Public Accounting in China and South Africa - Essay Example

Public Accounting in China and South Africa By Location Public Accounting in China and South Africa China Public Accounting The China government exercises regulation of its funds through the audit done by the office of the Director of Audit. The office is responsible for auditing all the government organizations and those that are within the scope of public audit. The government is in turn held accountable by the legislature through the parliamentary committees. For matters to do with financial reporting and audit matters the Public Accounts Committee (PAC) acts as the watchdog. The committee is required to look into the accounts of government entities and those that are suspected to be violating the laws (Stapenhurst et al. 2006). In case of financial statement, fraud or any the crime involving financial statements in the government organizations then the PAC is expected to carry out an investigation and table its report to the Parliament on debate and provide recommendations for the government (Kang et al. 2008). Members of the committee are expected to obtain information or evidence from public officers and even managers of the public organizations. They are expected to examine the Director of Audits report concerning any organization. The president, however, is not a member of the committee, and the committee is independent of any control by the executive. In China the process of reporting involves preparation of the audit report, then preparation of the tax reconciliation report and finally preparation of foreign exchange reconciliation for foreign companies operating in China. There is also profit Repatriation of the financial statements depending on tax clearance completion. The financial reporting process in China is coded as it was borrowed heavily from Germany. Previously, most of the companies were owned by the government, but after the 80’s they reduced though the government still has some control over their reporting. The source of capital is debt thus the reporting is inclined towards the requirements of their equity providers that is the government and banks. The management is responsible for the financial statements of an entity in China be it government’ public or private organization. Accountability of the financial statements is at the hands of the Chief Financial Officers and the top management who acts as the agents of the owners. It is expected that all financial reports must be audited before getting published so as to show a true and fair view of the financial position of the firm. The must comply with the reporting standards issued by Hong Kong Institute of Certified Public Accountants (Shah 2007). South Africa Public Accounting Financial reporting of public entities in South Africa is under the responsibility of the Public Accounts Committee in the legislature. Just like in China, it is a watchdog to the expenditure and income of public organizations. Government agencies are expected to prepare their annual financial reports and present the to the Auditor General’s Office for auditing purposes. The reports from the different provincial governments are also expected in that office for auditing (Roos 2011). The auditor general then prepares a summary report on the audited financial statements that he presents to the Public Accounts Committee. PAC is expected to review the report and examine any disparities (Roos 2011). The PAC is allowed to call the head of departments and even managers to account for the reports and answer questions concerning the financial reports under examination. They also check for compliance with the reporting principles set out by the Institute of Certified Public Accountants of South Africa (ICPASA). Publication of financial statements in South Africa is a process that requires monthly reports, quarterly reports and semi-annual reports depending on the sector or department that the organization falls. These in between period’s reports are subject to auditing by the internal auditor of the company who are independent of the management (Roos 2011). The quarterly reports are then subjected to examination by the security and exchange commission of South Africa. The commission is supposed to scrutinize the accounting ratios and compare them with the previous period reports. The final reports are subjected to audit by auditors from a company that is authorized by ICPASA. The auditors are supposed to determine whether the financial statements were prepared in accordance to the relevant accounting standards (Diamond 2002). The auditor is supposed to give a final report to the shareholders who determine their next course action for public companies. For the government organizations, the reports are audited by the office of the general auditor. In the case of a qualified report then the Public Accounts Committee looks at the report and tables their findings before parliament. Accrual accounting Accrual accounting involves three concepts namely accrual basis, multiple inter-period allocations and expense basis. Accrual basis is the direct opposite of cash basis accounting. It refers to not recognizing assets and liabilities to expenses and revenues. Under this method, liabilities are recognized whenever an obligation arises and also the assets are recorded when the company has the right to receive them (Wildeman 2012). Expense basis is derived from the matching concept thus outflows are rerecorded as accrued only when the services or goods are consumed or used. The statement of operations reflects the value of assets or cash that has been paid or commitment has been shown to be paid when this method is used. Inter-period allocation is the process that involves moving costs from the balance sheet to the statement of operations. They’re a lot of assumptions that are applied during the movement, for example, the cash flow assumptions that involve the movement of all inventory costs to expense. When this method is used then the statement of operation ceases to show the relationship between donated and used resources. Proponents of accrual accounting argue that it is a successful concept in the private sector thus implementing it in the public sector would have the same impact. For example, in the private sector or business accounting, it has assisted in the management of assets by the company. For instance, the recognition of an asset is only when it has been put into use or consumed. It limits instances of misuse of company assets thus the government can use the same accounting concept to help safeguard its assets (Hasan et al., 2008). The second argument is that it provides adequate financial information for accountability that is easier to understand, but difficult to manipulate. Comparability and consistency of the information provided are convincing thus limiting situations of financial fraud or misstatements. For example, when purchases are received the amount owed to the seller is accrued (Liu 1996). The commodities purchased will be reflected in the statement of financial position as an asset and moved to the statement of operations when they are consumed or used for their intended purpose. The above entry makes it impossible for manipulation since the asset will only have to be used so as to reflect in the statement of operations unlike the expenditure method where the commodity is recorded directly as expenditure (Knapp 2013). It creates loophole for a manager or a senior employee to put the company’s assets to their personal use other than the intended purpose. The third argument is that it will enable the government to separate between its capital and current expenditure (Jorge 2008). For example capital expenditure that involve the purchase of non-current assets like motor vehicles will be recorded in the assets accounts and an offset will be done in the cash account or recorded as a liability when purchase on credit (Gustavson 2014). When these capital costs are recorded in the statement of operations as expenditure, it makes it easy for anybody to misuse them, or make them disappear because monitoring their movement from the balance sheet would be difficult. The fourth argument is that the accrual basis of accounting enhances transparency because it involves recording the transactions in many different accounts that are easy to follow but difficult to alter. Transparency would enhance public sector performance (MCLeary 1999). Arguments against accrual principles claim that the nature of activities in the private sector is different from the government. The private sector is profit oriented, while the government is about providing services to its citizens. For example, the private sector will use the expense basis of accounting so as to ensure that goods purchased have to add value to the profit. Therefore, if a company purchases a van; then it is supposed to solve the transport problem in the logistics department thus bringing in more supplies thereby enhancing profits (Farvacque-Vitkovic 2014). For the government, the purchase of a van is to provide the service to the people and determination of the extent to which it improves the value of services rendered is a challenge. The second argument is that the application of matching revenue principle may not be applicable (Everingham 2007). It is because of the nature of transactions in the government. The revenues for the government are non-exchanged and are not compulsory that they must be received when service is rendered. The third argument is that the nature of the assets that are owned by the government makes it impossible to implement the accrual concept. It is because the depreciation and valuation of items such as heritage and military assets are debatable (Funell1998). They are not used to generate revenue as compared to the private sector where very asset owned by the company are supposed to be assisting directly or indirectly to the generation of revenue. The role of Supreme Audit Institutions (SAI) The SAI has a main role of public resource management in every government (Buckley 2008). The SAI is responsible for checking if the government has properly implemented the budgets according to the laws and policies set out by the constitution. It is also mandated with checking out irregularities in the government expenditure then forwarding them to the legislature to enforce findings and recommendations. Their other objectives include, communicating to the general public and public authorities in the form of reports from audit procedures carried on government entities. Secondly, is to develop a sound financial management system. It is made possible through the design of effective internal controls and accounting systems that minimize the possibility of misstatements (Frangos 2009). Thirdly is to effectively use public funds advanced to them by ensuring that they carry out their duties with due care and professionalism. The main types of audits they are expected to carry out are the compliance, financial and performance audits. Financial audits are aimed at determining whether there is fairness and accuracy in the presentation of financial statements (De Ferranti 2009). Compliance audits are staged to determine whether public funds were used for their intended purpose. Performance audits are to determine whether the services rendered are equivalent to the value of money that they cost. SAI’s faces difficulties that include; institutional, technical, and political and communication challenges. These challenges differ between China and South Africa because of the different models of governance in the two states. China uses the collegiate or board model of governance. Under this system, SAI has a number of members in its governing body. The opinions agreed on, and reports prepared by SAI are taken to the legislature especially the PAC for implementation. The basics structure of their accountability model is similar to that of the Westminster model (Chen 2001). However, there is a difference in their audit institution and internal structure. The collegiate SAI body is headed a president. The members of the board are appointed by a vote of parliament for a fixed term of the office. The SAI in this type of governance is faced with a slow decision-making process because of their all-inclusive and balanced audit system (Chai 2009). It is because the decision-making is shared between members, and all their views are needed on a subject matter before a final decision is made (Chai 2009). Another challenge is the period that a member is allowed to hold the office may be so little that they can hardly achieve much-concerning auditing in a whole country. There may be low corporate knowledge or leadership when the tenure of members are not renewed simultaneously. Political challenges are for instance in one party state where the appointment of members to the board is heavily influenced by political affiliation (Chai 2009). in most cases, it leads to a decrease in audit independence. It happens mostly where the tenure of SAI board members coincides with the General election terms. South Africa is a former colony of England thus uses the Westminster model of governance. In South Africa, the role of SAI is connected to the parliamentary system of accountability (Huang 2001). The model involves three stages where the government requests for funds through budgets that are approved by the parliament. SAI then examines the spending then reports to the parliament. The PAC holds its sessions and then prepares a report. The government is finally expected to respond to recommendations made by PAC (Huang 2001). Under this model, there is the National Audit Office (NAO) which is headed by the Auditor General. There is a chance of abuse of office and corruption under this model. It is because the Auditor General is the sole person with powers and is appointed by the president (Busco et al., 20113). The appointment may be subject to political influence because the president will appoint someone who will not expose financial management in his government thus undermining the auditor’s independence. There are legal challenges experienced by SAI in developing countries like South Africa. These challenges include the legal provisions that protect the office of the auditor general to audit the office of the president (Buckley 2008). The removal of the Auditor General from office is also a challenge in this system of governance since it is subject to approval by parliament. Corrupt politicians and leaders may help protect an auditor in office to serve their interests thus undermine independence of the SAI. References Buckley, S. 2008. Broadcasting, voice, and accountability: a public interest approach to policy, law, and regulation. Ann Arbor, University of Michigan Press. Busco, C., Frigo, M. L., Riccaboni, A., & Quattrone, P. 2013. 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Implementing the Public Finance Management Act in South Africa: how far are we? Pretoria, IDASA. Read More