International Accounting Harmonisation Effects on Chinese Accounting Policy - Case Study Example

INTERNATIONAL ACCOUNTING HARMONISATION EFFECTS ON CHINESE ACCOUNTING POLICY By Number of words (2356) Introduction The harmonisation of the accounting standards has become a highly demanded issue of the discussion and the debate amongst the accounting professionals around the world. Consistent with the apparently increased globalisation of the capital markets and the significant growth of the multinational enterprises, the uniform set of the international accounting standards is fundamental in order to enhance the comparability of the financial reporting around the world. There are some vital significant changes in the accounting system since china started its economic reform from the planned to the market-oriented economy in 1978. According to the Ding and Su (2008), “before the economic reform that began in 1978, the uniform accounting system in china consulted the accounting model of Soviet Union and it was mainly designed to assist its planning economy system. “There are no real accounting systems of external financial reporting as it is commonly understood” (Roberts et al, 2008). China is a classic country that has an accounting environment, which is different from that of Anglo-American countries, for instance, China is in a stage of transition from a centrally-planned economy to a market-based economy by gradually introducing a market mechanisms while at the same time maintaining a great vitality of the State-owned enterprises (SEOs) in its economy. The Chinese capital markets, for instance, lack the adequate liquidity and yet provide a considerable role in the provision of the finance for the companies. Additionally, accounting professionals have inadequate skills and training to make appropriate judgments that are required by consistently applying IFRSs. Despite of this, the Chinese government has taken considerable steps in ensuring there is convergence of Chinese accounting standards with the IFRSs (harmonisation). In order to attract investments and make Chinese companies competitive globally in the capital market (Wei, 2012), China harmonised and revised New Accounting System for Business Enterprises in 2007. This was aimed at bringing the practice largely in line with the IFRS and closer to the Western accounting system a practice that was perceived for potential manipulating of the profit. The general trend was for the gradual convergence with the IASs (Tang, 2000). Many scholars have investigated the factors and determinants influencing international accounting standards, financial reporting and practices. For instance, Nobes and Parker (2010) set the following standards that explain financial reporting differences internationally: legal systems, providers of finance, taxation, the accounting profession, inflation, theory and the accidents of history. Advantages of International Harmonisation The international harmonisation has the following advantages; more comparability of international financial information, set-up costs and time saving for countries that have no adequate codified standards of auditing and accounting, time and money saving spent on the consolidation of the divergent financial information and the raising of the international accounting standards to be consistent with the local economy, social and legal conditions. Disadvantages of the International Harmonisation The international harmonisation has the following disadvantages; lack of flexibility in handling differences in the national backgrounds, traditions and economic environments. Conversely, the international harmonisation is politically unacceptable challenge for national sovereignty, the collection systems used to collect tax varies internationally and the corporations that respond to ever-growing array of the national, political, social, and economic pressures are usually hard pressed in complying with the additional complex and costly international requirements. Harmonisation and the Context of China In the international accounting harmonisation situation, China has focused on harmonisation of its accounting policies to those of IFRS even though the harmonisation not always worked successfully. For instance, Hu (2010) asserts that, the low quality of account anting, which characterises the accounting environment and the implementation of new accounting standards are the three major problems affecting the harmonisation of accounting policy in china. These problems have lead to the distortion of the accounting information, destruction of the socialist market economic order, and profit manipulation and the long term development of the enterprises (Zeng, 2010). Previous studies point out that the impact of the institutional and political factors in China have led to unreliable accounting information (Eccher and Healy, 2000; Chen et al., 2001). Due to the fact that China is a highly centralized nation that has one-party political system, the Chinese accounting standards thus, were developed in a highly politicized environment with greater control of the government. The harmonisation, therefore, has made the CICPA (which is under the control of the government) less dependable in enforcing the IAS. In addition, there are approximately over 75% of local auditing firms in the Chinese state-owned auditing firms with majority of them being listed in the government agencies, therefore, making auditors have less incentive of keeping independence (Green, 2003). Further, this has led Chinese companies to overstate their earnings in order to make the financial statements look better, due to the heavy reliance by the government in evaluating the progression of the firms listed by the government (Xiao, Zhang and Xie, 2000). Conversely, Wei (2012) argues that, China being a public ownership system nation, and stated-owned economy, the government decides the users of the accounting information. The accounting practices in China are majorly regulated by the three laws, which includes; the Accounting Law (enacted in the 1985 and revised in 1999), the Enterprise Income Tax Law (enacted in 2007) and the Company Law (enacted in the 1993 and revised in the 1999). The MOF is entrusted with the role of preparation of the Chinese accounting standards that are usually applied for all the Chinese enterprises (Article 8). Traditionally, before the harmonisation of the accounting policies in China, a close link between the accounting and taxation existed, and the calculation of the taxable income was a major aim of accounting (Doupnik and Perera, 2012, p. 245). The Chinese regulators have; however, since tried to harmonise the taxation regulations and accounting standards with each other to reduce adjustments from accounting profits to the taxable incomes. Liu (1997) asserts that for an economic system, the IFRS/IASs are majorly based on the background of private and developed market economy of the Western nations. However, China until presently is still lagging on the initial stage of the market economy, in addition to, being a developing country. The harmonisation of the international accounting policy (IFRS/IASs) is not always and do not always suit the specific environment of China. For instance, if China imports the “fair value” of the IAS under the imperfect market economy, it would lead to the manipulation of profits. Additionally, the harmonisation is not good for the China’s economy due to differences in the legal system that exist between China and the background of the IFRS. For instance, Zhang (2010) asserts that most of the western countries are members of the common law system and thus, rely more on flexible professional judgment of accountants. In the case of China however, the lack of the professional judgment is a big problem because they are used to following orders from seniors and the authority; thus, preferring accepting accounting standards rules (Wright and Cheng, 2002). Moreover, Ding and Su (2008) argue that harmonisation of international accounting will affect China’s accounting policy due to the fact that Chinese accountants lack the necessary training in making professional judgment due to educational system limitations. Additionally, the accounting systems and standards in China are controlled and established by the government thereby leaving very little space for the accounting policies and professional judgment for accountants (Zhang, 2010). Conversely Liu (2012) states that, harmonisation will negatively affect accounting policy of China due to the fact that China belongs to a code of the law system and business accounting standards are also under the full force of the law. Additionally, the Chinese government has a preference on moving on towards the uniform rules for the businesses in its legal system (Roberts et al, 2008). Furthermore, in contrast to the harmonisation of the accounting internationally, China wants to set accounting rules in order to fix the problem of taxation system, control the accounting profession to ensure there is satisfaction to its national policy and the planned economy rather than the provision of the financial data for investors’ needs in a market based economy (Wu and Kao, 2006). Contrastingly, many enterprises in China minimize their profits with the main objective of reducing their tax burden but many western countries maximize their profits in order to attract investors. Culture plays a critical role in the harmonisation of the international accounting policy in China. Under the model of Gary (1988) and Hofstede (1984), and as Ayhan and Solas (2008) mentioned, the Chinese culture is usually characterized by collectivism and statutory control, which have a greater impact on the development of the Chinese accounting system. In fact China traditionally controlled all of its enterprises through the use of a centralized plan system. Therefore, it’s unlikely for the country to give up this power to the centralized professional bodies (Roberts et al, 2008). Besides, Chinese businesses are expected to use the uniform rules in conforming to regulations and established norms rather than the flexible guideline and principle of the IFRSs/IASs. The harmonisation of the international accounting to China’s accounting policy has led to the high level of the uncertainly avoidance, secrecy and conservatism in China. The Chinese government likes planning everything in advance like the “five year plan”, it does not want seeing unexpected happenings of things owing to the complex situation of the international accounting (Roberts et al, 2008). The international accounting harmonization has led to a weak accounting professional, statutory control system, imperfect and weak equity market and the inertia effect of the accounting cultural and traditional factors in China (Xiao et al, 2004). According to a review of the Riley and Cai (2009), the secrecy and conservatism lead to the problem that many of the Chinese enterprises does not disclose a lot of information with the main aim of protecting their collective profit. Harmonisation can therefore limit the disclosure, professional judgment and contribute to the low transparency. Additionally, in the case of conflicts, the subordinates that posses less power are expected to compromise and accommodate the wishes of their superiors (Kirkbride et al., 1991). Su and Littlefield (2001) argues that the international harmonisation of accounting would make China have some problems of enforcements, widespread bureaucratic corruption, confusion and a significant influence on the legal system of China. However, Luo and Chen (1997) say that guanxi-based business types of variables are “significantly and positively” related to marketing and accounting performance. “Guanxi” is the principle domination of all the social activities and businesses in China (Hwang and Staley, 2005). In fact for the whole system in China, the guanxi takes more benefits and positives compared to problems it causes. Fan (2002) adds that guanxi is relatively easier in conducting businesses as it lowers the costs and the bad debts expenses. Given the fact that each country has its own sets of philosophies, rules, and the objectives at the national level that is aimed at protecting and controlling national resources, therefore, the aspect of nationalism/harmonisation has given rise to particular measures and rules in the accounting policies of China. It’s in fact suggested that harmonisation requires recognition of national particularities, reconciliation of the international accounting policies with the country’s objectives and elimination or correction of some of barriers in order to achieve an acceptable degree of the required harmonisation. The international accounting harmonisation is perceived to be the contemporary phenomenon with questionable reflections, implications and consequences, more so with the emerging economies. Nowadays, China has evolved into becoming the second largest economy and has the great developments in its accounting system. The internationalization of the Chinese accounting standards and in line with the IFRSs/IASs is an inevitable product for the gradual growing of the socialist market ecosystem. Additionally, the further increasing changes and the way China overcomes its challenges are still one of the controversial issues. According to ICAS (2010), some of the interviewees believe that China is able to follow the FASB owing to its detailed rules. (Wang et al, 2009) opines that “Chinese Accounting Standards will continue to be updated in line with IFRS developments in order to attract more investor”. Therefore, with the harmonisation of the international accounting, China stands at a better position to have more business opportunities and integration with the global economy by IFRS. Additionally, due to political factors, China prefers IASB compared to the FASB. However, there is a long way for the harmonisation of the IFRS for China. Liu (2012) opines that “following the IASB directly would have many problems and would be costly for China”. Although the Chinese accountants are increasingly becoming dependent in their professional judgment, the Chinese legal system remains still due to other complex factors. This owes to the fact that institutional factors and the culture in China are a bit more integrated together making it hard to change and overcome. Additionally, the large power distance, low transparency, and strong uncertainty of avoidance that cannot change in the short term. In addition to the Chines legal, financing and political system, culture has been greatly affected by the international accounting harmonisation. Even though the financial statements are comprehensible to users in regard to the monetary units, accounting principles applied or language, culture greatly affects the development of the China’s accounting system/policy with regard to the harmonisation. In regard to this, culture has been, therefore, greatly impacted by the harmonisation. In specific, Chinese accountants make personal judgments in regard to the evaluation and the disclosure of the accounting information. Conclusion The harmonisation of the international accounting in China has not been that easy. The increasing debate on the international accounting harmonisation ramifies commentators into opponents and proponents as it has been regarded as the tool for globalisation and the creation of rigid standardization following the Western domination. Therefore, controversy continues to stem whether international standards for the social science for accounting can be stalled and whether it’s optimal for emerging economies such as China. With this example, it’s, therefore, apparent that there are quite ambitious steps in the application of the economic reform establishment on the one hand. 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