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Moving ahead: the evolving role of the finance & accounting function in China.

This is the first of three articles based on the recently completed study by the Institute of Management Accountants (IMA[R]) of the state of management accounting in China. The study included field studies as well as an extensive survey of 209 companies; in conducting it, we were given access to companies that was unprecedented for Westerners. This first article discusses the evolution of the finance and accounting (F&A) function in Chinese companies; the second, the management accounting techniques they employ; and, the third, these companies' costing practices.

The economy of the People's Republic of China (China) has been growing at an explosive rate for the last two decades (see Figure 1). This growth has been fueled largely by exports to the West, especially the United States, which is experiencing a growing trade imbalance with China. But despite this emergence of China as a major player in the world market, little is known about the management accounting techniques and costing methodologies that Chinese companies use to cost their products and manage their firms. Similarly, the role played by the finance and accounting function in these firms isn't well understood, although both areas can significantly impact operations and affect companies that work with or compete against these firms. Whether you are looking to compete against, partner with, merge with, or in some other way do business with a Chinese company, understanding these factors can help determine whether that interaction results in success or failure.


Management accounting has changed tremendously in China since 1979, when the country opened its doors to the West. Prior to that time, the country operated as a planned economy where the prices of each company's inputs and outputs, as well as their production targets, were set by the government. Strictly speaking, management accounting as a profession didn't exist in China before 1979 because the accounting function had a very different role in companies under the planned economy than in a market economy. Yet management accounting existed in the sense that the functions typically performed by management accountants were performed by various departments inside Chinese companies, such as the Planning Department.

The role of the finance and accounting function can affect a company's ability to implement its strategy, plan its operations effectively, and achieve desired performance results. Examination of the difference in the role played by the F&A function in Chinese companies and in organizations elsewhere can also contribute to improvement in worldwide best practices. This article examines the reasons for the differences in the role played by the F&A function, how the role has changed, and the implications for Western organizations.

The F&A Function under the Planned Economy

To understand the state of management accounting in China today, it's helpful to know something about the country's history. Under the planned economy, the F&A function was viewed solely as an accumulator and reporter of financial data. Analysis of that data typically was done by a separate Planning Department that was responsible for both operational and financial planning. This department reported not only to a company's management but, equally importantly, to a Planning Department in the region or sector in which it operated and that, in turn, reported to the central government's Planning Department. It was in this way that the economic activity of the country was planned and controlled. Under this economic system, accountants were regarded as little more than bookkeepers, despite efforts by some to contribute to their companies in other ways. These efforts included the development of various management accounting techniques, which are discussed in the next article in this series.

F&A Today

China's transition to a social market economy has had a tremendous impact on the way companies operate. They have had to evolve from an economic system in which the cost of their inputs and the price of their outputs were fixed by the central government and where the most important measure of performance was amount of output to one in which control of costs and profit maximization have become the primary concerns.

This has radically changed the role that F&A departments need to play. Survival in the changing environment requires companies to redesign their corporate planning and control systems, reexamine their performance evaluation systems, and reexamine the role the accounting function performs in meeting these and other challenges. As part of this transition, most companies have eliminated their Planning Department and have expanded the role of their F&A function to include some of these planning and control responsibilities.

But Chinese companies in general still hold a very traditional view regarding the role of the F&A department. As indicated in Table 1, fully two-thirds of the IMA survey respondents strongly disagreed that planning and control were responsibilities of equal importance to bookkeeping and financial reporting.
Table 1: Survey Question--To what extent to you agree that in aiding the
internal decision-making process, the importance of planning and control
in the finance/accounting department is not any less than providing
accurate bookkeeping and financial reporting?

Strongly Somewhat Somewhat Strongly
Agree Agree Agree Neither Disagree Disagree Disagree

4% 0% 1% 14% 6% 9% 67%

IMA's study also explored the changing role of the F&A area by examining the perceived importance of various activities that function often performed. Survey respondents were asked the extent to which they agreed with a variety of statements. Figure 2 presents the "average" ranking of the responses (on a scale of 1 to 7, where 7 = "strongly agree" and 1 = "strongly disagree"). It's clear that the F&A functions of these companies are now viewed in a manner similar to that in the West. In both regions the emphasis of the function is on its traditional role as an accumulator and reporter of data, and the transition of the role of the management accountant to strategic partner is only beginning to occur, with much progress remaining to be accomplished.


For example, the statement with the lowest level of agreement dealt with the proposition that the F&A function was primarily strategically (vs. tactically) focused, indicating a focus on the traditional responsibilities of the area. Similarly, the greatest level of agreement was with the idea that the F&A function focuses on cost measurement.

Survey respondents were also asked to indicate the importance (on the same scale) of various common responsibilities of F&A departments (see Figure 3). Each activity was considered important, and the average response for each responsibility was at least "highly important" (i.e., greater than 5).


As you can see, the most important activity listed is a traditional one--providing others with financial information. Cost management/control is close behind. Management decision making, preparing external financial reports, and preparing budgets are less important. Budgeting's low rank is surprising, but it may be because this responsibility is being handled under the planned economy by Planning Departments. A lower ranking for external financial reporting may be due to the inclusion of privately held companies in the sample. Interestingly, respondents perceived strategy formulation and planning and corporate investment as the least important responsibilities.

The lack of importance attributed to the more value-added activities down the accounting information value chain is understandable given the relatively newly expanded role of the F&A function. Nevertheless, it's a cause for concern and raises the possibility of Chinese companies wasting scarce capital resources because they don't adequately consider financial factors in the investment decision-making process. Evidence of this possibility is provided in our study, which found that state-owned enterprises, which tended to have the most traditional view of F&A, also tended to have the lowest rate of return on their capital.

Our study results thus indicate that the role of the F&A function in Chinese companies is evolving. As previously noted, these departments were formerly viewed primarily as the accumulator and reporter of data that would be analyzed by others. Their role is now evolving to include responsibility for cost management and control--traditional responsibilities in the West. Some leading Chinese companies are also seeing the strategic role management accountants can play, but they remain the exception rather than the rule.

Size of F&A Departments

To help their organizations become effective and efficient global competitors, F&A departments need to operate efficiently. One way to measure their efficiency is to look at the size of an organization's F&A function staff (in full-time equivalents) relative to sales. Table 2 compares this measure for the Chinese firms in our survey to those in the APQC database. (APQC is a member-based nonprofit organization that provides benchmarking and best-practice research for approximately 500 organizations worldwide.) While keeping in mind that the typical APQC member organization tends to be relatively larger than the organizations participating in our study, you can see that there's room for substantial improvement in the efficiency of the Chinese companies' F&A departments.
Table 2: Number of F&A Function FTEs per $1 Billion Revenue

 25th Percentile Median 75th Percentile

APQC members 236.6 111.8 47.4
Chinese firms 748.7 271.0 99.2

Another measure of the efficiency of an F&A department is the ratio of accounting and finance staff members to total company employees. This percentage varied widely in the sample companies (see Table 3), ranging from zero to 50% (for a very small organization), with a median percentage of 3.3%.
Table 3: Accounting & Finance Personnel as a Percentage of the Total of
Number of Employees in a Company

 Number of Cumulative
Percent Companies Percent Percent

0 2 1.1 1.1
0<x[less than or equal to]0.1 4 2.2 3.4
0.1<x[less than or equal to]0.25 3 1.7 5.0
0.25<x[less than or equal to]0.50 11 6.1 11.2
0.50<x[less than or equal to]0.75 20 11.2 22.3
0.75<x[less than or equal to]1.0 9 5.0 27.4
1.0<x[less than or equal to]1.5 10 5.6 33.0
1.5<x[less than or equal to]2.0 15 8.4 41.3
2.0<x[less than or equal to]3.0 12 6.7 48.0
3.0<x[less than or equal to]4.0 14 7.8 55.9
4.0<x[less than or equal to]6.0 11 6.1 62.0
6.0<x[less than or equal to]8.0 13 7.3 69.3
8.0<x[less than or equal to]10.0 14 7.8 77.1
10.0<x[less than or equal to]12.0 7 3.9 81.0
12.0<x[less than or equal to]14.0 12 6.7 87.7
14.0<x[less than or equal to]20.0 16 8.9 96.6
20.0<x[less than or equal to]40.0 5 2.8 99.4
50.0 1 0.6 100.0
Total 179 100.0

You can gain additional insight by looking at this percentage by type of company ownership. Further analysis of the data collected indicated that, for state-owned enterprises (SOEs), the median percentage of staff in F&A was 8.4%; for publicly owned, listed companies, the median percentage was 3.3%; and for privately owned, unlisted companies, it was 1.9%.

Thus state-owned enterprises tend to be the furthest from having word-class finance and accounting functions in terms of their efficiency; they have vastly more staff (as a percentage of total employees) than other organizations. This may be a reflection of their history under the planned economy with its strong emphasis on control through the "original record system." Additionally, it reflects current Chinese public policy of maintaining employment in order to ensure social stability in this period of transition (see Figure 4). Privately owned, unlisted companies tended to have the fewest F&A staff, possibly because of fewer reporting requirements (both to the government and external shareholders), and listed companies fell in between the state-owned enterprises and the privately owned, unlisted companies.


Qualified Management Accountants

Having an effective F&A function requires having a staff that's appropriately trained. How effectively are Chinese companies meeting this challenge?

To hold certain accounting positions in state-owned firms, employees must pass qualifying exams. Three levels of accounting examinations exist:

1. A basic test on bookkeeping and financial principles, which is required for accounting clerks and assistant qualified accountants;

2. The Qualified Accountant (QA) exam for accounting/finance department heads; and

3. The Senior Qualified Accountant (SQA) exam for CFOs of large and medium-sized state enterprises.

The QA and SQA are essential for in-house accountants, and the SQA is the ultimate professional designation for Chinese accountants. In China, those not passing the QA exam usually can't expect to be promoted to the head of an accounting section, and those not passing the SQA exam probably won't be promoted to the head of an accounting department (although the requirements vary depending on firm size). At this point, 1.6 million people have passed the exam at the elementary level, 800,000 are QAs, and 22,000 are SQAs. One of the prerequisites for taking the QA exam is four years of work experience. As a result of this requirement, many new accounting graduates are taking the Chinese Certified Public Accountant (CPA) exam rather than the QA exam. The SQA exam has additional requirements; for instance, candidates must possess a university degree and have a greater amount of work experience.

The QA exam tests four areas: accounting practice I, accounting practice II, financial management, and economic laws. The SQA exam tests two subjects: accounting practice and economic laws. A comparison of the range of these topics to those covered on international management accounting certification exams, such as the Certified Management Accountant (CMA[R]) designation, clearly indicates gaps in the required skill sets of Chinese management accountants, such as strategic planning and decision analysis. Failure to address these gaps could hinder attempts to advance the management accounting profession in China and to evolve the role of the management accountant in a way now occurring elsewhere in the world. The need for a better certification system has been recognized: In a 2003 survey of 1,450 large PRC companies by the China Association of Chief Financial Officers (CACFO), 87% of CFOs said there was a need for a better certification system than the QA or SQA.

In terms of the qualifications of the CFOs, most are SQAs (65%), and the rest are largely QAs (33%). Most of these CFOs were educated before China opened its doors to the West, so they have a fairly traditional view of the role of the F&A function. According to the CACFO survey, most CFOs (87%) prefer a different system of selecting CFOs than the current one of appointment by the government.

What about F&A Functions in the West?

For nearly 15 years, IMA has sponsored a series of studies examining the evolving role of the management accountant in the U.S. This research has consistently shown that the role of the management accountant increasingly is shifting from data collector and reporter to data interpreter and involvement in decision making (see Figure 5). Research by other leading organizations has found similar results.


A shift to higher-value-added types of activities also is taking place. These activities include such items as customer and product profitability analysis, process improvement, and performance evaluation (see Table 4). This shift is consistent with the idea that the role of the management accountant (especially at higher levels in the CFO organization) is evolving to one of business partner with top management.
Table 4: Work Activities that Will Increase in Importance (U.S.)

Work Activity Percent

Customer and product profitability 59%
Process improvement 56%
Performance evaluation 52%
Long-term, strategic planning 52%
Computer systems and operations 51%
Cost accounting systems 51%
Mergers, acquisitions, and divestments 46%
Project accounting 45%
Educating the organization 45%
Internal consulting 44%
Perform financial and economic analyses 42%
Quality systems and control 41%

Source: Gary Siegel and James Sorensen, The Practice Analysis of
Management Accounting, IMA, 1996.

Where do Chinese companies stand on this evolution of the role of the management accountant? As discussed above, most have a very traditional view of the role of the F&A function, but this role is evolving in some companies as they begin to have strategically oriented departments.

Some Implications

Reflecting the shifting economic environment in China, the F&A function in most mainland China companies has evolved to include responsibilities similar to those of Western organizations. Yet there's still a great emphasis on bookkeeping and financial reporting. Continued change in the roles and responsibilities of these functions, especially for state-owned enterprises, is necessary for their F&A organizations to operate at world-class levels.

Chinese companies face several challenges in making this happen. First, there's a shortage of management accountants on the mainland. Second, there's a need for management accountants to be better trained and certified. Third is a need for a better method of selecting CFOs than the current system of selection by the government.

There are also several implications with regard to the current state of management accounting in China. One of these is that non-Chinese companies that partner with Chinese firms may find it desirable to work with their Chinese partners in developing appropriate performance management and cost measurement systems. These systems may possibly be a blend of Western and Chinese methodologies and reflect the different cultures--both societal and organizational--of the partners.

Additionally, while Chinese companies have enjoyed significant cost advantages over many of their Western competitors, their costs of labor and other resources are now increasing. Having an appropriate costing and profitability system will become more important to them. It's possible that non-Chinese companies that employ more advanced management accounting tools and techniques to manage their costs and identify profitable customers, products, and channels can use these tools to obtain a competitive advantage over their Chinese competitors.

In both of these situations, management accountants can play an important role in enabling the survival and successes of their organizations. They can help their organizations manage and control their costs, evaluate and enhance the performance of their staff, assist in long-term strategic planning, and perform other activities that are part of the domain of the management accountant.

By Raef Lawson, CMA, CPA

Raef Lawson, CMA, CPA, Ph.D., is the vice president of research and Professor-in-Residence at the Institute of Management Accountants (IMA[R]). You can reach him at
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Author:Lawson, Raef
Publication:Strategic Finance
Article Type:Cover story
Geographic Code:9CHIN
Date:Mar 1, 2009
Previous Article:Slowdown on IFRS.
Next Article:Is finance a business partner yet? Progress has been made, but there's still a way to go for some companies.

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