China\'s Developing Accounting System China

China's Developing Accounting System

China is in full growth and development process. The region is becoming one of the world's most important markets, in terms of workforce, on the one hand, and in terms of buying potential, on the other hand. Therefore, it was only a matter of time until China became one of the favorite destinations for significant foreign investments.

However, in order for these investments to be successful, it is necessary to apply an accounting system in conformity with international standards that every involved party agrees with. Unfortunately, China's current accounting system is not quite in harmony with international standards, and some specialists in the field consider that this situation will not improve in the future.

Although in 2001 China adopted the Accounting System for Business Enterprises, based mostly on ISAB standards, it seems that ISAB rules have not been entirely embraced. However, China does not seem to be making much effort regarding the implementation of an accounting system that would be in accordance with international standards. Instead, China's officials prefer to declare that the country is in a special situation and must, therefore, be treated in accordance with this situation.

This situation is likely to have negative effects for foreign companies investing in China's potential, on medium term and on long-term. These companies that are investing significant technical and financial resources in this region expect that things will develop following the standards that they are used to. Instead, these standards will be avoided. This situation will generate a lot of confusion in the first phase of the phenomenon.

Many international companies have observed the potential that China has in terms of workforce, and in terms of consumption market. Therefore, these companies invested in exploiting this potential, given the growth forecasts regarding China. The Chinese government has supported these investments, by offering generous tax incentives to foreign companies investing in China. However, these incentives were not backed up by a suitable accounting system. Even more, these investments incentives are somehow annulled by a defective accounting system.

China's current accounting system is not suitable with foreign companies' strategy, given the fact that the Chinese system used to follow the Soviet system. There still are certain reminiscences that affect the country's accounting system. Therefore, the activity of foreign companies in China is affected by this situation.

There is a series of cases that show very clearly how foreign investing companies have already been affected by the Chinese accounting system. For example, there are several suspicions regarding the foreign companies audited by Chinese authorized auditors, given their reduced number and lack of experience. Another example regards China Life Insurance, which was listed on the Hong Kong and New York stock exchanges, raising approximately $3.4 billion. The company's future evolution was not as successful, since the following year a routine audit on the company revealed that it had uncovered $652 million in financial irregularities. The result was the immediate fall of stock, attracting a series of lawsuits regarding financial fraud. The United States investors were obviously misled, they lost significant amounts of money, their efforts were in vain, and their image was severely shaken.

The consequences of this defective accounting system that is still applied in China can become quite severe for foreign companies that invest here. As mentioned above, a series of financial irregularities can emerge. Although these irregularities are conducted by the Chinese party, it will affect the foreign one also.

It is quite probable that negative attention regarding such issues will cause these foreign companies' stock to fall, affecting severely all investors. In addition to this kind of losses, foreign companies' financial and technical resources will not be rewarded at all. Also, such situations can attract lawsuits in which foreign companies will be involved, even if they are not guilty of any financial misconduct. Even more, these situations will attract a series of suspicions regarding companies' financial activity. These suspicions will create a negative image on the companies in case. Given the fact that for most companies a great part of their success relies on their image, the negative issues regarding their image could have repercussions that these companies will not be able to counteract.