What is the background of China's accounting and auditing systems?
With the founding of PRC in 1949 all resources of production in the
country came under State ownership and basically the only form of
economic entity was the state-owned enterprise. The accounting rules
and regulations, known as fund accounting, and characterized by their
rigidity and uniformity, were used on the one hand primarily for establishing
an information and reporting system for the implementation of State
economic policies, and on the other hand for the maintenance of administrative
control over assets of the State. To a great extent accounting rules
also served as a tool to strengthen the financial discipline of an
enterprise and to safeguard State property.
Since the promulgation of the Joint Venture Law in 1979 a separate
set of accounting rules was formulated to govern the preparation of
financial statements by enterprises. This was undoubtedly the first
step away from the fund accounting concept, which applies to state-owned
enterprises and is used mainly for the purpose of resource allocation
in a planned economy.
Alongside economic reform and the open-door policy adopted since
the beginning of the 1980s, foreign investors were allowed to set
up enterprises and conduct business in China. A separate set of accounting
regulations that is applicable to foreign investment enterprises only
was developed and implemented. Although these regulations or principles
are now much in line with the International Accounting Standards (IAS),
the requirements are subservient more to the purpose of ascertaining
the amount of tax an enterprise should pay rather than to the purpose
of ascertaining the 'truthfulness and fairness' of the financial statements.
Concurrently China has undertaken a program to restructure the form
and structure of state-owned enterprises by transforming them into
enterprises which issue shares and have limited liability - joint
stock limited companies. Most of these enterprises will eventually
go public. A third set of accounting regulations, intended specifically
for joint stock limited companies, was formulated in the early 1990s
and revised in 1998.
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