Accountancy in China: Young profession, Ancient civilisation

China lake with purple haze

The accountancy profession in China has a short history of about 30 years and auditing is even younger. The profession’s role in China’s capital market is still evolving and is yet to achieve a status akin to that of the profession in mature markets such as Australia and the US.

Jessie Wong CPA and University of Melbourne Alumnus and Len Jui of KPMG China and Amir Ghandar of CPA Australia report on the state of accountancy in the world’s most populous nation.

Of course, differences abound and operating successfully in China requires strong awareness of its numerous defining factors. Not least is its place in the populous Asian region, which accounts for almost two-thirds of the world’s people over a vast geographical expanse that occupies the same area as Europe.

On top of this, China’s 5000-year history has given rise to an immense diversity of local cultures and business practices. Grasping these outstanding features is not only important for businesses, but also critical for understanding and interacting with the Chinese accounting profession.

To put this in perspective, let’s crunch the numbers. There are about 98,000 public accountants (PA) and 8000 accounting firms in China. At the end of last year the profession served a nation of more than 1.3 billion people, accounting for trade volume of more than US$3.8 trillion. This equates to about one public accountant for every 14,000 people and one accounting firm for every 170,000 (see table).

Country # People / CPA # People / Accounting Firm
China 14,000 170,000
US 500 7,500
Australia 110 2,300

There are about 50 accounting firms licensed to audit listed companies in mainland China. The number of accounting firms in China licensed to provide cross-border audit services is far lower.

In comparison with the numbers in advanced Western economies, the differences are staggering. The US has more than 600,000 PAs and 40,000-plus accounting firms serving a nation of more than 300 million people, accounting for trade volume comparable to China in 2012. This equates to one accounting firm for every 7500 people.

Australia had more than 200,000 professionally qualified accountants and 9500 accounting firms at the end of last year, serving a nation of 22 million people and accounting for trade volume of US$609 billion. This comes to one accountant for every 110 people and one accounting firm for every 2300 people.

Making sense of these stark differences requires an appreciation of the Chinese accounting profession’s early stage of development. The profession in China started to emerge in the late 1980s when the Chinese Institute of Certified Public Accountants (CICPA), a government body, was set up to represent the profession.

This developmental stage brings about challenges similarly faced by the accounting profession in the US and Australia previously.

However, to comprehend the extent of the challenges faced by the profession in China, factors that are unique to the country must be added to the mix.

High on the list is the significant shortage of qualified accountants and auditors in China, where the profession faces competition for talent from other industries and big state-owned enterprises in a rapidly growing Chinese economy.

The corporate governance conundrum

High-quality financial reporting and auditing go hand-in-hand with good corporate governance. This is firmly imprinted in the minds of accountants and auditors worldwide.

In response to regulatory requirements, Chinese companies have introduced corporate governance frameworks that appear in line with international best practice. However, many companies lack the resources for effective implementation and monitoring.

Worse, some companies lack the know-how to implement an effective corporate governance framework. Some continuing areas for improvement include distinguishing the roles of directors and management, establishing effective audit committees and transparency around related-party transactions.

Chinese regulators are cognisant of the importance of Chinese companies implementing high-quality corporate governance – this means ensuring accountability of boards to shareholders and alignment between the interests of management and investors.

Pushing the corporate governance agenda is the China Association of Public Companies (CAPCO), a national self-regulating organisation backed by the Chinese securities regulator.

Notwithstanding efforts by the regulatory community to strengthen corporate governance, demand from capital markets and investors is critically needed to motivate Chinese companies to adopt a far stronger focus. Perhaps the trickier part of the issue is that recognition of the value of strong corporate governance among management, those charged with governance and investors are still very much lacking.

The audit black box

The accounting profession in China still has much to do, particularly in educating the investing public on the role of auditors and the value of audits. In China, accountants may sometimes be inaccurately perceived as mainly performing the role of bookkeepers, because preparers of financial statements perceive this is of most value, resulting largely from the low competency of some companies’ accounting departments.

An understanding of “the value of audit” as an important part of corporate governance is also wanting. More pressing, however, is the need for China to develop strong accounting in companies ahead of driving audit reforms.

Consequently, financial statement audits are treated as compliance exercises. Without understanding the objective of the audit, many select auditors on the basis of their fees; ahead of audit quality, professional competency, and the audit firms’ integrity and reputation. This can discourage efforts to emphasise audit quality in the Chinese auditing profession, effectively penalising good behaviour.

Audit firms that invest in resources to ensure effective quality control systems, competent staff on audit engagement teams and internal infrastructure – all measures that minimise risk for the firm and its clients – will necessarily be compelled to quote higher audit fees to recoup this upfront investment. Firms that have not chosen to focus on quality can afford to provide much lower audit fee quotes as a result.

Nonetheless, the extensive work done by Chinese regulators and standard-setters to enhance audit quality should also be acknowledged. For example, they have improved the effectiveness of the framework for inspecting accounting firms, reviewed auditor independence to ensure requirements are up-to-date with current practice and promoted the importance of good corporate governance among Chinese listed companies.

These efforts have resulted in changes in attitudes – and the need for these efforts to be continued is clear.

The future of auditing in China is highly dependent on the success of the profession in changing perceptions from audit as a “black box” to being viewed as a valued and essential tool in the corporate governance toolbox.

The challenge ahead

Amid the country’s rapid economic development, the accounting profession in China has evolved with its rapid rise to become the world’s second-largest capital market and fastest-growing emerging economy. China has captured the world’s attention and become a prevalent discussion topic across global business.

There is often a degree of misunderstanding and speculation in such discussions, which is understandable given that the predictions for growth are so impressive. Consider this: by 2025, China will build 10 New York-sized cities and by 2030, China will add more new city dwellers than the entire US population.

Undue speculation about these issues may be grave. Commentators often fail to remember that China is home to one of the world’s most ancient civilisations, with more than 50 recognised ethnic groups that speak more than 200 languages and dialects. The country’s diversity underpins how government and organisations operate and how people live and work.

Against this backdrop, the young Chinese accountancy profession faces challenges on multiple fronts. However, it has the opportunity to rise to the important role of ensuring stability of China’s capital market.

China’s accountancy profession is inextricably linked to the international accounting community. The impact of this interconnection on the profession’s progress flows both ways.

It is vital for the international community’s engagement with China to progress beyond one of form and formality to one of genuine appreciation of the country’s underlying facts and circumstances. China equally needs to reciprocate. It is worth remembering this is achievable, as accountancy professions in other jurisdictions have had to walk a similar path.

About the authors:

  • Jessie Wong CPA PhD, a member of CPA Australia, is KPMG China’s Director – Public Policy and Regulatory Affairs, Quality and Risk Management. She is a BCom honours alumna.
  • Len Jui CPA MBA, a member of the American Institute of Certified Public Accountants (AICPA), is KPMG China’s Partner – Head of Public Policy and Regulatory Affairs, Quality and Risk Management. He was formerly Associate Chief Accountant of the US Securities and Exchange Commission. He graduated from the University of Miami, Florida, USA with MBA (Accounting). Jui is a member of the China Auditing Standards Board and Technical Adviser to China’s Member of the Board of the International Federation of Accountants.
  • Amir Ghandar CPA is a member of and policy adviser at CPA Australia, where he oversees audit and assurance including professional development and training, policy, resource development, research and key initiatives on integrated reporting and sustainability.

 

This article is from the May 2013 issue of INTHEBLACK magazine

 

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