http://news.ft.com/cms/s/9f464ef6-9f4a-11da-ba48-0000779e2340.html
After a decade-long review, China was this week celebrating its decision to
bring accounting and auditing practices in line with international standards.
Jin Renqing, finance minister, presided at an elaborate ceremony at the Great
Hall of the People in Beijing that was attended by many Chinese officials and
international accountancy celebrities.
"This is a milestone for the accounting and audit industry in China which
will move the country towards a more modern economic model and help investors
make more sensible decisions," said Mr Jin.
It is a milestone that dozens of other countries have passed as they seek to
harmonise business practices with the global economy.
But the experiences of China's predecessors – in the industrialised world as
well as emerging markets – carry cautionary tales for the Beijing authorities,
and for those who rely on Chinese accounts.
According to Deloitte, China will be the 74th country to align itself with
international financial reporting standards, joining a group that already
includes the European Union's 25 member states.
Actions to adopt IFRS – or to base local accounting systems on IFRS, as China
intends – are meant to increase reliability of financial information. That
matters because trustworthy accounts are seen to facilitate economic growth.
Sir David Tweedie, chairman of the International Accounting Standards Board,
said the decision would "encourage investor confidence in China’s capital
markets and … be an additional spur for investment from both domestic and
foreign sources".
The new accounting rules will apply for listed companies from January 1 next
year, although blue chip companies quoted in Hong Kong and New York already
report under US standards or IFRS.
Called the China Accounting Standards System, the rules include one "basic
standard" based on the principles of IFRS, on top of 39 separate standards for
different business sectors and 48 auditing benchmarks.
Elsewhere, decisions to adopt "modified" versions of IFRS have caused concern
as countries exploit the branding power of international standards but then
actually introduce rules that are substantially different.
"In some countries there have been overstated claims about the extent of
adoption of IFRS," says John Hegarty, chair of the private sector accounting and
auditing committee at the World Bank.
"But the Chinese authorities have been very clear. So long as there is
clarity about exactly which standards are applied, users can make informed
decisions."
Important exceptions to the IFRS rules in China affect "related party"
disclosures and the reporting of assets and liabilities at market values.
David Lindsell, global IFRS director at Ernst & Young, says: "It remains
to be seen if China will allow free enterprise accounting without the finance
ministry running all over it. Areas like writing down assets are very sensitive.
The temptation for governments to interfere can be very high."
Applying the new standards is likely to be fraught with difficulty, not least
because local accountancy firms are struggling to stop skilled staff being
poached by the big four international firms.
Even in Europe, the transition to IFRS has meant slip-ups, confusion and
consternation. The standards require greater precision than before and involve
difficult interpretations of broadly framed guidelines.
"It is all new in Europe and will take years to bed down," says Mr Lindsell.
"What we’re doing now is effectively a massive experiment."
Richard Martin, head of financial reporting at the Association of Chartered
Certified Accountants, says better accounting in emerging markets requires broad
reforms.
"The accounting standards are only one component of the financial reporting
supply chain," he says. "You also need good corporate governance, qualified
auditors and users who understand the information."
The Chinese authorities have focused on education in recent years, but there
is widespread concern that the youth and inexperience of many auditors will
increase the risk of reporting misdemeanours.
