Accountants
in China have something of a tough time, often perceived by senior
management as expensive cost centres with little real value to add
to the future growth of a company. Their image resembles a throwback
to the days when accountants were seen as little more than boring
number crunchers, necessary only to check that all was in order and
keep governing authorities at bay. Add to this occasional pressure
on accountants to adjust a few numbers here and siphon off a few million
renminbi there, and you will find the position of the accountant in
China worsened further still.
There
are around sixty thousand Certified Public Accountants (CPAs) in China
employed in more than four thousand accounting firms, the majority
with less than one hundred accountants. Of this, there are around
thirty larger local firms, a number of international-run firms in
the middle ground such as LehmanBrown, and the 'Big Four'. Most of
the local firms focus on audit services, which, whilst teaching a
good grounding in compliance rules and risk identification, do not
necessarily teach value-adding or strategic thinking. There are currently
no management accounting qualifications in China such as the UK-based
Chartered Institute of Management Accountants (CIMA). Therefore, there
can be an over emphasis in China for accountants and, in turn Chief
Financial Officers (CFOs), to focus on statutory compliance, often
at the expense of identifying business drivers and feeding management
information.
Chinese
Business Environment
In
order to fully appreciate the difficult position of accountants in
China, particularly that of the management accountant whose role is
really about adding real value to the company through effective forward
planning, understanding key business drivers and minimising the impact
of future potential financial threats, it is first necessary to know
something about the business environment. Unaffected by the SARS crisis
and the global economic slowdown, in 2003 China attracted $54 billion
in foreign direct investment (FDI). The period from January to June
last year saw the approval of 18,877 new foreign invested enterprises
(FIEs), an increase of 22.3% compared with the same period in 2002.
In
China it is not possible to simply import foreign methods of doing
business however and bureaucracy, rules and simple procedures can
generate mind-boggling quantities of red tape. Many foreign companies
investing in the Chinese market find they have to discard the business
formula used in other markets and start anew.
Simply
put, Chinese business practices are different to those in the West.
Negotiating and building effective relationships is vital to the success
of doing business in China. Business relationships are based on guanxi,
meaning connections and somewhat akin to the phrase, "It's not
what you know, but who you know." Many foreign companies in China
conduct business based on market situations without too much consideration
for the importance of building personal relationships with those involved.
The obligation that having 'good guanxi' carries can be developed
into a loyalty that ordinary business relations cannot achieve.
Unfortunately
in China, with it's still developing legal system and the tendency
by authorities to 'turn a blind eye' for the right price, corrupt
dealings are still common. The Government is working hard to try and
stamp out corruption but it is still rife, the greater so, the further
you travel away from the main cities. Of key interest here is the
fact that accountants, by the very nature of their job are often key
players in corrupt dealings, and are therefore under pressure to be
ethical and report to the Government any wrongdoings. Accountants
are also often paid low salaries out of the bigger cities and therefore
temptation exists to share the spoils rather than report them.
Chinese
history has also affected business outlook and a tendency by foreign
business people in the past to attempt to dominate proceedings has
left some Chinese business people sceptical of their foreign counterparts.
Consequently many perceive that it is wrong for foreigners 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 of straying from the generally
accepted way of doing things. Though the overall structure in many
Chinese companies is somewhat autocratic, managers suffer from a lack
of overall autonomy and often do not realise the importance of generating
ideas outside of their accepted job scope. Having grown up in an education
system that advocates learning by rote and accumulation of facts at
the expense of creativity, most Chinese managers are consequently
unwilling to delegate, a problem which is exacerbated by the fact
that in any given department there is usually only one decision maker.
East Meets West
You
might therefore be forgiven for thinking that Chinese companies were
having a rather tough time competing with their foreign counterparts,
whose style of management might be considered to better suit China's
current evolution from a planned economy to a market economy. On the
contrary, many modern Chinese enterprises are thriving and the key
to their success is often attributed to their abiltity to adapt and
combine western management practices with their own. Despite the growth
of foreign computer manufacturers like Dell into the Chinese market,
local Chinese brand Legend still claims a considerable chunk of the
market.
The
computer industry in China, like everywhere else in the world, has
declined lately and as a result Legend is embarking on several new
tactics to get things moving again. It has moved into new markets
in China such as Mp3 players and digital cameras and has started to
lay the groundwork to begin providing IT services and network products.
Most ambitiously, and something of a rare move for Chinese companies,
it has long-term plans to take its business overseas. In April last
year the company took a first step towards this by changing its English
brand name.
Such
a move is becoming increasingly popular with many Chinese companies,
and with an increasingly sophisticated and wealthy customer base,
many are starting to pay serious attention to brand building. The
country's largest sportswear manufacturer recently launched a new
advertising campaign costing eight times the cost of their previous
advertising budget. After a good length of time focusing on trying
to undercut their expensively priced foreign rivals, many Chinese
companies are starting to realise that branding pays.
Until
now, perhaps the only Chinese band with a global presence is Haier,
a diversified manufacturer of a vast array of more than 80 products
ranging from refrigerators and washing machines to air conditioners
and televisions. Haier sells its products in more than 150 countries
and owns 13 factories outside China. The CEO of the Haier Group believes
that his company can extend its strong domestic brand reputation into
the West by introducing innovative products for specific consumer
markets and then expanding into bigger ones, a strategy that would
enable the company to enjoy the higher margins that come with brand
sales instead of slugging it out as a low-cost supplier to western
companies.
Research
has shown that the companies in China that are most successful are
those that are able to infuse Chinese and western business practices.
In joint-venture partnerships both sides are able to draw on the strengths
the other has to offer and in this respect Chinese employees are normally
very responsive towards any change towards a more western style of
management. Chinese employees can be quick and eager to adapt their
style of working. It is important to note that this can only be allowed
to happen if western partners make a long term commitment to Chinese
companies to allow time for the benefits of western style management
to be assimilated slowly.
Accounting
Profession in China
In
China, the accounting profession in China is particularly short on
business skills, which really only come from the ability to question
and think innovatively, not for questioning sake but for gaining a
better understanding of a client's business and therefore their financial
needs. The trend of late for Chinese companies to move towards a more
western style of management has however led to some accountants being
able to question the decisions of senior management and to impart
to them the importance of effective budgeting and forecasting.
What’s
important to note is that the general lack of management skills is
not really caused by the lack of a suitable environment in which to
exercise such skills, but rather that no formal management accounting
courses are offered. Those wishing to become certified accountants
in China are limited to only one association offering such a qualification,
the Chinese Institute of Certified Public Accountants (CICPA).
Like
other stages in the Chinese education system the emphasis in CICPA
exams tends to be on rote learning with little or no attention paid
to the benefits of budgeting and forecasting. Until recently, most
of the major Chinese corporations were state-owned enterprises (SOEs),
more answerable to political rather than economic forces. In order
to keep these SOEs 'in business', banks in China traditionally met
government policy demands by financing their operations with massive
loans, regardless of their profitability or risk. Accountants at such
SOEs never had to worry about projecting out cash flows.
China's
Changing Accounting Regulations
Under
China's WTO commitments there is an obligation from five years after
entry to treat foreign and domestic companies similarly. A new accounting
system was implemented effective from the beginning of 2002. This
system is now compulsory for all FIEs in China and brought the Chinese
accounting regulations more in line with international Accounting
Standards. These changes have represented a move towards higher standards
and responsibility to the public for FIEs, but unfortunately a high
proportion of local firms are not yet required to be audited. It would
seem that there is still a great deal of work to be undertaken to
achieve this equal treatment.
The
new accounting system saw a paradigm shift towards a principle-based
system providing greater flexibility for companies and less strict
governance on accounting policies and treatment. This has left a gap
however between the accounting system and the taxation system that
was previously based on something close to a cash accounting system.
Accountants working for FIEs however must now reconcile between international
accounting practice, China accounting practice and the tax requirements.
Many internal accounting systems in companies in China are geared
to producing accounts for the tax man only, not for accounting practice
nor internal management analysis.
Unfortunately,
the majority of an accountant's time in China is spent on ensuring
compliance. Aside from providing information on the performance and
position of the business itself, accountants are also generally responsible
for a suite of regulatory requirements. As such the ability for accountants
to provide extra value to their services is somewhat time constrained.
Companies therefore need to upgrade their systems in order to try
and simplify the reconciliation work required, which takes time and
adds no value to an organization. Accountants must drive this change
in order to position themselves in a value-adding role. They need
to become more proactive in their efforts to educate senior management
of the non-financial aspects of their value. This will in turn help
to change perceptions of accounting departments as merely cost centres.
Accountants
in China need to try and move towards the role of being a member of
decision-making groups within an organisation. They should endeavour
to move away from being data creators to being information providers.
Key to this is greater understanding of management accounting techniques.
Attention needs to be focused on designing and implementing new systems,
understanding the organisational concept of accounting and also on
the links within the organisation, and finally on developing a closer
relationship between those in practice and those in business. The
number crunching can be largely automated so freeing up time for analysis,
review and assistance in decision-making.
Need
for Corporate Governance
For
the accounting profession in China there is still along road to be
travelled in the areas of corporate transparency and accountability,
necessary in order to further accelerate China's move towards a market-based
economy. Fair and transparent accounting services are critical to
provide good corporate governance, an issue of fundamental importance
in China today, where a healthy corporate sector is vital for sustained
and shared growth.
The
accounting profession in China, already bruised and battered internationally
by the likes of WorldCom and Enron, has recently had to deal with
it’s own scandals, such as Guangxia Corporation which is accused
of fabricating more than $85 million in profits over three years.
One of China's best-known accounting firms was involved in the cover-up
and had its licence rebuked as a result. A weak accounting system
renders financial information irrelevant and unreliable, jeopardising
the quality of decision making by senior management, which would seriously
endanger Chinese accountants drive to spearhead a move to increase
the overall financial value of their services.
For
the Chinese government to stamp out corruption and improve the image
of accountants they should consider making it compulsory for all companies
to have an annual audit conducted. They should also consider providing
more powers to the accounting bodies (both local and internationally
recognised) to supervise and protect the profession. Lastly, and most
importantly if accountants in China are to develop into true management
accountants, they will need to better understand business and how
technology can help them move away from their traditional cost and
compliance centres. The future in China is about adding value and
everyone needs to play their part, both domestic and international
accountants.
Russell
Brown, Managing Partner, LehmanBrown
Russell
Brown is a Fellow of the UK-based Chartered Institute of Management
Accountants (CIMA) and acts as the CIMA Representative in
Beijing.
This
article is an abbreviated version of an article that was originally
published in the October 2003 edition of the CIMA Financial Management
magazine.
CIMA
have over 80,000 students and 62,000 members in 155 countries. Its
members are "accountants in business" who work in industry,
commerce, not-for-profit and public sector organisations and whose
key activities are related to business strategy, information strategy
and finance strategy. CIMA's focus on management functions makes it
unique, and it is internationally recognised as offering the
financial qualification for business.
CIMA
have members and students working in many leading companies throughout
China and have recently opened a representative office in Shanghai.
For more details please contact Li Ying at: cima_china@sina.com
.jpg)
