has signaled

that the issue of corporate bonds would play an increasingly important role, as Chinas bond

markets developed.

China Securities Regulatory Commission

The China Securities Regulatory Commission (CSRC) was established in 1992, shortly

after the establishment of Chinas two stock exchanges. The CSRC is under the direct leadership

of the State Council, the highest executive organ of State power and administration in China (1).

The CSRC carries out regulation and supervision of the securities and futures markets

nationwide according to applicable laws and regulations.

The CSRC consists of a chairman, five vice-chairmen, and three assistant chairmen. In

addition to the senior management listed above, the CSRC holds a staff of over 2,500 employees.

The CSRC is headquartered in Beijing, but most of the staff works in the 36 regional offices that

are located in various regions throughout the country. The CRSC comprises 21 functional

departments, 4 affiliated institutions, and 4 special committees.

The CSRC was modeled after two regulatory bodies: the Securities and Exchange

Commission (SEC) in the United States and the Securities and Futures Commission (SFC) in

Hong Kong. It performs regular reviews and random inspections of companies and securities

firms. It also investigates allegations of company and securities fraud and malpractice. The

allegations come from investors, current and former employees, insiders, newspapers, stock

exchanges, legal proceedings, and police investigations.


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If the CSRC finds that a wrongdoing has been committed, it will publish the information

in a report that is shown in national newspapers. The CSRC has four different categories for

penalizing companies: public criticism, public condemnation, official warning, and monetary

fines. The CSRC may also suspend trading and withdraw licenses from securities firms. In

regards to individuals, the CSRC can take actions that result in criminal prosecutions with strict

punishments that include the death penalty.

In addition to its supervision and enforcement responsibilities, the CSRC is also

responsible for developing rules and regulations for the securities market that are based on public

law. Also, the CSRC formulates the qualification criteria and codes of conduct for securities

practitioners and fund employees.

Legal Enforcement of IFRS

The Chinese capital market is segmented into two different categories: A-shares and B-

shares. A-shares can only be owned and traded by Chinese citizens while B-shares can be

owned and traded by anyone. The regulations that apply to Chinese firms depend on what type

of security they issue. Companies that issue A-shares must develop financial statements that

comply with Chinese GAAP only, while companies that issue B-shares must develop a set of

financial statements that comply with IFRS and a set that comply with Chinese GAAP. The

companies that issue B shares must also prepare a line-item reconciliation of earnings under the

two standards.

Chinese law states that the financial statements that are issued under the Chinese GAAP

can be audited by a local auditor. However, the financial statements that are issued under IFRS

must be audited by an international reputable auditor, like a Big 4 firm. Also, the CSRC may


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require an international auditor to review the Chinese financial statements when a company

applies for new equity offerings in the domestic market.

The audit opinions of international auditors are more highly regarded then those of local

auditors since the independence of Chinese local auditors can be compromised due to the weak

institutional environment in various areas throughout China. Evidence of this occurred in the

early 2000s when the CSRC supported a significant increase in international audit support in

hopes that the quality of auditing in China would improve. From 1999 to 2002, local CPA firms

declined from 106 to 71 due to increased competition from international firms. However,

research shows that the international auditors actually did not outperform the local CPA firms in

increasing IFRS compliance.

In 2001, the CSRC implemented a compulsory policy that is regarded as the most

influential regulatory enforcement effort on IFRS compliance in China. The policy states that

management must choose the same accounting policies for both Chinese GAAP and IFRS, where

possible. Thus, the only differences between the two sets of financial statements would be the

differences in Chinese GAAP and IFRS. The policy was created to increase national

convergence with the international accounting standards. Research shows that the

implementation of the policy led to a clear decline in line-item earning differences between

financial statements based on Chinese GAAP and corresponding financial statements based on

IFRS.

Summary of contents of financial statements


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Transition Process of Accounting Standards

In the early 1990s, with the establishment of Chinese stock exchanges, foreign investors

in the stock market had difficulty interpreting the financial statements of Chinese firms and the

restatement of the financial statements into international terms was a costly process (Winkle et

al, 1994). In this sense, the existing socialist accounting model needed to shift to a market

oriented model to attract foreign investors. Since the countrys economic reform, the MOF has

developed Chinese accounting standards that improve the quality of Chinese firms financial

reporting. To achieve this purpose, the MOF made an effort to converge Chinese GAAP with

internationally recognized accounting standards (Chen, Gul, & SU, 1999). In 2005, the MOF

officially clarified its goal of as convergence with IFRS (IASB, 2005).

On February 16, 2006, the MOF announced that it promulgated a new basic accounting

standard and 38 new Chinese Accounting Standards (CASs) that are substantially in line with

IFRS, with a few exceptions. The MOF required all listed companies to start using the new CASs

in their 2007 financial statements. The MOF expanded the use of the new standards to all state-

owned enterprises starting in 2008, and then to all large and medium-sized companies starting in

2009.

Peng et al. (2010) divides this development and convergence progress into four stages.

They consider the first stage (from 1992 to 1997) a revolutionary change in Chinese accounting

because the MOF introduced a market oriented accounting model for the first time. During the

second stage (from 1998 to 2000), the MOF promulgated theAccounting System for Joint Stock

Limited Enterprise and ten specific CASs. The third stage (from 2001 to 2006) is represented by

the issuance of theAccounting System for Business Enterprises, which replaced the 1998

Accounting System, and 16 CASs (6 newly issued, 5 revised, and 5 original standards). The


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fourth stage (from 2006) is initiated by the issuance of theAccounting Standards for Business

Enterprises (ASBEs), which consists of a revised Basic Standard and 38 specific standards.

Peng et al. documents that since 1992, the MOF has moved Chinese GAAP toward

convergence with IFRS through the issuance of a series of Chinese GAAP that enhanced the

level of successful convergence, which refers to fully or substantially converged items, with

IFRS (20% in 1992, 35% in 1998, 49% in 2001, and 77% in 2006). The convergence has been

carried out both through the direct import of standards from IFRS (74 of 123 items, 60%) and

through progressive changes to Chinese GAAP (49 of 123 items, 40%).

According toRoadmap for Continuing and Full Convergence of the Chinese Accounting

Standards for Business Enterprises (ASBE) with the IFRS, the MOF targets 2011 as the year for

completion of the convergence program of the ASBE and IFRS, and all large and medium-sized

enterprises are required to use the revised standards as of 2012.

Auditing Standards

Full convergence with International Standards

The development of socialist market economy, privatization, and large inflows of foreign

investment requires the innovation of a Chinese accounting system in harmony with international

practice. To reinforce the confidence of investors, to regulate the performance of audits, and to

harmonize with international practices, China began to issue 10 independent auditing standards

with the first batch being effective from January 1, 1996. The second and third batches of 17

standards, 5 practice pronouncements and 3 related general standards on professional ethics,

Comment [b1]: This is written as thoa year in the future. I realize that is becareference was written before 2011, but I t

will want us to research and find out if th

target last year.


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quality control and continuing professional education became effective from January 1, 1997,

and July 1, 1999, respectively (Lin and Chan, 2000).

On December 8, 2005, the Chinese Auditing Standards Board (CASB) and the

International Auditing and Assurance Standards Board (IAASB) released a joint statement in

which the CASB indicated that the fundamental principle of drafting Chinese auditing standards

is to improve the Chinese auditing standards system and to accelerate its convergence with the

IAASBs ISAs. As an outgrowth of this joint statement, the CICPA published new 48 Chinese

Auditing Standards (CASs) that adopted nearly all International Standards on Auditing (ISAs) in

2006 (Deloitte, 2006). In China, the CICPA is responsible for publishing auditing guidelines, but

it must seek approval from the MOF before any auditing guidelines can be published.

According to a press release issued on November 10, 2010, the CASB completed the

revision ofCSAsCASs, and achieved full convergence with the clarified ISAs. During the

international convergence process, the CASB made limited additions it considered necessary and

maintained some standards dealing with matters that are not specially covered in ISAs to reflect

Chinas unique circumstances and business requirements, such as standards for the verification

of capital contributions and communications between predecessor and successor auditors. The

IAASB admits that such additions are acceptable if only they dont conflict with ISAs.

Chong (2008) expects that adopting international standards may help streamline the audit

approaches and reporting between the primary and secondary auditors in China. The primary

auditors, based outside China, would have little or no difficulty subcontracting their audit

assignments to the secondary auditors, their Chinese counterparts based in China.

The revised CSAs were officially released in early November 2010, and are effective for audits

of financial statements for period beginning on after January 1, 2011.


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Verification of Capital Contribution

Verification of capital contribution is peculiar to China. CAS defines verification of

capital contribution as the verification of the truthfulness and legitimacy of the entitys paid-in

capital and its relevant assets and liabilities. In China, verification of capital contribution is a

legal requirement when: (1) a new business is set up that requires each party to pay its

contribution within the times as fixed in the contract; (2) the change of legal person, merger, or

demerger, increases in and assignments of registered capital; and (3) contracting parties wish to

change their registered capital. For instance, equity joint ventures in China are required to have a

registered capital to which all parties must contribute. After each party makes all contributions,

an accounting firm is called upon to verify the contributions and issue a certificate of

verification. The guidelines require the auditor to carry out necessary verification procedures and

obtain sufficient appropriate evidence for the expression of an opinion and the issuance of a

verification report. The verification report should contain two paragraphs: one describing the

scope of the verification and one expressing the auditors opinion on the verification of capital

contribution.

However, there is no equivalent ISA in this area. Verification of capital contribution is

usually not a statutory audit in the developed countries such U.S., U.K., Canada, and Australia,

even though auditors sometimes have to verify capital contributions under various regulatory

requirements.


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Comparison of Chinas Old GAAP and IFRS

As stated previously, China issued its latest set of accounting standards in February of

2006. Although the standards are very similar to IFRS, certain modifications have been made to

reflect Chinas unique circumstances and environment. Most of the differences between the two

standards come as a result of the Chinese limiting some of the options that are allowed in IFRS.

Therefore, companies that are compliant with the Chinese standards will generally be compliant

with IFRS, as well. A listing of the key differences between the two standards is presented

below.

ASBE 2 only allows the equity method to be used when accounting for jointly controlledentities. IAS 31 allows both the equity method and proportionate consolidation to

account for such entities.

ASBE 3 allows the cost model or the fair value model when measuring land use rightsthat is held for rental property and classified as investment property. Under IAS 40,

enterprises are allowed to classify such land rights as investment property only if the fair

value method is adopted.

ASBE 4 and ASBE 6 require the cost model to be used to measure fixed assets(excluding investment properties) and intangible assets, respectively. However, the

comparable international standards (IAS 16 and IAS 38) allow the use of both the cost

model and the revaluation model.

ASBE 5 requires the cost model to be used to measure biological assets unless there isevidence that the fair value of the assets can be obtained reliably on a consistent basis.

IAS 41 requires that the fair value be used to measure biological assets unless evidence

shows that it cannot be obtained reliably.


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ASBE 8 prohibits the reversal of all types of types of impairment losses whereas IAS 36only prohibits the reversal of impairment loss for goodwill.

ASBE 17 requires the capitalization of all borrowing costs that meet the criteria forcapitalization. IAS 23 provides an option to expense all borrowing costs.

ASBE 30 states that the expenses of the income statement must be shown by function.IAS 1 allows the same expenses to be presented by function or by nature.

ASBE 31 requires the direct method to be used when reporting cash flows from operatingactivities. An enterprise must also develop a note that shows the reconciliation of profit

to net cash from operating activities. Under IAS 7, an enterprise is only encouraged to

use either the direct method or the indirect method.

ASBE 36 exempts state-controlled entities from being regards as related parties simplybecause they are state-controlled. No such exemption exists under IAS 24.

Accounting Education in ChinaFor bachelors degree, students must take several accounting, management, math, and

finance classes even though the required courses are a bit different depending on colleges. Main

courses of B.A. Accounting at Nanjing Audit University include: Economics, Management,

Statistics, Management Information System, Economic Law, Tax law, Marketing, Monetary and

Banking, Financial Accounting, Intermediate Accounting, Advanced Accounting, Cost

Accounting, Management Accounting, Auditing, International Comparative Accounting,

Accounting Information System, Accounting Statement Analysis, Research of Accounting

Cases, Accounting System Design, Financial Management, etc. (English.nau.edu.).


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For master's degree, students should take more theoretical classes including accounting

history and modern accounting theory. Generally, Master of Professional Accounting (MPAcc in

short) programs are more profession-oriented in terms of education objective, admission policy,

course content, educational pattern and quality standard. Whereas, Master in Accountancy

programs are more academic and emphasize more on research.

(http://www.rbs.org.cn/templates/T_eng_new_list/index.aspx?nodeid=280)

The Chinese Institute of Certified Public Accountants

The CICPA Overview

The Chinese Institute of Certified Public Accountants (CICPA) is an organization under

the guidance of the Ministry of Finance and the Council. It was founded in November 1988 in

accordance with The Law of the Peoples Republic of China for Certified Public Accountants

and The Regulations for the Registration and Administration of Social Organizations.

As of October 31, 2010, CICPA has nearly 180,000 individual members, with 95,378 practicing

members and over 83,000 non-practicing members. (CICPA, 2011)

The CICPA Examination

The CPA National Examination Committee of the Ministry of Finance decided to reform

the CPA examination system in early 2007, with a view to support the further implementation of

the professional strategies. In accordance with the MOFs decision and the CICPAs reform

action plan, the new examination system was launched in 2009.

The main characteristic of the new CPA examination system in China is that the

examination consists of two stages:

1) Level 1: Professional stage
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In this level, the examination primarily assesses whether examinees possess a good command of

the professional knowledge as required of a CPA in public practice, as well as the basic skills

and the professional ethics.

The 5 subjects under the old examination system are split, expanded, and combined. Level 1

examination consists of 6 subjects: Accounting, Auditing, Financial Management and Cost

Management, Corporate Strategies and Risk Management, Economic Law, and Taxation Law

2) Level 2: Advanced stage

The Level 2 examination assesses whether examinees can integrate and apply the professional

knowledge in practice, and whether examinees maintain the professional values, ethics and

attitudes, as well as the capability of solving problems. Level 2 exam tests an integrated subject

of all disciplines.

Examinees are only allowed to take up the examination of the advanced stage after he/she has

passed the professional stage. As the advanced stage focuses primarily on examinees

competency, it is suggested that examinees should gain adequate practical work experiences

prior to sitting the second stage examination.

The two levels of examinations are held once a year. The CPA examination in China is a

national unified examination and unlike the AICPA examination, there are no particular

requirements for each province. The examination results of each of the 6 subjects in the

professional stage are valid for 5 years. After successfully passing all the required subjects of the

professional stage examination, the candidate obtains the Certificate for Passing the

Professional Stage Examination. The integrated subject in the advanced stage should be

accomplished within 5 years after obtaining the Certificate for Passing the Professional Stage


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Examination. After successfully passing the advanced stage examination, the candidate can

obtain the Certificate for Passing All Subjects.


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Accounting Student


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Chinas Cultural Influences on Accounting

China has had a long and rich history. A large portion of its traditional culture has been

influenced by Buddhism, Confucianism, and Taoism. The culture that has built open over

generations places high value in harmony and moderation. Radical transformations in China are

not perceived favorably. Instead, Chinese culture advocates the importance of harmony and

unity amongst the Chinese people, the environment, and the society.

The government policies that have been places in China over the years have largely been

influenced by the nations culture. In recent years, China has been engaging in gradual

transformation from a planned economy to a market economy. The Ministry of Finance in 2006

implemented new accounting standards. While the government understands the importance of

IFRS in its accounting practices, China has until recently agreed upon a convergence path rather

than completely adopting all standards. This point stresses the importance that the government

places on a harmonious society. Harmony is viewed to incorporate the law in governing society

and bringing about fairness and honesty.

Hofstede (1980) from Holland developed a model of culture as the collective

programming of the mind that distinguishes the members of one human group from another. The

four cultural dimensions that he identified were Individualism versus collectivism, Large versus

small power distance, Strong versus weak uncertainty avoidance, Masculinity versus femininity.

Collectivism dominates Chinese culture as opposed to individualism. Authority by an upper

hand and the level of respect towards seniors is strongly accepted. This goes to show that there

is a large power distance. Since Chinese people do not tolerate extreme changes, they would

prefer to avoid a sense of avoidance. They view that everything has its own cycle eventually the


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cycle will itself die out. Lastly, culture values such as relationship and harmony in China point

out that the country can be categorized as feminism as opposed to masculinity.

Based on the preceding four cultural dimensions identified by Hofstede, there is

uniformity, secrecy, low professionalism, and high regulatory control in China. As an example

of large power distance, in recent years that poor have become poorer, while the rich have

become richer. This gap, mainly created from Chinas transition from a planned economy to a

market economy, has given opportunities to many privileged people to make a lot of money.

The vast majority of accountants in China abide by the many detailed regulations set

forth in accounting standards. They lack the skills of judgment and self-discipline. These rules

and standards direct the accountants how to act given different situations. However, since real

life scenarios can be vastly different from what is written in accounting standards, Chinese

Accountants tend to become clueless as to what actions to perform. The accounting regulations

and laws implemented in China is set by the government. Private bodies and individuals rarely

have any say on the design of accounting standards. In regards to Uniformity, this concept is

highly correlated with uncertainty avoidance and low individualism. Chinas acceptance of its

enforcement regulations set for by the government also goes to show that uniformity is related to

the degree of high power distance in the nation.

The concept of secrecy reflected in China portrays the fact that the financial information

provided need not to be transparent. Since a majority of the enterprises in China are state-

owned, the financial information which are produced are mainly used by the management of the

same entities. The large power distance and low individualism in China contribute to the fact

that financial information is not widely dispersed with the public.


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With the introduction of the new accounting standards in 2006, there is a greater

likelihood that there will be greater evidence of higher professionalism. This is mainly reflected

by the new standards requirement of professional judgment by accounting professionals and the

need for financial information to be useful for decision making. The new standards mandate

enterprises present reliable and fair information to investors. Furthermore, the increase in the

number of college graduates studying accounting will also help increase the level of high

professionalism. The creation of a good moral standard can promote honesty amongst

accountants, resulting in the production of fair and authentic financial information.


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Appendix 1. Comparison of CASs and ISAs (As of 2006)

Chinese Auditing Standards

Equivalent

International

Standard

General Standard

1 General Standard for Assurance Engagements ISA 120

Auditing Standards for CPAs of China

2 No 1101 - Objective and general principles governing an audit of financial

statement

ISA 200

3 No. 1111 - Audit engagement letters ISA 210

4 No. 1121 - Quality control for audits of historical financial information ISA 220R

5 No. 1131 - Audit working papers ISA 230R

6 No. 1141Consideration of fraud in an audit of financial statements ISA 240

7 No. 1142Consideration of laws and regulations in an audit of financial

statements

ISA 250

8 No. 1151Communications with those charged with governance ISA 260

9 No. 1152Communications between predecessor and successor CPAs

10 No. 1201Planning an audit ISA 300

11 No. 1211- Understanding the entity and its environment and assessing the risks of

material misstatement

ISA 315

12 No. 1212Consideration relating to entities using service organizations ISA 402

13 No. 1221 - Materiality ISA 320

14 No. 1231Procedures in response to assessed risks of material misstatement ISA 330

15 No. 1301Audit evidence ISA 500

16 No. 1311Supervision of physical inventory count ISA 501 PartA

17 No. 1312 - Confirmations ISA 505

18 No. 1313Analytical procedures ISA 520

19 No. 1314Audit sampling and other means of testing ISA 530

20 No. 1321Audit of accounting estimates ISA 540

21 No. 1322Auditing fair values measurements and disclosures ISA 545

22 No. 1323Related parties ISA 550

23 No. 1324Going concern ISA 570

24 No. 1331Audit of opening balances on initial engagements ISA 510

25 No. 1332Subsequent events ISA 560

26 No. 1341Management representations ISA 580

27 No. 1401Using the work of other CPAs ISA 600

28 No. 1411Considering the work of internal auditing ISA 610

29 No. 1421Using the work of an expert ISA 620

30 No. 1501Auditors report ISA 700R

31 No. 1502Modified auditors report ISA 701

32 No. 1511 - Comparatives ISA 710

33 No. 1521Other information in documents containing audited financial

statements

ISA 720

34 No. 1601Auditors report on special purpose audit engagements ISA 800

35 No. 1602Verification of capital contributions

36 No. 1611Audit of financial statements of commercial banks IAPS 1006

37 No. 1612Inter-bank confirmation procedures IAPS 1000


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38 No. 1613Relationship between banking supervisors IAPS 1004

39 No. 1621Special considerations for audit of small entities IAPS 100540 No. 1631Consideration of environmental matters in an audit of financial

statements

IAPS 1010

41 No. 1632Auditing derivative financial instruments IAPS 1012

42 No. 1633Effect of electronic commerce on the audit of financial statement IAPS 1013

Standard on Review Engagements for CPAs of China

43 No. 2101Engagements to review financial statements ISRE 2400

Standards on Other Assurance Engagements for CPAs of China

44 No. 3101Assurance engagements other than audits or reviews of historicalfinancial information

ISAE 3000R

45 No. 3111Examination of prospective financial information ISAE 3400

Standards on Related Service for CPAs of China

46 No. 4101Engagements to perform agreed-upon procedures regarding financialinformation

ISRS 4400

47 No. 4111Compilation of financial information ISRS 4410

Standard on Quality Control for CPA Firms

48 No. 5101Quality control of professional work ISQC 1

(Source: Earnest & Young China, 2006)

ISAInternational Standards on Auditing

IAPSInternational Auditing Practice Statement

ISREInternational Standards on Review Engagements

ISAEInternational Standards on Assurance Engagements

ISRSInternational Standards on Related Services


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Appendix 2. Accounting Firms in China

The accounting profession experienced robust revenue growth in 2010, reaching a record

high of 37.5 billion RMB, an increase of 18 percent and higher than the growing pace of GDP.

Revenues for the Top 100 were 61.6 percent of the profession, or 23.1 billion RBM. The top 10

domestic firms grew over 20 percent, which was way above the Big Fours 4.24 percent.

By the end of 2010, excluding firms which are organized in the form of Chinese-Foreign

cooperation, firms with securities practice qualification have established 64 subsidiaries,

members or associates in Hong Kong or other overseas regions, generating revenue of 0.57

billion RMB, or 1.58 percent of the profession.

The Top 100 employed a total of 24,968 certified public accountants, an increase of 8

percent. Average revenue per capita (ARPC) continued growth trend, reaching 340,000 RMB in

2010, increased by 34,000 RMB, or 11.53 percent.


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Bibliography

chinese accounting system

Documents