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In the red: although joint ventures with western companies are starting to bring modern management accounting techniques into China, the profession as a whole is still woefully underdeveloped. Russell Brown explains why the Chinese accountant's lot is not a happy one.

Accountants in China have a rather tough time. They are often viewed by senior management as expensive cost centres with little real value to add. Their image is a throwback to the days when they were seen as numbercrunchers, required only to check that all was in order and to keep the governing authorities at bay. Add to this low esteem the occasional request to adjust a few numbers here and siphon off a few million renminbi there, and their position becomes even less enviable.

There are around 60,000 certified public accountants in China and 4,000 accountancy firms, most of which employ fewer than 100 finance professionals. There are also around 30 larger local firms, a number of international players in the middle ground and the Big Four. Most of them focus on audit services, which, although they involve a good grounding in compliance rules and risk identification, don' necessarily teach resourceful thinking. There are no management accounting qualifications as such, so there is a tendency for accountants and CFOs to focus on statutory compliance, often at the expense of identifying business drivers and driving management information.

To appreciate the difficult position of accountants, particularly those concerned with adding value through effective forward planning and minimising the impact of potential financial threats, it's necessary to understand the commercial environment. Many foreign business people in China reflect that success is usually as a result of dogged persistence. You can't simply import foreign methods of doing business in this country, since even simple procedures can generate mind-boggling quantities of red tape.

Last year China attracted $52 billion in foreign direct investment (FDI), a 1.5 per cent increase on 2001. China is expected to outshine the US for the second year in 2003 as the largest sponge soaking up FDI, with a record high capital inflow of $60 billion. Recent statistics show that investment is continuing to rise, despite the Sars outbreak and the global economic slowdown. The period from January to June fills year saw the approval of 18,877 new foreign-invested enterprises, an increase of 22 per cent on the same period last year.

Many foreign companies investing in China find they must discard the business formula they have used in other markets and start anew. Almost all of them find that they bare to adjust their expectations and, sometimes, drastically change how they operate in the Chinese market. Key determinants of success are how soon a company realises the need to adapt, and how innovatively it does so.

Negotiating and building effective relationships is vital. They are based on personal connections, known as guanxi. Many foreign companies in China base their activities on market situations without considering the importance of building relationships. The obligations that having good guanxi carries can be developed into loyalty that goes well beyond ordinary business relations.

Unfortunately in China, with its underdeveloped legal system and the tendency for authorities to turn a blind eye for the right price, corruption is still common. The government is working bard to stamp it out, but it's still rife--increasingly so the further you move away from the main cities. Accountants are often key players in corrupt dealings and are therefore under pressure to report wrongdoing to the government. They are often paid lout salaries outside the bigger cities, so there is a temptation to share the spoils rather than report them.

The tendency of foreign business people in the past to try to dominate proceedings has left some Chinese business people sceptical of their foreign counterparts. Consequently, many believe that it's wrong for outsiders to expect to make a big profit in China, sometimes citing their country's current relative poverty to justify this view.

Chinese society generally discourages individuals from straying beyond the accepted way of doing things. The structure of most companies is such that managers bare little autonomy and do not realise the importance of generating ideas outside their own jobs. Having grown up with an education system that advocates learning by rote and the accumulation of facts rather than creativity, most Chinese managers are unwilling to delegate. This problem is exacerbated by the fact that in any given department there is usually only one decision-maker.

Not long ago, cash management in China was a frustrating affair--couriers would travel miles with bags of money to settle payments. As FDI grows, so will the demands of multinational companies for banks to provide more efficient cash management. Strict regulations govern borrowing and lending between different firms and even between subsidiaries of the same company. Most importantly, the government still monitors all foreign exchange dealings.

The computer industry in China, like everywhere else in the world, has declined in recent years. As a result, Legend, a major local brand, is trying several new tactics. It has moved in to new markets in China--for instance, MP3 players and digital cameras--and it has started to lay the groundwork for providing IT services and network products. Most ambitiously, and in a rare move for a Chinese company, it has long-term plans to take its business overseas. In April the organisation took a first step by changing its English brand name to Lenovo.

With an increasingly sophisticated and wealthy customer base, many Chinese firms are starting to pay attention to brand building. The country's largest sportswear manufacturer, Li Ning, has just launched an advertising campaign that will cost the company eight times more than than the whole of its previous advertising budget.

Until now, perhaps the only Chinese brand with a global presence has been the Hater Group, a manufacturer of more than 80 products ranging from refrigerators and washing machines to air-conditioners and televisions. Hater sells its products in more than 150 countries and owns 13 factories outside China.

Hater's chief executive, Zhang Ruimin, believes that his company can extend its strong domestic brand reputation to the west by introducing innovative products for specific consumer markets and then expanding into bigger ones. The intention is to enable the firm to enjoy the higher margins that come with brand sales, rather than to slug it out as a low-cost competitor to western companies.

Research shows that the most successful companies in China are those that can infuse both Chinese and western business practices. Joint ventures enable both sides to draw on each other's strengths, and local employees are normally responsive to a more western style of management if they are allowed to assimilate it gradually.

The accounting profession in China is particularly short of skills relating to the ability to question and think innovatively to gain a better grasp of a client's business needs. But the recent trend for Chinese firms to adopt a more western style of management has allowed some accountants to question the decisions of senior management and stress to them the importance of effective budgeting and forecasting. The general lack of skills stems from a dearth of formal management accounting courses. Only one local association currently offers accountancy qualifications: the Chinese Institute of Certified Public Accountants (CICPA).

The focus of CICPA exams tends to be on rote learning, and little or no attention is paid to budgeting and forecasting. Until recently, most major Chinese firms were state-owned enterprises (SOEs), more answerable to political dynamics than economic forces. In order to keep these SOEs in business, banks traditionally met government policy demands by financing them with massive loans, regardless of their profitability or risk. Accountants at these SOEs have never had to bother with projecting out cash flows.

One of China's commitments to the World Trade Organisation is that after five years of WTO membership it will treat foreign and domestic companies the same way. A new accounting system was implemented on 1 January 2002, which is compulsory for all foreign-invested enterprises (FIEs) in China and brings the rules more in line with international accounting standards. These changes represent a move towards higher standards for FIEs, yet local firms still aren't required to be audited. There's obviously still a great deal of work needed to achieve equal treatment.

The new accounting regime is a shift towards a principles-based system, providing greater flexibility for companies s and less strict governance on accounting policies and treatment. But there is a gap between this and the taxation systems. Accountants working for FIEs must now reconcile between international accounting practice and Chinese accounting practice and tax requirements.

Unfortunately, accountants in China spend most of their time ensuring compliance. Apart from providing information about the performance and position of the business, they are also generally responsible for a suite of regulatory requirements. Companies need to upgrade their systems to simplify this reconciliation work and accountants must drive this change to give themselves a valueadding role.

Chinas accountancy profession has recently been forced to deal with scandals such as that of the Guangxia Corporation, which fabricated more than $85 million in profits over three years. One of the country's best known accountancy firms was implicated and had its licence revoked as a result. The profession therefore still has a long way to go in achieving the transparency and accountability that will be crucial to accelerate China's move to a market-based economy.

If the government is to stamp out corruption and improve the image of accountants, it should make it compulsory for all companies to be audited annually. It should also provide more powers to accountancy bodies to supervise and protect the profession. Most importantly, if accountants in China are to develop into true management accountants, they win need to understand business and how technology can help them move away from traditional cost and compliance centres. The future in China is about adding value, which is where CIMA has a valuable part to play.


Russell Brown FCMA ( is Managing partner at LehmanBrown in Beijing
COPYRIGHT 2003 Chartered Institute of Management Accountants (CIMA)
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Title Annotation:China
Author:Brown, Russell
Publication:Financial Management (UK)
Geographic Code:9CHIN
Date:Oct 1, 2003
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