China facing a skills shortage

If anything can be said to represent China’s staggering development over the
past decade, it has to be Oriental Plaza. A stone’s throw from Tiananmen Square
and the Forbidden City, the towers – and the underground floor space beneath
them – are home to eight commercial buildings, five themed shopping malls, a
five-star hotel and four blocks of luxury serviced apartments.

It’s the largest commercial complex of its kind in Asia. The towers are home
to the offices of Deloitte, KPMG and Ernst & Young, while in the mall below
you can buy everything from a Starbucks coffee to a Lamborghini.

If the Oriental Plaza represents China’s ambition – the brakes that have the
potential to curb development are already clear to see.

Take power, for example. Rapid economic development is driving China’s
soaring power demand. And while power supply growth has itself been rapid,
electricity still tends to be over used, because state-set power prices are
lower than market rates. And with the nation’s air conditioners whirring into
action to deal with the summer heatwave, electricity will remain in short supply
nationwide for the next few months. Blackouts are expected and a tangible impact
on GDP growth feared.

But it’s not just a lack of electricity that is causing problems in China’s
engine room. If the world’s biggest country is to grow into the biggest economy,
it needs accountants. Thousands of them – and fast.

China has been aware of its need to train more accountants for almost a
decade. A strategy was put in place by former president Jiang Zemin with the
baton taken up by his former premier Zhu Rongji, who opened the China National
Accounting Institute in 2001.

At the time almost every corruption case exposed involved fake accounts, said
Zhu, which had become a ‘tumour’ threatening the country’s economic order. The
trouble is the premier identified a need for 300,000 accountants then. And it
still needs 300,000 today. It’s a tough target. If every qualified accountant in
the UK and Ireland were to move to Beijing it wouldn’t plug the hole.

Progress has been slow. The Chinese institute, whose exams are notoriously
tough, will never be able to train that sort of number on its own, and while it
has a mutual recognition agreement with its Hong Kong equivalent, it only
extends to a couple of papers.

International accounting bodies, from the US, UK, Canada and Australia, are
making limited inroads, though perhaps a corner was turned last month when ACCA,
Oxford Brookes University and Beijing’s Tsinghua University signed an agreement
to develop a foundation programme.

Professor Cui Guowen, director of the centre for overseas academic and
cultural accountants at Tsinghua university, says the agreement will help young
Chinese accountants develop their skills – something that will aid the growth of
overseas and domestic companies. ‘This agreement aims to provide a comprehensive
training programme to the young Chinese students who plan to work in the
accounting – especially international accounting – area.’

As China gets to grips with the need to train a generation of accountants,
the big firms are having to look to import the necessary skills. It should open
up opportunities for accountants around the world to work in one of its most
exciting countries. But the Big Four – the biggest employers of expat
accountants in China – are having to be selective.

The ability to speak the language is not quite a prerequisite, but unless you
have a fairly unique set of skills to bring, and can help local accountants
develop those skills, you are going to struggle to get a foot in the door. ‘The
need to have Mandarin-speaking skills is developing rapidly,’ says Deloitte
China CEO Peter Bowie.

But everything in China is developing rapidly. Since 1980, the economy has
grown by about 8% each year, outperforming any other country at any time in
history for such a sustained period of time. And, with the financial boost that
will come through WTO entry and Beijing hosting the 2008 Olympic Games, the
Chinese government is well on its way to achieving its goal to double GDP by
2020.

The accountancy profession has had to play catch-up. Since the mid-1980s,
when China began to look at the then fledgling international accounting
standards and decided to use them as a model for the development of People’s
Republic of China GAAP. It was a diplomatic and policy decision. China didn’t
want to follow any particular country, so a decade ago, China’s ministry of
finance instead developed standards largely modelled on IFRS.

The first standard was issued in 1997. Since then the move towards IFRS has
continued apace. All listed companies that sell shares to foreign investors have
to prepare accounts in accordance with Chinese GAAP and international standards.
All financial institutions have to publish IFRS-compliant accounts as well. And
many others elect to do so, including companies in which foreign businesses are
investing, and Chinese firms that want to make a public statement about the
soundness of their governance.

With many of the larger corporations still state-owned, China is having to
learn fast about how to produce financial reports, how to go through an audit
and how to apply proper governance procedures.

‘Many have used the IPO process to make the change,’ says Deloitte’s Bowie.
‘Those companies have to raise their standards to go public. All the indications
you get from talking to regulators are that they all have the same view. They
want it to get better. They want it to improve. But sometimes when I come to
Beijing or Shanghai and look at all these tall buildings, I have to remind
myself it’s still a country where the per capita income is $1,000 a year. It’s
growing very quickly, but you can’t expect it to build those standards
overnight.’

One difference is the way firms are forced to assess client risk. ‘The way
the Big Four audit here is no different to the way we audit in the UK or Hong
Kong,’ says Deloitte audit partner Charles Lip. But as the Chinese state seeks
to inject more private enterprise into the economy, it is often unclear who owns
what – even at the point of an IPO. ‘Getting information and corroborating it
requires more effort than if you were auditing Royal Bank of Scotland,’
acknowledges Bowie.

Nevertheless, rapid growth has made audit in China a profitable business,
with the flood of companies going public the principle driver. ‘If you win a big
job with one of these companies you can need 300 people,’ says Bowie.

And that’s why China needs so many accountants – in finance departments, in
firms and in government. The accepted estimate of the shortfall is 300,000
accountants – widen that to finance departments in general and some say the
number is nearer to three million.

Clive Saundersen, an Ernst & Young partner based in Beijing, says his
firm uses secondments to offer both its Chinese accountants overseas experience
and to give other nationals a taste of China. And while he acknowledges that the
ability to speak Mandarin offers a huge advantage, other skills – from financial
services or oil and gas industry expertise to knowledge of tax vehicles – can be
enough. ‘There’s a balance where specialised industry or GAAP skillsets outweigh
an inability to talk Mandarin,’ he says.

Bowie agrees, though he has a suggestion for UK trainers. ‘If you take the
rate of growth in the marketplace and the higher rate of growth of companies
wanting to go public and the demand for our services from Sarbanes-Oxley we’re
on a steep growth curve,’ he says. ‘So I’d suggest UK institutes should adopt
Mandarin as part of their syllabuses.’

He’s only half-joking.

MIND THE GAP

Just how much ground China’s audit and accountancy profession has to make up
was highlighted by an investigation into the most recent audits of the
mainland’s 181 biggest state-owned companies.

The results, published earlier this year, made for grim reading. All but five
audits were found to be inaccurate or problematic, according to the enquiry by
the Statistics and Evaluation Bureau. More worryingly, 13 companies were found
to have falsified reports.

With Chinese companies looking to attract foreign investment, the decision to
open up the books was widely seen as an attempt to improve the scrutiny of
state-owned enterprises (SOEs). It may have been triggered by last year’s
financial debacle involving China Aviation Oil (Singapore) Corp, which lost
US$550m (£301m) in speculative trading.

Meng Jianmin, director of the bureau, said the investigation found 120 key
SOEs submitted incomplete financial audit reports, 30 companies’ audits were
insufficient and another 13 firms had unspecified ‘technical problems’ with
their reports, according to the Beijing Times and South China Morning Post.

Meng also said he held financial firms responsible for the audit errors.

Between them, the 181 SOEs hired more than 300 firms, and Meng said many
auditing firms were careless or even submitted falsified reports.

The Chinese government is looking to address the problem. Meng said the SASAC
would create positions for chief accountants in key SOEs this year. Among the
current 181 key SOEs, 92 do not have chief accountants, and SASAC will directly
appoint accountants to those firms. China may have come a long way, but it has a
long way to travel.