Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-04T19:33:26.221Z Has data issue: false hasContentIssue false

Enforcement of China's Accounting Standards: Reflections on Systemic Problems

Published online by Cambridge University Press:  20 January 2017

Sonja Opper*
Affiliation:
Eberhard-Karls-University
*
*Eberhard-Karls-University, Economic Faculty, Nauklerstr. 47, 72074 Tübingen, Germany. Tel: +49-7071-2978175; Fax: +49-7071-295077; E-mail: [email protected]

Abstract

The key objective of this paper is to highlight the interconnectedness between China's political and economic system and its weak enforcement of accounting and auditing standards. The institutional analysis shows that the prevailing political and economic priorities constituting China's “socialist market economy” create a framework, that basically relies on state-led enforcement with weak supplementary private safeguard mechanisms. The resulting policy-mix is characterized by a mismatch of incentives and available devices to effectively enhance enforcement. While the state bureaucracy has little incentive to effectively fight financial misreporting because of both blurred policy–economy boundaries and the coexistence of multiple and even non-economic goals, shareholders and creditors do not have sufficient and effective private safeguard mechanisms at hand. Findings lead to the conclusion that China's recent harmonization move of accounting and auditing standards urgently needs to be backed up by stronger efforts to create effective enforcement mechanisms. Sound reforms would have to center on a rigorous upgrading and restructuring of the responsible bodies supervising auditing quality and financial disclosure. Parallel to these measures, the increasing integration into the global economy may provide incentives and competitive pressure to comply with globally accepted standards.

Type
Research Article
Copyright
Copyright © V.K. Aggarwal 2003 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1.

Valuable comments by Sonia M. L. Wong and two anonymous referees are gratefully acknowledged.

References

Abdel-khalik, A. Rashad. 2002. ‘Reforming Corporate Governance Post Enron: Shareholders’ Board of Trustees and the Auditor.’ Journal of Accounting and Public Policy 21: 97103.CrossRefGoogle Scholar
Arrunada, Benito. 2000. ‘Audit Quality: Attributes, Private Safeguards and the Role of Regulation.’ The European Accounting Review 9 (2): 205224.CrossRefGoogle Scholar
Bao, Ben-Hsien. and Chow, Lynne. 1999. ‘The Usefulness of Earnings and Book Value for Equity Valuation in Emerging Capital Markets: Evidence from Listed Companies in the People's Republic of China.’ Journal of International Financial Management and Accounting 10 (2): 85104.CrossRefGoogle Scholar
Bardhan, P. 1997. ‘Corruption and Development: A Review of Issues.’ Journal of Economic Literature XXXV: 13201346.Google Scholar
Becker, Gary S. 1968. ‘Crime and Punishment: An Economic Approach.’ Journal of Political Economy 76: 169217.CrossRefGoogle Scholar
Chen, C.J.P., Gul, Ferdinand A. and Su, Xijia. 1999. ‘A Comparison of Reported Earnings Under Chinese GAAP vs. IAS: Evidence form the Shanghai Stock Exchange.’ Accounting Horizons 13 (2): 91111.CrossRefGoogle Scholar
Chen, C.J.P., Chen, Shimin and Su, Xijia. 2001. ‘Is Accounting Information Value-Relevant in the Emerging Chinese Stock Market?Journal of International Accounting, Auditing & Taxation 10: 122.CrossRefGoogle Scholar
Chen, Shimin, Sun, Zheng and Wang, Yuetang. 2002. ‘Evidence from China on Whether Harmonized Accounting Standards Harmonize Accounting Practices.’ Accounting Horizons 16 (3): 183197.CrossRefGoogle Scholar
China Daily. Internet Edition, http://www.chinadaily.co.Google Scholar
China Online. US-based News Service, http://www.chinaonline.com Google Scholar
China Securities Regulatory Commission. 2000. China Securities and Futures Statistical Yearbook. Beijing.Google Scholar
China Securities Regulatory Commission. 2002. China Securities and Futures Statistical Yearbook. Beijing.Google Scholar
Chinalaw web, University of Maryland, Law School, http://www.qis.net/chinalaw.Google Scholar
Cooke, Terence and Wallace, R. 1990. ‘Financial Disclosure Regulation and its Environment: A Review and Further Analysis.’ Journal of Accounting and Public Policy Summer: 79110.CrossRefGoogle Scholar
Davidson, Ronald A., Gelardi, Alexander M. G. and Li, Fangyue. 1996. ‘Analysis of the Conceptual Framework of China's New Accounting System.’ Accounting Horizons 10 (1): 5874.Google Scholar
Dolven, Ben. 2002a. ‘New Breed of Newshounds tests the Limits.’ Far Eastern Economic Review 1 August.Google Scholar
Dolven, Ben. 2002b. ‘Capital Drought.’ Far Eastern Economic Review 11 July.Google Scholar
Farrell, K. A. and Whidbee, D. A. 2002. ‘Monitoring by the Financial Press and Forced CEO Turnover.’ Journal of Banking & Finance 26: 22492276.CrossRefGoogle Scholar
Freedom House. Freedom in the World Country Ratings 1972–73 to 2000–01, http://www.freedomhouse.org Google Scholar
Gensler, Howard and Yang, Jiliang. 1995. A Guide to China's Tax & Business Laws. Hong Kong: FT Law&Tax Asia PacifiC. Google Scholar
Gough, Neil. 2002. New Journalism. Time Asia, www.time.com, 04.11.2002.Google Scholar
Heritage Foundation. Washington, DC, http://www.heritage.org Google Scholar
Kornai, Janos. 1992. Socialist Systems. New York: Cambridge University Press.Google Scholar
Lardy, Nicholas R. 1998. China's Unfinished Economic Revolution. Washington, DC.CrossRefGoogle Scholar
Lawrence, Susan V. 2002a. ‘Shareholder Lawsuits. Ally of the People.’ Far Eastern Economic Review 9 May.Google Scholar
Lawrence, Susan V. 2002b. ‘Investors’ Rights. Wielding a Double-Edged Sword.’ Far Eastern Economic Review 20 June.Google Scholar
Leung, Man-Kwong and Mok, Vincent Wai-Kwong. 2000. ‘Commercialization of Banks in China: Institutional Changes and Effects on Listed Enterprises.’ Journal of Contemporary China 9 (23): 4152.CrossRefGoogle Scholar
Leuz, Christian, Nanda, Dhananjay and Wysocki, Peter D. 2001. ‘Investor Protection and Earnings Management: An International Comparison.’ MIT Sloan School of Management, Sloan Working Paper 4225–01, August, http://papers.ssrn.com.Google Scholar
Lin, Z. Jun, Chen, Feng and Tang, Qingliang. 2001. ‘An Empirical Evaluation of the New System of Business Accounting in China.’ Journal of International Accounting, Auditing & Taxation 10 (1): 2349.CrossRefGoogle Scholar
Narayan, Francis B. and Reid, Barry. 2000. Financial Management and Governance Issues in China. Manila: Asian Development Bank.Google Scholar
OECD. 2002. China in the World Economy. The Domestic Policy Challenges. Paris: OECD.Google Scholar
Opper, Sonja, Wong, Sonia M. L. and Hu, Ruyin. 2002. ‘Party Power, Market and Private Power: CCP Persistence in China's Listed Companies.’ Research in Social Stratification and Mobility 19: 103136.CrossRefGoogle Scholar
Panorama. Commercial stock market service provided by Panorama Network Corp Ltd, Shenzhen (China), http://www.p5w.net Google Scholar
Park, Albert and Sehrt, Katja. 2001. ‘Tests of Financial Intermediation and Banking Reform in China.’ Journal of Comparative Economics 29: 608644.CrossRefGoogle Scholar
Qi, Daqing, Woody, Wu, and Hua, Zhang. 2000. ‘Shareholding Structure and Corporate Performance of Partially Privatized Firms: Evidence from Listed Chinese Companies.’ Pacific-Basin Finance Journal 8: 587610.CrossRefGoogle Scholar
Shleifer, Andrei and Vishny, Robert W. 1986. ‘Large Shareholders and Corporate Control.’ Journal of Political Economy 94 (3): 461488.CrossRefGoogle Scholar
Solomons, David. 1978. ‘The Politicization of Accounting.’ Journal of Accountancy 156 (11): 6572.Google Scholar
Sombart, Werner. 1902. Der moderne Kapitalismus. Leipzig.Google Scholar
South China Morning Post. Internet Edition. http://www.scmp.com.Google Scholar
Stamp, Edward and Moonitz, Maurice. 1982. ‘International Auditing Standards.’ Part I, CPA Journal 2432.Google Scholar
Steinfeld, Edward S. 1999. Forging Reform in China: The Fate of State-Owned Industry. 2nd edn. Cambridge: Cambridge University Press.Google Scholar
Sussman, Leonard R. and Deutsch Karlekar, Karin. eds. 2002. The Annual Survey of Press Freedom 2002. New York: Freedom House, http://www.freedomhouse.org/research/pressurvey.htm Google Scholar
Tang, Yunwei, 2000. ‘Bumpy Road Leading to Internationalization: A Review of Accounting Development in China.’ Accounting Horizons 14 (1): 93102.CrossRefGoogle Scholar
Tenev, Steven and Zhang, Chunlian. 2002. Corporate Governance and Enterprise Reform in China. Building the Institutions of Modern Markets. Washington, DC: World Bank and the International Finance Corporation.Google Scholar
Transparency International, http://www.transparency.org Google Scholar
Watts, Ross L. 1979. ‘Corporate Financial Statements—A Product of the Market and Political Process.’ Australian Journal of Management 2: 5375.CrossRefGoogle Scholar
Wilhelm, Kathy and Saywell, Trish. 1999. ‘Mission Critical.’ Far Eastern Economic Review (Internet Edition) 9 September.Google Scholar
Wong, Richerd. 2000a. ‘Competition in China's Domestic Banking Industry.’ Part I. China Online 02.10.2000.Google Scholar
Wong, Richard. 2000b. ‘Competition in China's Domestic Banking Industry.’ Part II. China Online 03.10.2000.Google Scholar
World Trade Organization. 2001. ‘Report of the Working Party on the Accession of China, Addendum, Schedule of Specific Commitment on Services.’ 1 October, WT/ACC/CHN/49/Add. 2, http://www.wto.org/english/thewtoe/acce/completeacce.htm.Google Scholar
Xu, Xiaonian and Yan, Wang. 1999. ‘Ownership Structure and Corporate Governance in Chinese Stock Companies.’ China Economic Review 10: 7598.CrossRefGoogle Scholar
Zeff, Stephen A. 1978. ‘The Rise of Economic Consequences.’ Journal of Accountancy 156 (12): 5663.Google Scholar
Zhu, Tian. 1999. ‘China's Corporatization Drive: An Evaluation and Policy Implications.’ Contemporary Economic Policy 17 (4).CrossRefGoogle Scholar