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Accounting Standards in China Since China adopted its open-door policy and embarked on a path to economic reform more than two decades ago, the world has witnessed a stunning transformation. GDP growth has averaged 8 percent per year, exports have grown 15 percent per year, the state’s share of industrial output has shrunk from 78 to 28 percent, China has attracted $300 billion of foreign direct investment, and individual and foreign portfolio investment have become considerably more significant. China is now an active participant in the increasingly integrated world markets. Prior to the reforms, China’s accounting rules were adapted to a Soviet-era planning system. Like their counterparts in many countries, China’s regulatory authorities have concluded that international transactions would stand to gain if the accounting standards Chinese companies used conformed more closely to international practice. Higher-quality financial statements also increases their utility in evaluating managers’ performance, a significant problem during China’s transition from state control to a market economy. China has made a great deal of progress in reforming its accounting standards. Most notably, in 1992 the Ministry of Finance promulgated a completely new set of standards for domestic companies known as the Accounting Standards for Business Enterprises (ASBE). The ASBE were based on International Accounting Standards (IAS) and adapted to local conditions. Despite these reforms, the quality of domestic financial statements was thought to be insufficient for international users for the following reasons:
Managers have few incentives to incorporate losses in reported income on a timely basis. (Economic losses arise from reduced present values of expected future cash flows from an individual asset or group of assets, for example, a portfolio, a business unit, a subsidiary company, or a strategy. Timeliness implies that soon after managers are aware of an economic loss, an asset write-down is charged against income.) Information asymmetry is resolved at least in part by private communication rather than through published financial statements. The pressure for transparent, publicly-disclosed accounting information is reduced by the following:
Thus government regulation by itself will not induce the provision of high-quality accounting information. Managers and audit firms must face market-based incentives to ensure that such information is provided. Accounting standards interact closely with the institutional environment, including the development of an independent judicial system, the reform of the management and governance of state-owned enterprises, the implementation of bankruptcy law, and the reform of the financial and tax systems. The real challenge facing accounting in China today involves the domestic uses of accounting information, for example, in resource allocation, corporate governance, stewardship, and performance evaluation, and the development of auditor training and independence. This implies that the most fruitful area for Chinese accounting reform lies not in simply adopting or imitating IAS, but in reforming domestic institutions. The authors may be contacted as follows: Ray Ball, Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, IL 60637, tel.: (773) 834-5941, email: ray.ball@gsb.uchicago.edu; Ashok Robin, College of Business, Rochester Institute of Technology, Rochester, NY 14623, tel.: (716) 475 -5211, email: ajrbbu@rit.edu; Joanna Shuang Wu, William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627, tel.: (716) 275-5468, email: wujo@ ssb.rochester.edu. The authors’ sample consisted of 1,625 firms during 1992–98. |
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