Accounting Systems and Structure in China - Essay Example

Accounting Systems and Structure in China Introduction China is known to be a communist country with totally different accounting environment as compared to other countries. Therefore, the understanding of Chinese background on social, political, legal and economic front is important to enable elaborate understanding Chinese accounting system and structure. The evolution process of accounting system in China occurred as a result of many theories and writings in accounting and finance (Ball et al., 2003). From the historical perspective, this paper considers different information on the claim that Chinese accounting system has been shaped by cultural, economic and political factors over the years. This is revealed through detailed comparison of the historical phenomena that occurred in Chinese accounting system over the years. Critical assessment of the effects of culture on development and transformation of Chinese accounting is discussed with a look at significant changes within institution’s value system that supported accounting structures (Luft, 2007). A brief history of accounting and its traditional use in China and significant changes and reasons that led to changes The development of Chinese accounting system adopted a new dimension in 1949 after the establishment of People’s Republic of China by Chinese Communist Party (Zhang, 2005). This marked the new phase of Chinese accounting where most of the financial models were adopted from the Soviet Union (Shalin, 1999). The development of the accounting system in China is divided into two distinct periods based on different legislative contents (Güvemli, 2001). The Chinese economic system before 1979 was planned on socialist platform, where the Central Government and the Party were the chief controllers of the economic system. After the 1979, the open door policy as well as the economic reform led towards the evolution of China’s economic and legal system. The National People’s Congress (NPC) issued several laws including the PRC Accounting Law which marked the beginning of the development of Chinese accounting system. The reforms within the accounting system turned the Chinese accounting system into a capital market that was based on financial reporting system. This served the market-oriented economy in the year 1992 bringing the Chinese accounting system towards standardization as well as internationalization (Ashbaugh and Pincus, 2001). The first phase of accounting law was issued in 1985 by National People’s Congress and later revised in 1993 and 1999. However, the Chinese government has used PRC Accounting Law as the basic law in China safeguarding accounting structures and system. The revised laws in 1999 proposed the implementation of state uniform accounting system that incorporated business, supervision, agency, personnel and management accounting system. The second phase involved executive regulations that provided general conceptual framework as well as principles safeguarding accounting structures. The ministry of finance in Chinese government had promulgated a total of seventeen accounting standards applicable in the nation by the year 2003. The third phase comprised of uniform accounting systems that operated under the authority of PRC Accounting Law issued by the Ministry of Finance (MOF). The phase comprised of different sectors of accounting and systems before the reform. There were rules developed for accounting work in national departments including accounting statements and preparation processes (Lu, 2004). Maoist regime rejected the western learning and therefore, advocated for the policy of self-reliance. The accounting system during the Maoist era followed a macro-oriented system that had many control systems. These systems focused on provision of financial information on business management and government departments (Miller, 2007). The initiation of the People’s Republic of China in 1949 by Chinese Communist Party as previously discussed led to significant changes within China’s accounting system. Prior, Chinese government operated on borrowed principles from Soviet Union which they used in drafting different accounting regulations applicable at various economic departments. Later, the Government of China improved on these principles that reflected Chinese specific conditions as well as requirements. This led to the establishment of unified accounting system having elements of Chinese culture (Drenevich, 2006). The Chinese accounting system during Maoist regime was macro-oriented system with several control elements. The primary focus of this system was the provision of financial information on the use of government funds in the management of organizations and government departments (Ball, 2001). However, there was less focus on profits as well as long-term development of economic enterprises. Initiation of Cultural Revolution in 1966 led to the elimination of traditional Chinese culture with the focus on cleansing Communist Party, which was driven by political opponents. The result was enormous damage to Chinese economy that led to the suspension on various developments within accounting system (Nobes and Parker, 2010). During the Great Leap Forward (1958-1961), there was rapid establishment of communes as well as rapid control by Party representatives on communal administration. Within this period, there was introduction of accounting system without books where accounting ledgers were eliminated. This caused great disruption to the existing accounting system which was production oriented as well as accounting education. The processes that followed in 1966 saw the abolishment of debit-credit bookkeeping, which was replaced by increase-decrease method applicable in business sector. The words “increase” and “decrease” were used as bookkeeping labels in the process of maintaining balance between application of finances and sources. The debit-credit bookkeeping was identified as the most preferable in maintaining balance between debits and credits within all transactions and account balances (Lu, 2004). The era of the “Open Door Policy” was marked by Deng’s modernization movement that challenged Mao’s political rationality. There was enactment of several commercial laws during this era such as The Equity Joint Venture, The Foreign Enterprise Law, The Trade Marks Law amongst other laws (Kollen, et al., 1998). Deng transformed China into a socialist market economy with elements of Chinese characteristics. The various institutional changes initiated during this era encouraged higher growth rates and development. Transitional changes required provision of strategic services such as accounting for the purposes of sustenance. Within the information services, the setting of prices followed a central pricing board that relied on information data provided by accounting system. However, detailed transformation processes with the market economy demanded inclusion of meaningful prices that required development of cost accounting into an independent and disciplined system (Lam, 1995). Rational Discussion of Institutional and other Factors, Including Culture Culture Hofstede defines culture as a collective programming of the mind that can distinguish members of different human groups (Toohey, 2003). However, the term culture is appropriately used within the confines of societies or nations while subculture refers to the level of an organization or family. Research shows that the degree of cultural integration varies between societies while, in most instances, subcultures share common characteristics. Value system is perceived to be one of the essential components of culture. In this case, value is defined as the aspect of giving preference to certain state of affairs over others. Ralston (1997) argues that all collectively held values represent culture that is used as a reference to the societal system. The aspect has made culture to be one of the dominant factors that greatly influenced the accounting evolution in China. In this case, the Chinese culture was classified into two broad categories that included Chinese traditional culture and Chinese modern culture. The traditional culture was mainly rooted in Confucianism and Buddhist philosophy that was used through generations (Lu, 2004). On the other hand, the modern culture was modelled in accordance with socialist structure of governance. The Chinese culture known as Confucian dynamism refers to deeply rooted Eastern value system that was used within China. This value system was characterized by the element of collectivism that impacted the development of Chinese accounting system. Within such a society, only government institutions with microeconomic dimensions were allowed access and use of accounting information. This is since accounting was only used for the purposes of keeping track of the flow of Emperor’s wealth and checking efficiency within state properties (Lin, 2003). Additionally, the information that was provided through accounting was only considered as part of statistics on government census. This is since the ancient Chinese culture never recognized calculation of profits as well as measurement of costs within their accounting system (Lin, 2003). The idea was propagated by Confucian LI and Yi that presented opposite ethics, therefore, preventing Chinese accounting system from accounting for profit or losses. The prevailing culture during these periods made Chinese people comply with already existing rules and regulations rather than innovating new ones. Different rules such as Confucian doctrine ensured some level of order within the country that avoided the use of private accounting, as a result, leading to widespread application of governmental accounting practices (Schradhha, 2005). Different reforms in Chinese system such as the enterprise reform led to various changes within the corporate landscape that led to complete alteration within the accounting environment. This led to government of China responding by enacting a number of accounting regulations that transformed the system from traditional rigid and uniform system to the predominant Anglo-Saxon approach towards financial system. There has also been enactment of approximately thirty detailed accounting standards leading to Chinese accounting practice conforming to IAS (Nobes and Parker, 2002). Models Used Chinese accounting system operates under a cluster that supports statutory control, same practices, confidentiality in disclosure of information as well as approach towards conservative measurement. Hofstede developed a model of culture that incorporated collective programming of mind. Hofstede defined culture as an element that incorporates a set of societal values capable of driving institutional practices. Hofstede model included four major levels through which culture operates that include levels of symbols, values, heroes as well as rituals (Toohey, 2003). These levels were used to conceptualize accounting as the system that operates along national cultural norms. The model describes culture in several dimensions that include an aspect of individualism versus collectivism, large versus small domains of power, the aspect of masculinity versus femininity and the aspect relating to strong against weak uncertainty (Ma and Ning, 1999). Hofstede model explains the impact of national culture on accountants and their behaviours towards accounting practices. For instance, in case of a high level of uncertainty avoidance within a region, then there is the minimization of alleged uncertainties. In such cases, there is application of rules and regulations that are detailed and prescriptive. Subsequently, there was Gray model that considered culture as the value system shared amongst major population groups (Doupnik and Tsakumis, 2004). Hofstede model includes additional elements based on Chinese values that relates to long-term and short-term orientation. Gray’s theoretical perspective argued that accounting and culture can be linked to an environment where assessment on the influence of culture on accounting values is possible (Toohey, 2003). The model refers to accountant’s value system as derived from societal values incorporated in workplaces. Such accounting values ultimately impacts accounting practices that include reporting of information, which affects accounting systems that have a direct influence on national financial reporting systems. Gray’s theory gives an explanation that supports the fact that each accounting system should relate to specific culture and serve its unique requirements. Consequently, Gray developed accounting values that were based on Hofsede’s model that represented aspects of control between professionalism and Statutory, values between uniformity and flexibility, conservatism and optimism as well as secrecy versus transparency (Nobes and Zeff, 2008). Current Economic and politics or other culture and institutions that may lead to problems in implementing IFRS According to Armstrong et al., (2007) and Deloitte (2011), financial reporting systems have remained different by country including the regions that have adopted international Financial Reporting Standards (IFRS). The various international differences in reporting financial information have led to a number of problems since users such as investment analysts; assess companies in comparison to international standards. Several explanations have been given for the existing differences in accounting systems for different countries. In this case, many opportunities for IFRS practices differ from country to country due to the different versions of IFRS (Armstrong et al., 2007). There are major environmental characteristics that influence accounting system within different environments. According to Zhang (2005), these environmental factors fall into four major categories that include educational, socio-cultural, legal dimension, political and economical dimensions. The extent of economic development within a region results into dynamic changes within legal, political and learning objectives that ultimately influence accounting practices. The other elements that determine national differences in international accounting practices included cultural, linguistic, civil, legal, demographic and political relativism. In this case, the cultural relativism demands that every behaviour and practices be defined based on native cultural contract. In the view of Ball et al. (2000), this helps in the process of understanding various determinants of national differences within international accounting practices. There are some factors such as economy, law, politics as well as culture that posse some challenges between Chinese accounting system and IFRS. However, the development of Chinese economy as well as improvement within their international status have continued to attract more investors alongside business tycoons due to great potential within Chinese market. Despite the Chinese national accounting standards being separately developed, they are based on the relevant International Accounting Standards (IAS). At the same time, despite the notable progress and China’s effort in accounting reform through the years, the country still finds itself far apart as pertains to convergence in international accounting standards. In this case, convergence is used to refer to the act of using accounting method for similar economic transactions within different jurisdictions. Due to differences in nation’s social structures, market systems and legal environment, there is a major challenge in trying to find out major similarities in the application of IFRS. The Chinese government is facing economic conversion resulting into great differences between the country and other developed nations regarding economy, law and culture (Lu, 2004). Economic environment presents one of the major influences in the convergence between China’s accounting system and international standards. This is since the Chinese Socialist market economy is mainly based on public ownership, which is different from economic patterns in western countries. The China’s market economy is considered to be in the process of development in the aspects of supervision and resource allocation. In this case, the country is still actively exploring process of establishing various accounting standards. The Chinese business system is under the control of SASAC that bases economic system on public ownership. On the other hand, the country’s market of equities is considered immature to achieve what is referred to as fair value in accounting (Zhang, 2005). On the legal front, accounting systems and structures in China operates under the mandate of Ministry of Finance. In this case, the government expects all business enterprises to submit financial reports that reflect universal accounting system. Such system avoids the application of accounting policies as well as making it impossible for accountants’ professional judgement. The Chinese law allows the use of Business Accounting Standards that uses force of law; this is contrary to most western countries that use the common law system that follows case law system. This means that the western countries rely more on professional judgement of accountants that follows the accounting rules that involves calculation of fair value and cash flow measurement (Zhang, 2005). The Chinese traditional culture follows the social power where people revere the sense of hierarchy that adorns superiority and inferiority complex amongst people. The system follows the superior’s will that acts in accordance to laws, regulations and systems, therefore, having elements of Chinese characteristics. The Chinese cultural background raised people with traditional thought and lacks sense of innovation since they focus so much on interpersonal relationships. This has led to accountant’s inability to acutely execute new matters and at the same time, cautious concerning accounting calculations as well as means of information disclosure. However, international accounting standards with high influence of western culture are established based on some accounting business principles that grants power of decision making within the specified accounting standards that concerns accounting calculations. Where Accounting is heading The accounting reforms launched from the year 1980 focused on establishment of new framework used in the regulation of financial reporting that is considered as adaptable to the present Chinese market economy that is socialist oriented. However, the subsequent adoption of accounting standards in the reform process led to dramatic and significant changes to Chinese accounting history. This made the Chinese financial system of reporting to incline towards international Anglo-Saxon orientation. There have been major activities done by International Accounting Standards Board (IASB) that focuses on ensuring the revision and amendment of existing accounting structures, as well as developing new accounting standards for various member countries. These revisions and issuance of new standards corresponds directly to member’s call for specific transactions alongside disclosures that require further clarification. The international convergence of accounting standards has led China’s current business accounting standards to attain to substantive convergence with the International Financial Report Standards (IFRS). Different models of accounting system adopted in China are revealed to be different from other countries due to differences in economic backgrounds and accounting objectives. Mueller classifies accounting system into distinct patterns that include macroeconomic, microeconomic, uniform accounting as well as independent discipline patterns. These patterns work closely with relevant environmental factors prevailing within Chinese government (Ali and Hwang, 2000). Recent research shows that China has operated on inseparable links that incorporate traditional norms, culture, and common lifestyle. However, out of the mentioned aspects, culture is considered the major element that ensures the existence of traditions and lifestyles (Gao and Handley, 2003). In the traditional Chinese society, there was no use for preparing or measuring profit and losses in financial reporting. However, evolution of new trade systems will demand the use of financial instructions that would ensure timely payments, provision of credit and deposits. The Chinese society focuses on modernizing its accounting system whereby different businesses sees the necessity of using different types of business ledger (Luft, 2007). However, the evolution and development of accounting as a profession is largely influenced by economic, political and social trends. Conclusion The study gives several changes that have indeed taken place on accounting system within the Chinese society. Chinese government has given an expression on the strict rule of law that is based on their traditions, which enables them provide peaceful and reliable environment. This paper provides discussion on historical influences and changes that have occurred within accounting system in China. Some of the influences on bookkeeping are drawn from cultural variables, with culture seen as the most dominant factor used in shaping Chinese accounting system. The entire accounting system is characterized by values from either Feng Shiu or Confucian. In the case of Chinese system, cultural models such as Hofstede and Gray’s provide excellent values from which environmental factors can be differentiated. These incorporate political and economic factors that have a high level influence on Chinese accounting practices. From this paper it can noted that accounting in China has deep roots in Maoist ideologies that used collectivism as means of shaping institutions and protecting assets. However, Moo’s era was also characterized by irresponsible actions, which prevented Accounting education for the purposes of protecting communist regime from being influenced by capitalist policies. The study reveals the importance of unifying political, economic and cultural factors in the process of identifying cultural elements within Chinese accounting system. However, political influence still plays a key role in dictating Chinese lifestyle, economic trends as well as accounting practices. There was major achievement in balancing organizational operations through Yin-Yang principles. The Chinese society experienced evolution towards the market economy that overwhelmed the traditional accounting system. 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