Governmental influences in the development of Chinese accounting during the modern era

Abstract

This paper reviews the historical development of accounting in China during the modern era since 1911, dividing the period into three phases: the pre-revolution period (1911–49); the pre-reform period (1949–79); and the current period (1979–to date). Attention is focused on the development of accounting during the current period. This paper critically evaluates an important phenomenon in Chinese accounting history – governmental dominance. It reveals that there have been two forces at work during the modern era, governmental control and outside influence. In China, the state has dominated the evolutionary process of accounting despite strong external influences, e.g. from Japan in the early part of the twentieth century, from the Soviets in the 1950s, and from the West more recently. The article examines accounting developments in their social, political and cultural environment, and concludes that with the Western influence increasingly strong, particularly given the world-wide trend towards the adoption of International Financial Reporting Standards, the Chinese government can maintain its controlling power over accounting affairs for the foreseeable future.

Keywords:

• Chinese accounting
• accounting history

Notes

For example, the Congress of the United States passed the Sarbanes–Oxley Act in 2002 and established the Public Company Accounting Oversight Board (PCAOB), which is charged with overseeing, regulating, inspecting and disciplining accounting firms in their role as auditors of public companies (Gordon et al. 2006). Australia has moved towards governmentally controlled standard-setting process (Deegan 2007), where the responsibility for generating accounting standards lies with the Australian Accounting Standard Board (AASB). The AASB reports to the Financial Reporting Council (FRC). The FRC was established in 2000 by the Federal Government, and its members are appointed directly or indirectly by the Treasurer. The FRC also has responsibility to oversee the activities of the Australian Auditing and Assurance Standards Board (AuASB) which develops and promulgates auditing standards and guidelines. This accounting standard-setting structure ensures that the government has adequate control over the accounting regulating process.

Cooke (1991) discusses the roles of the accounting profession and of government in the evolution of financial reporting in Japan. He observes the fact that, despite the strong backup provided by US intervention after the Second World War, an independent Japanese accounting profession has not yet materialised. The development of accounting is still controlled by the Ministry of Finance in Japan.

Roberts (1979, 32) defines the state as ‘the presence of a supreme authority, ruling over a defined territory, which is recognised as having power to make decisions in matters of government and is able to enforce such decisions and generally maintain order within the state. Thus the capacity to exercise coercive authority is an essential ingredient: the ultimate test of a ruler's authority is whether he possesses the power of life and death over his subjects.’

The ideas of Confucianism can be summarised by eight words: loyalty; filial piety; benevolence; righteousness; honesty; truthfulness; and ritual. According to Confucianism, people should act according to the Doctrine of the Mean (Li 1985).

They are the three leading thinkers in the school of Legalists. Shang Yang was probably the first Legalist, Han Feizi, who died in 233 BC, in the years before the final Qin victory, and Li Si, who was the prime minister of the Qin and was also attributed with many policies implemented by the emperor. He witnessed the triumph and collapse of the Qin (Watson 1987).

Before 1840, when the first Opium War occurred in China, the government of the Qing Dynasty had advocated a ‘closed door’ policy on the grounds that China was rich in resources. It did not need to obtain products from other countries (Adler 1957). However, following the invasion of China by other countries during the period 1840–42, the government's dream was shattered. With the introduction of modern industrial techniques from the West, and their operation of Chinese military industries and other national production entities, the self-sufficient economy began to collapse. For these reasons, many historians consider that the First Opium War marked the beginning of a new period and that the year 1840 provides the demarcation line between ancient and modern Chinese history (Su 1985).

The Order for Establishing Independent Accounting Department was issued by the Nationalist government in 1931. The five ‘House’ system is still used in Taiwan, as inherited from the Nationalist government of Republic of China.

The national economy of the People's Republic of China from 1949–79 was a socialist planned economy (Cheng 1971). It was based on public ownership, including ownership by the country as a whole people and other aspects of collective ownership. The guiding philosophy was Marxist political economy, which also constituted the foundation of Chinese accounting theory. People's Delegates were, and still are, elected to the National People's Congress (NPC) and attended congress at different levels. The NPC enjoys great power; it amends the Constitution, makes laws and elects the head of state. The highest organ of state administration is the State Council, which is formed by the premier, vice-premiers and ministers. The State Council has the power to adopt administrative measures, rules and regulations, and is responsible to the NPC.

Previously private-owned enterprises were either confiscated or reformed to state-owned.

Some enterprises were owned directly by central government and others were owned by local governments at provincial or municipal levels.

‘Accounting without books’ is not about use of a computer but the elimination of all necessary journals and ledgers (Zhao 1988).

Chinese accounting legislation has three levels. On the first level, there are laws promulgated by the people's congress, such as the Accounting Law of the People's Republic of China. On the second level, there is legislation promulgated by the State Council, such as Regulations on Accountants’ Responsibilities. On the third level is legislation issued by the MOF or legislation issued jointly by the MOF and other ministries. Uniform accounting systems and accounting standards are examples of regulations on this level.

There were several reasons for the promulgation of the Accounting Law. First, the influence of the Cultural Revolution on the management of state enterprises had not been completely removed. As a result, some illegal financial activities such as corruption, embezzlement and speculation had caused the state significant losses. Second, a great number of practitioners were unqualified and were incapable of exercising adequate accounting supervision and managerial control. Third, prior to the new law, accountants had little or no protection when they undertook their duty to fight illegal and criminal activities. In this context, it should be noted that some authorities at various levels not only interfered with accounting practices but also were generally antagonistic to accounting officers and staff.

Six specific accounting standards were issued in 1998. Another six standards were issued in 2001 (see Table 1).

These guidelines included Accounting Guideline for Investment Enterprises; Accounting Guideline for Enterprises of the Film Industry; Accounting Guideline for Enterprises of the Shipping and Port Industry; Accounting Guideline for Railway Transportation Enterprises; Accounting Guideline for Enterprises Engaging in Publishing Businesses.

Deng Xiaoping regained power at the Third Plenary Session of the Eleventh Central Committee of the Chinese Communist Party held in December 1978. After this conference, China began experimenting with economic reforms and re-opened the door to the outside world (Beijing Review 1978).

The functions of CICPA are described as: to handle the registration of CPAs and the firms, to supervise and regulate their practice; to recruit and regulate the members of the Institute; to draw up professional standards and rules of CPAs and monitor and inspect their implementation; to organise and promote professional training; to organise and implement the National CPA Examination; to approve overseas accounting firms and professionals to conduct business in China, and to supervise and regulate their practice in China; to organise business discussions and conduct theoretical research; to coordinate the relationship within and beyond the profession and protect the legitimate rights of members; to undertake activities of international exchanges and cooperation; to provide guidance to provincial CPA institutes on their operations; to handle other affairs as stipulated in State laws and regulations or authorised by government agencies.

The famous cases involved an accounting firm which falsified the certificates of capital contributions for its client, Shenzhen Yuanye Industrial Corporation Limited; the other was the Zhongcheng accounting firm involved in the ‘Great Wall Fund Raising’ scandal. The result of those scandals obviously harmed the newly established stock market and undermined public confidence in the accounting profession. In dealing with this crisis, the MOF conducted a serious review of all CPA firms during the period July 1997 to March 1999. Under this programme, licences of many firms were forfeited, while other firms received serious warnings to improve their service within a certain period of time (Tang 2000).