AS XI JINPING looks forward to the official announcement of his appointment as chief of the Chinese Communist Party – and beyond, to March next year, when he will take over as president of the world's most populous country and second largest economy, one area that will likely be giving him little cause for concern is the state of the country's accounting profession.
He will inherit a system that has seen its share of challenges but has made significant progress, putting itself on a sound footing to transform the global landscape of the profession in the years to come.
The accounting profession in China is relatively young, but it is on an accelerated upward trajectory. It is not unrealistic to expect a number of Chinese firms to be challenging the dominance of established international networks in the near future.
Rising demand for professional services
China has an undoubted need for more professional services.
Since the relaunch of economic reforms in 1992, the country has seen two decades of extraordinary growth. In the past ten years, the economy has quadrupled in size in dollar terms. In 2011, inward investment in excess of $116bn (£72.3bn) fuelled the creation of more than 27,000 new foreign-backed enterprises in China. In the same year, domestic investors made accumulated direct investments totalling $60bn to more almost 3,400 foreign enterprises in 132 countries and regions throughout the world.
Against this backdrop, the provision of high-quality financial reporting is of primary importance to deliver the accountability and transparency that underpin the confidence of investors and the efficient functioning of the capital markets. This is a fact that the Chinese authorities are very aware of; measures have been introduced over an extended period with the objective of delivering this.
Since 2005, the Chinese Institute of Certified Public Accountants (CICPA) has taken a number of steps to ensure that the accounting profession can better service the rapidly growing Chinese economy. Most significantly, it has established accounting and auditing standards systems that have converged with international standards and are considered a model for emerging countries and countries in transition. This is helping Chinese accounting firms to meet international requirements, and boosting the international development of Chinese companies.
In other areas, it has established auditing standards and codes of ethics that are equivalent with those of Hong Kong, and an audit supervision system that is equivalent to the European Union's. It has encouraged accountancy firms to become limited liability partnerships, helped strengthen accountancy firms' governance mechanisms, and promoted the expansion of services from traditional auditing to the tax and consulting areas. Recent developments in China have built on this progress.
The Chinese government is keen to create domestic audit firms with sufficient scale to audit the country's huge state-owned enterprises and rapid growth businesses, especially as they increasingly look overseas for growth opportunities.
This is not a new ambition – back in 2009, Chinese firm Shine Wing acquired an Australian competitor, a move driven by a major Chinese industrial and resources company that was establishing a presence in Australia but preferred to work with a Chinese audit firm. This sent a real message to the accounting and audit industry about China's intent.
This message was reinforced by recent regulation announced by the government, which mandates that audit firms in China are comprised of a minimum of 60% of Chinese partners by 2014, rising to 80% by 2017.
This is a positive step forward that will bring China into line with global norms. After all, most other countries already demand that accounting firms are run by local partners. Singapore's accounting industry went through similar changes in the 1980s, as did Hong Kong's in the late 1990s.
The new regulation will encourage domestic firms to speed up the cultivation of talented Chinese professionals with the international vision, skills and experience that the market expects. It will help establish a level playing field for domestic firms and bring greater balance to the market, boosting auditor independence and audit quality. And it will go some way towards avoiding the challenge of audit market concentration that has been seen in some developed markets.
In another positive development, the fact that the Chinese authorities have struck a tentative agreement with the US PCAOB to begin observing each other's oversight activities should lead to greater cooperation and ultimately benefit all stakeholders.
Domestic firms have already enhanced their ability to compete with their global peers by poaching their top talent and there is now in reality very little difference between local firms and international in terms of skills and professionalism. The main thing on which Chinese firms still lag behind is brand image but this will change as their businesses expand globally.
The rise of the Chinese accounting profession is inexorable – the only questions that remain are about how fast and how far.
Geoff Barnes is CEO and president of Baker Tilly International
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