Asian Review of Accounting - Volume 15 Issue 1 (2007) - Special Issue: Chinese accounting

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ISSN 1321-7348

Volume 15 Number 1 2007

Asian Review of Accounting Chinese accounting Editor: Jeffrey Faux

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Asian Review of Accounting

ISSN 1321-7348 Volume 15 Number 1 2007

Chinese accounting Editor Dr Jeffrey Faux

Access this journal online ______________________________

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Editorial advisory board ________________________________

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Editorial __________________________________________________

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The importance in accounting of ambiguity tolerance at the national level: evidence from Australia and China Noel Harding and Mingchuan Ren ________________________________

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An analysis of current trends in accounting professional development in People’s Republic of China P.W. Senarath Yapa and Zhen Ping Hao ___________________________

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How do the Chinese management accountants cope with changes from a planned economy to a market economy? Xu-dong Ji, W. Lu and M. Aiken__________________________________

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Accounting education in modern China: an analysis of conditions and observations Gordon Francis Woodbine _______________________________________

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CONTENTS

CONTENTS continued

Determinants of disclosures of A-, B- and H-share companies Jinghui Liu and Ian Alexander Eddie ______________________________

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Asian Review of Accounting Vol. 15 No. 1, 2007 p. 4 # Emerald Group Publishing Limited 1321-7348

EDITORIAL ADVISORY BOARD Theo Christopher Edith Cowan University, Australia Barry Cooper Deakin University, Australia Russell Craig Australian National University, Australia Craig Deegan RMIT University, Australia Alan Dunk University of Western Sydney, Australia Jim Fisher Wilfrid Laurier University, Canada Sidney J. Gray University of New South Wales, Australia Dhia Al Hashim California State University, Northridge, USA Vince Hooper University of New South Wales, Australia Atique Islam Edith Cowan University, Australia Dominick S. Iwisi Technikon SA, South Africa Pem Lal Joshi University of Bahrain, Bahrain Jeong Bon Kim The Hong Kong Polytechnic University, Hong Kong Louise Kloot Swinburne University of Technology, Australia

Chong Man Lau University of Western Australia, Australia Philomena Leung Deakin University, Australia Woody Liao University of California Riverside, USA Mandy Li Man-Lai Open University of Hong Kong, Hong Kong SAR Ken Moores Bond University, Australia Mort Nelson Wilfrid Laurier University, Canada Les Nethercott Monash University, Australia Normah Haji Omar Universiti Teknologi Mara, Malaysia Maliah Sulaiman International Islamic University, Malaysia Mohammad Tahir Griffith University, Australia Benjamin Tai California State University Fresno, USA Greg Tower Curtin University of Technology, Australia Peter Wolnizer University of Sydney, Australia

Editorial

Editorial Chinese accounting standards and practices are continuing to adapt to international market forces as the Chinese economy opens further to foreign investment. Chinese corporations are playing an ever more significant role in the global economy and the need to understand and interpret financial information produced by these corporations presents a continuing challenge to international fund managers and investors. Many Chinese corporations are now listed on international stock exchanges and have financial reporting obligations governed by non-Chinese regulatory authorities. The Chinese economy is continuing to transform as the state-owned enterprise sector is restructured, and public corporations play a growing role in the Chinese economy. Given the above developments, it is timely to examine the latest research relating to Chinese accounting and financial reporting issues. A special thanks to Professor Ian A. Eddie for reviewing papers for the Special Edition. Professor Eddie is the Head, School of Business and Government at the University of Canberra

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Jeffrey Faux

Asian Review of Accounting Vol. 15 No. 1, 2007 p. 5 q Emerald Group Publishing Limited 1321-7348

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1321-7348.htm

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The importance in accounting of ambiguity tolerance at the national level

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Evidence from Australia and China Noel Harding The University of New South Wales, Sydney, Australia, and

Mingchuan Ren Fudan University, Shanghai, China Abstract Purpose – The aim of the research is to examine potential differences in the levels of ambiguity tolerance between Australian and Chinese accountants at the national, rather than individual, level. Design/methodology/approach – Ambiguity tolerance levels of final year accounting students (proxying for entry level accountants) and first year accounting students from Australia and China were measured using the MacDonald AT-20 Ambiguity Tolerance Index. Comparisons were made across the four subject pools with a view to identifying national level differences suggested by the cultural, sociological, historical, and contemporary issues impacting on the accounting profession in the two countries. Findings – Entry level accountants in China are less tolerant of ambiguity than their Australian counterparts. There are, however, no statistically significant differences in the levels of ambiguity tolerance between first year accounting students in China and Australia. Research limitations/implications – The research employed final year accounting students as surrogates for entry level accountants. Future research could usefully extend this research to practicing accountants at different ranks. Practical implications – Given the central role of ambiguity in contemporary accounting practice, the potential implications are broad. This is particularly the case with regard to the harmonization of accounting practices in that accountants with different tolerances for ambiguity might make different decisions in the face of similar accounting standards and circumstances. Interestingly, the results from the research suggest that differences in ambiguity tolerance are attributable to events occurring while students are studying. Originality/value – This research examines ambiguity tolerance at the national level (rather than the individual level), thereby allowing practical implications to be prescribed. Keywords Australia, China, Culture, Accounting standards Paper type Research paper

Asian Review of Accounting Vol. 15 No. 1, 2007 pp. 6-24 q Emerald Group Publishing Limited 1321-7348 DOI 10.1108/13217340710763726

Introduction In this study, we examine the importance of ambiguity tolerance in accounting judgment and decision making. We, however, address this issue from a viewpoint different to that taken in previous research. While previous studies in accounting have examined this characteristic at an individual level, we examine ambiguity tolerance at a national level. We propose that a combination of factors specific to the accounting profession, together with broad cultural considerations, will result in accountants from

different nations exhibiting different degrees of ambiguity tolerance, and support our arguments in this regard by reporting on data collected from Australia and China. Ambiguity tolerance is a concept particularly relevant in accounting environments due to its association with judgment, a core characteristic of accounting activity. In fact, judgment could be considered to be decision making in the face of ambiguity. Scho¨n (1983, p. 17) states that professionals must be aware of the “uncertainty, complexity, instability, uniqueness, and value conflict” associated with the work they perform. According to Scho¨n, professionals must develop skills in, among other things, professional judgment. Gibbins and Mason (1988, p. 1) observed that “the exercise of professional judgment by those preparing and auditing financial accounting information is at the core of financial reporting”[1] The Accounting Education Change Commission (AECC) in 1990 listed intellectual skills as one of the components on which life-long learning for accountants is built. Intellectual skills included “. . .the ability to identify and solve unstructured problems in unfamiliar settings and to exercise judgment based on comprehension of an unfocussed set of facts”(AECC, 1990, p. 307). Also, the presence of judgment has long been argued to be a distinguishing feature that, in part, characterizes accounting as a profession (e.g. Eaton, 1955; Trueblood, 1960; Becker, 1982) and helps define the accounting profession’s relationship with society (e.g. Willmott, 1986; Abbott, 1988; Allen, 1991). The relationship between judgment and ambiguity can be seen in the various definitions of ambiguity (in)tolerance. Budner (1962, p. 29) defined ambiguity intolerance as “the tendency to perceive (i.e. interpret) ambiguous situations as sources of threat”. Norton (1975, p. 608) defined it as “a tendency to perceive or interpret information marked by vague, incomplete, fragmented, multiple, probable, unstructured, uncertain, inconsistent, contrary, contradictory, or unclear meanings as actual or potential sources of psychological discomfort or threat”. According to Zebda (1991, p. 118), the definitions of ambiguity, while differing slightly between disciplines, “. . . all emphasize the basic idea of imprecision and inexactness”. It is the imprecision and inexactness that creates the need for judgment in accounting environments[2]. Early research suggested that ambiguity tolerance had no effect on accounting judgment (McGhee et al., 1978; Faircloth and Ricchiute, 1981), or reported contradictory results (Dermer, 1973; Oliver and Flamholtz, 1978). Later work, however, highlighted that it can impact on decision confidence (Hall et al., 1982; Gul, 1984, 1986), audit evaluation of misstated account balances (Pincus, 1990), and performance/staff evaluation assessments (Lowe and Reckers, 1997; Johnson et al., 1998). While studies highlighting the relationship between ambiguity tolerance and accounting judgment and decision making are of interest, beyond the psychological testing of the individuals making the judgments, it is difficult to prescribe any practical recommendations from these findings. Individuals will vary in their level of ambiguity tolerance, and in the absence of a convenient means of identifying those individuals who are tolerant or intolerant of ambiguity, there is little that can be done to minimize the undesirable consequences and leverage off the desirable consequences. One way in which this research can contribute to improvements in accounting judgment and decision making is to identify consistencies within, and differences between, identifiable groups within society. This is particularly relevant where there

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are differences between nations, as interventions such as new regulations and/or revised accounting standards are most easily implemented at the national level. Certain factors and circumstances prevailing in a particular nation may condition accountants in that nation to be, on average, more or less tolerant of ambiguity than accountants in other nations. To illustrate, one nation might exhibit a harsh legal and regulatory environment that severely punishes incorrect application of an ambiguous accounting principle. While we would still expect individual variation in the level of ambiguity tolerance, as a societal group, accountants of that nation might exhibit lower levels of ambiguity tolerance than accountants of other nations with a less harsh legal and regulatory environment. Where systematic differences in ambiguity tolerance exist between nations, we would also expect systematic effects on accounting judgment. For example, we might expect that accountants from nations exhibiting low levels of ambiguity tolerance, as compared to accountants from nations exhibiting high levels of ambiguity tolerance, to be more likely to conclude that a misstated account is not fairly stated (but possibly also search for excessive amounts of evidence leading to an ineffective audit) (see Pincus, 1990), be more prone to outcome effects when evaluating a subordinate’s audit performance (see Lowe and Reckers, 1997), and give less favorable performance evaluation reviews to female subordinates (see Johnson et al., 1998). More generally, if, as we argue is the case, factors specific to the accounting profession, in addition to broad cultural considerations, combine to result in accountants in some nations exhibiting lower levels of ambiguity tolerance than those in other nations, there will be implications for the harmonization of accounting practices and comparability of accounting information throughout the world. Contemporary international accounting practices and standards recognize ambiguity as an inherent characteristic of the accounting domain. Where the accountants of particular nations are, on average, more or less tolerant of ambiguity than accountants of other nations, it might be expected that, on average, the accountants of different nations will respond differently to the same situation. Accountants from nations exhibiting low levels of ambiguity tolerance may, for example, inadvertently or deliberately fail to identify the ambiguity or uncertainty inherent in the judgment that needs to be made. Accountants from nations exhibiting high levels of ambiguity tolerance may, for example, inadvertently or deliberately seek ambiguity that may not be present. In this environment, harmonized accounting standards may result in less comparable, rather than more comparable, accounting information. In this preliminary study, we examine ambiguity tolerance in Australia and China. These two nations were selected for the reason that Australia represents a developed nation which has had considerable input into the development of contemporary international accounting practices and China represents an increasingly important developing nation presently in the process of harmonizing its accounting practices with those of more developed nations. China was also selected on the basis that the factors thought to influence the levels of ambiguity tolerance within nations can be clearly contrasted with more developed nations. We first consider the cultural, sociological, historical, and contemporary issues that are argued to influence ambiguity tolerance at the national level and then consider those issues in the Chinese and Australian contexts. We propose that differences between China and Australia on these issues will condition accountants in China to be,

on average, less tolerant of ambiguity than Australian accountants. Our results reveal that accountants in China are, indeed, less tolerant of ambiguity than their Australian counterparts. Interestingly, our results also reveal that these differences in ambiguity tolerance are attributable to events occurring while students are studying for their undergraduate accounting degree. These findings have important implications for accounting practitioners, regulators, researchers, and educators throughout the world. The remainder of this paper is organized as follows. The following section examines the factors argued to influence the level of ambiguity tolerance at the national level and considers these factors in an Australian and Chinese context. This analysis suggests that there will be differences in the level of ambiguity tolerance between accountants in China and Australia. This is followed with a description of the methodology and then the results. The final section concludes the paper by discussing the implications of the study’s findings, limitations, and opportunities for future research. Determinants of ambiguity tolerance in accounting domains While ambiguity tolerance is a personality variable and, by definition, individual in nature, we argue that certain cultural, historical, contemporary, and sociological factors will predispose the members of particular social groups to be more or less tolerant of ambiguity than members of other social groups. This is not to deny ambiguity tolerance as an individual psychological variable, but rather, recognizes that environmental factors contribute to the conditioning of members of particular societal groups towards a higher or lower level of ambiguity tolerance. In this study we focus on accountants from different nations and consider below how cultural, historical, contemporary, and sociological factors impact on their average ambiguity tolerance. These issues are addressed as they relate to accountants in China and Australia. Cultural considerations Referring to Hofstede’s (1980) cultural dimensions, three dimensions emerge as being particularly relevant to the study of ambiguity tolerance, those being, uncertainty avoidance, individualism, and power distance. Uncertainty avoidance is “. . . the extent to which the members of a culture feel threatened by ambiguous or unknown situations” (Hofstede and Hofstede, 2005, p. 167). Those cultures exhibiting high uncertainty avoidance socialize their members not to accept uncertainty. Members of such cultures need familiarity, predictability, and clear rules. They do not feel comfortable in unstructured situations. Ambiguity and uncertainty are similar concepts. Those who wish to avoid uncertainty are likely to also avoid ambiguity, or at least feel psychological discomfort when faced with ambiguity. Accountants from cultures with high levels of uncertainty avoidance are likely to be less tolerant of ambiguity than accountants from cultures with lower levels of uncertainty avoidance. Individualism, or its opposite, collectivism, is concerned with the extent to which individuals are integrated into strong and cohesive groups. Individualistic cultures focus on the self (or very close loved ones) with a concern for their own needs, interests, and goals. Individuals believe that their views are unique and accept confrontation. Collectivist cultures are heavily influenced by, and behave according to, the social norms established within their in-groups. Preference is on making decisions that are in

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the interests of the in-group or decision avoidance so as to minimize the possibility of making a decision that would impact on the social harmony of the in-groups to which they belong. Accountants from individualistic cultures are likely to be more tolerant of ambiguity than those from collectivist cultures. They are more willing to make judgments and decisions in the face of ambiguity, as it presents them the opportunity to express their individualism. Accountants from collectivist cultures may see ambiguity as a threat in that it opens the possibility of differing opinions within the in-group, something that is to be avoided. Power distance is “. . . the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally” (Hofstede and Hofstede, 2005, p. 46). Large power distance societies have many hierarchical levels with unquestioned authority. The authority of others is accepted and respected, with decisions often referred to one’s superior. There is a high level of dependence between superiors and subordinates, and subordinates expect to be told what to do. Small power distance societies have decentralized authority and encourage consultation and participation in decision making. Accountants from large power distance cultures may be reluctant to make decisions and experience stress in ambiguous situations. They are used to, and accept, that decisions are made by their superiors. They are unwilling to make decisions themselves for fear of breaking the hierarchical order. Accountants from small power distance cultures are likely to be more tolerant of ambiguity. They are often, and might even expect to be, included in the decision making process. Their opinions matter and they are used to having them heard. Analysis of Hofstede’s rankings for China and Australia on the dimensions of uncertainty avoidance, power distance, and individualism reveals that while China and Australia are similarly ranked on uncertainty avoidance, China is a more collectivist culture than Australia and exhibits a larger power distance than Australia[3]. This would suggest that cultural factors condition Chinese in general, and accountants more specifically, to be less tolerant of ambiguity than their Australian counterparts. To the extent that Australia is similar to the USA, Ralston et al. (1993) support this contention in that they found Chinese managers to be less tolerant of ambiguity than their US counterparts. Interestingly, however, in a later study, Ralston et al. (1995) report results suggesting that Chinese managers are becoming more tolerant of ambiguity, although still lower than their US counterparts. Historical and contemporary considerations Judgment, being decisions made in the face of ambiguity or uncertainty, develops from experience. Where accountants in a particular nation have a history of needing to make decisions in the face of ambiguity, are trained in and required to regularly face ambiguous situations, and operate in an environment conducive to the exercise of judgment when faced with ambiguity, it might be expected that they will be tolerant of ambiguity. The opposite would also hold true. That is, if accountants have no history or experience in making judgments in the face of ambiguity (e.g. the accounting system has traditionally been rules rather than principles based), have not been trained to make judgments (e.g. the education system teaches the application of rules rather than decision making in the face of ambiguity), and do not need to make judgments on a

regular basis (e.g. accounting and auditing standards do not create an environment of uncertainty and ambiguity), it might be expected that they will experience some psychological discomfort when faced with ambiguity, that is, be less tolerant of ambiguity. Compared to accountants in Australia where decision making in the face of ambiguity has long been emphasized in the undergraduate curriculum and a feature of the accountant’s work, Chinese accountants have had less education and experience in dealing with ambiguity. Of the approximately 140,000 Chinese CPA’s, only 33 percent have completed the CPA qualifying exams and only 16 percent are university graduates (Wang and Zhang, 2004)[4]. Partly due to necessity and the ability of those teaching, the Chinese accounting education system does not generally emphasize the development of judgment skills. Rather, it has emphasized the memorizing/rote learning of rules. There was, and generally still is, little opportunity to develop decision making skills when faced with an ambiguous environment. In May 1996, a taskforce set up by the China Accounting Society (an academic organization) to examine accounting education noted that textbooks were basically “regulation plus explanation” and teaching pedagogies “lecture plus memorization” with little analysis on real cases. Overseas academics with Chinese experience have expressed similar views (see Zhou et al., 1997)[5]. Accounting experience is also unlikely to have provided Chinese accountants the opportunity to develop an appreciation of ambiguity and judgment. Under the planned economy, Chinese accountants were required to follow very detailed accounting regulations promulgated by the government with very little, if any, ambiguity or uncertainty. Take, for example, the depreciation rules stipulated by the state council (the Chinese cabinet). There were established depreciation periods for 30 categories and more than 400 kinds of fixed assets. For the majority of equipment, the depreciation period ranged from 10 years to 20 years. The estimated residual value was set at 3 percent to 5 percent of the original cost. There was no need to consider the unique characteristics of particular assets, particular enterprises, and particular uses to which the asset would be put. In short, accounting was standardized[6]. Lou et al. (1987) note that the regulations were formulated in great detail, rigid and concrete, so as to satisfy the need for consistent and comparable information in planning and decision making by central and local governments. It was not until the accounting regulation for equity joint ventures was issued by the Ministry of Finance in 1985 that judgment became a factor in Chinese accounting, and even then, it applied only to a very small proportion of the accounting community. While the 1990s saw the introduction of a number of accounting standards and regulations reflecting international practice (and the need to exercise judgment) the standards were not equally applicable to all entities and did not have to be understood by all accountants. Furthermore, much of the ambiguity and judgment introduced into Chinese accounting in recent years has been viewed as an opportunity for earnings management rather than an opportunity to reflect the unique circumstances underlying a transaction or event. This has sometimes led to a subsequent reversal of the decision to introduce judgment. For example, in response to widespread earnings management, the Chinese Ministry of Finance recently revised standards on Debt

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Restructuring and Non-Monetary Transactions reducing the amount of judgment required in their application (see Zhu and Sun, 2004)[7]. Highlighting the concerns with education and training of Chinese accountants, Xiao et al. (2000) noted that the lack of systematic professional training and academic education of Chinese accountants meant that many CPAs did not understand the term “audit”. Ren (1998) also reported a general misunderstanding of judgment among Chinese accountants. This leads us to conjecture that the historical and contemporary issues associated with the training of, and work performed by, Chinese accountants will further condition them to be less tolerant of ambiguity that Australian accountants. Sociological considerations The role of ambiguity in the complex relationship between accountants and society has been a topic of investigation in the literature, generally following the critical approach to the sociology of professions[8]. This literature argues that accountants would be reluctant participants in a reduction in the amount of ambiguity or indeterminacy associated with the work they perform (Pichler, 1974; Carpender and Dirsmith, 1993). In exploring why accountants would not support a narrowing of accounting principles, Pichler (1974, p. 69) states: . . . practitioners would suffer a loss in prestige and power if the range of principles were narrowed because there would be a corresponding reduction in the area within which judgment can be exercised. Public accountants would lose a major claim to professional status and be shifted towards the category of technician. The loss of mystique would have economic as well as social status consequences.

According to Willmott (1986, p. 562), mystique “. . . allows the seller [of the labour resource] to mystify and embroider the nature of the task and the means of its execution”. Similarly, Nilson (1979, p. 571) notes that uncertainty “. . .serves to increase the profession’s control over the public’s faith in them, beyond the degree justified by their expertise and ethics”. It might therefore be expected that accountants are more tolerant of ambiguity than non-accountants (or at least those members of society whose relationship with society does not depend to any significant degree on ambiguity). While there are increased risks associated with decisions in the face of ambiguity or uncertainty, these risks are justified by the returns afforded to accountants by society (e.g. privileged societal position, professional fee premiums, self regulation). However, across nations, the accounting profession’s relationship with society is not consistent. In some nations the legal and regulatory environment might mean that there is little to be gained from fostering ambiguity and indeterminacy. This might arise, for example, when there is no significant professional premium afforded to the accounting profession. In other countries, particularly those with limited regulation, one might expect even greater tolerance of ambiguity. In Australia, as with other developed nations, it might be expected that accountants will embrace, search for, and foster ambiguity. In doing so, they secure the sociological benefits that society affords to them (e.g. privileged societal position and professional fee premiums). Harding and McKinnon (1997) report results consistent with this understanding in that they found that accountants were more favorably disposed to an increase in judgment than financial statement users.

In China, however, the relationship of the Chinese accounting profession with society is different than in more developed countries. In China, accountants do not enjoy the same professional privileges as those bestowed on their colleagues in more developed countries. Accounting is not a favored occupation ranking well behind doctors and lawyers and lower than even air hostesses and police[9]. In China, ambiguity creates risk that is insufficiently rewarded and is, therefore, unlikely to be embraced. In this regard, Lu (1998) noted that when accounting for a new transaction, “. . . company accountants would first consult rule books. If no rule was available, the accountant would seek the advise of the government authorities in charge”[10]. Hypothesis In light of the above discussion, we expect that accountants in China will be less tolerant of ambiguity than their Australian counterparts. However, as noted above, there is an apparent trend towards greater tolerance of ambiguity amongst younger Chinese (Ralston et al., 1995). With this in mind, any proposed difference in ambiguity tolerance between accountants in China and Australia is likely to be less evident amongst junior accountants and more evident among senior accountants. This would also be consistent with the fact that junior accountants in China have had less exposure to the historical factors argued to condition accountants to be intolerant of ambiguity. If our hypothesized differences in ambiguity tolerance are present among entry level accountants, then we would expect similar, if not greater, differences between older accountants. Our focus in this study, therefore, is on entry level accountants. This leads to the hypothesis that is tested in the present study. H1. Entry level accountants in Australia will be more tolerant of ambiguity than entry level accountants in China. While we expect to find differences in ambiguity tolerance between entry level accountants in China and Australia, the source of these differences is of practical and theoretical interest. Previous sections proposed a number of reasons underlying our expectation that there will be differences in average levels of ambiguity tolerance between nations. Some of these factors would affect society as a whole (e.g. culture) while others are specific to the accounting profession (e.g. sociological considerations). Still others (e.g. accounting education) may modify attitudes towards ambiguity. These issues are considered in a number of research questions. Given the central role of accounting education in the development of accountants, we were particularly interested in the effect of university education on ambiguity tolerance. As was the case with our hypothesis, we investigate these issues with data collected in China and Australia. Research questions As discussed above, one of the factors argued to contribute to national differences in ambiguity tolerance is culture. Given the pervasiveness of culture, this suggests that differences in ambiguity tolerance will extend beyond the accounting profession. That is, society conditions all its members in this way and it is not a unique accounting phenomenon. If this is the case, we would expect to see differences in attitudes to ambiguity at university matriculation level. That is, prior to the commencement of accounting studies and prior to any accounting work experience. Countering this is the

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possibility that members of a particular nation might self-select into particular professions including accounting. Variation that could be present when entire populations are compared could be reduced or eliminated by individuals tolerant of ambiguity self selecting into an accounting course. RQ1. Are there differences in ambiguity tolerance between first year accounting students in Australia and China? Accounting education is meant to equip students with not only accounting skills, but also an understanding of the environment into which they will enter on graduation. The accounting education environment in Australia encourages the development of a tolerance for ambiguity. One of the generic skills that must be demonstrated before a University’s accounting program can be accredited by the Australian professional accounting bodies is an ability to tolerate ambiguity[11]. If this is the case, then it might be expected that students will exhibit higher levels of ambiguity tolerance as they complete their university studies in Australia. This would be consistent with the understanding that a favorable attitude to ambiguity can be developed and fostered as part of an accounting curriculum. This is explored in the second research question. RQ2. Are there differences in ambiguity tolerance between first year and final year students in Australia? While Chinese universities, especially “top-tier” institutions are beginning to employ teaching pedagogies that are argued to encourage the development of decision making skills in the face of ambiguity, these are being introduced into an environment not necessarily conducive to success. In a survey of Chinese accounting academics, students, and practitioners, Chen et al. (1999) note that while there is general acceptance of the need to reform the dominant textbook/chalk/blackboard teaching methods involving a unilateral impartation of knowledge in favor of more case teaching and other competency based pedagogies, Chinese academics lack “. . . the motivation, means, and sometimes energy, to improve the situation” (Chen et al., 1999, p. 153). It is unclear whether these pedagogies, applied by faculty that are probably, themselves, intolerant to ambiguity, have a marked impact on ambiguity tolerance. This leads to the final research question. RQ3. Are there differences in ambiguity tolerance between first year and final year students in China? The following section considers the methodology employed in examining the hypothesis and research questions. Methodology Subjects Subjects were final year undergraduate students enrolled in accounting programs at a top tier university in Australia and a top tier university in China[12]. Final year accounting students were considered appropriate surrogates for entry level accountants in this study. Final year students will shortly be entering the workforce and are therefore equivalent to entry level accounts[13]. To investigate our research questions, we also collected data from first year students at the two universities[14].

In both countries, students were approached with a view to eliciting volunteers for the study. No financial incentives or course credits were offered to elicit participation. In total, 100 Chinese and 83 Australian students completed the materials. Demographic data is reported with the results. In China the first year students had completed an accounting principles and an introductory financial accounting course (in addition to other business related courses). The final year students had completed all their accounting courses and were finalizing their undergraduate thesis. Many had already been offered jobs and were preparing to enter the workforce in approximately three months from the date of administration. In Australia, the first year students were completing their first semester of study following university matriculation three months earlier. At the time of administration, these students had completed nine weeks of an introductory accounting course as well as some introductory material in economics and statistics. The final year students had completed 212 years of their three year degree. At the time of administration, these students had completed three financial accounting courses, three management accounting courses, an auditing course, and a range of other business/commerce related courses. At the time the data was collected, these students were participating in interviews with a view to entering the workforce in approximately six months time. Like their Chinese counterparts, many had already been offered jobs following graduation[15, 16]. Research design The hypothesis and research questions were examined with the use of a two (country) by two (stage of study) design. The two “country” treatments were Australia and China. The two “stage of study” treatments were first year and final year. Measurement of ambiguity tolerance Several scales have been proposed for the measurement of ambiguity tolerance. Of these scales, we selected the MacDonald AT-20 Ambiguity Tolerance Index (MacDonald, 1970). In addition to having been shown to be more reliable than other scales[17], the AT-20 Ambiguity Tolerance Index has been widely used in the accounting literature[18]. The Macdonald AT-20 Ambiguity Tolerance index contains 20 attitude statements to which subjects respond true or false. Using this scale, ambiguity tolerance has theoretical range of 0-20. The higher the score, the greater the tolerance for ambiguity. The 20 questions making up the scale are presented in Table I. The test instrument was administered in English to the Australian students and in Chinese to the Chinese students[19]. No modifications were made to the English version. Several steps were taken in order to ensure that the translated Chinese version was equivalent to the original English version. The English version of the instrument was first translated into Chinese by one of the authors. Following this, the help of a number of graduate students from a leading Chinese University fluent in both Chinese and English, was elicited. Half of these students were asked to translate the English version into Chinese while the other half translated the Chinese version into English. The translations were reviewed with a view to identifying any translation errors which were then corrected in the next draft of the research instrument. Thereafter, the help of 19 graduate students, also fluent in English and

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16

True/Falsea

Question A problem has little attraction for me if I do not think it has a solution I am just a little uncomfortable with people unless I feel that I can understand their behavior There is a right way and a wrong way to do almost everything I would rather bet 1 to 6 on a long shot than 3 to 1 on a probable winner The way to understand complex problems is to be concerned with their larger aspects instead of breaking them into smaller pieces I get pretty anxious when I am in a social situation over which I have no control Practically every problem has a solution It bothers me when I am unable to follow another person’s train of thought I have always felt that there is a clear difference between right and wrong It bothers me when I do not know how other people react to me Nothing gets accomplished in this world unless you stick to some basic rules If I were a doctor, I would prefer the uncertainties of a psychiatrist to the clear and definite work of someone like a surgeon or X-ray specialist Vague and impressionistic pictures really have little appeal for me If I were a scientist, it would bother me that my work would never be completed (because science will always make more discoveries) Before an examination, I feel much less anxious if I know how many questions there will be The best part about working on a jigsaw puzzle is putting in the last piece Sometimes I rather enjoy going against the rules and doing things I am not supposed to do I do not like to work on a problem unless there is a possibility of coming out with a clear-cut and unambiguous answer I like to fool around with new ideas, even if they turn out later to be a total waste of time Perfect balance is the essence of all good composition

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

False False False True True False False False False False False True False False False False True False True False

a

Table I. MacDonald Ambiguity Tolerance AT-20 Index

Notes: This column reports the response consistent with ambiguity tolerance. The table reports the 20 questions comprising the MacDonald (1970) AT-20 Ambiguity Tolerance Index that was used in this study to measure ambiguity tolerance. Questions are scored such that higher scores represent greater tolerance for ambiguity with a theoretical range of 0 to 20. Subjects were given the following instructions which preceded the 20 questions. Please answer the following true false questions. Do not spend too much time on any one question. There are no right or wrong answers and therefore your initial response is very important. For the same reason, please do not change your response once you have recorded your initial impression. Please tick the appropriate box to indicate your response to each statement. Please be sure to respond to every statement

Chinese, from a sino-foreign joint venture program being taught in China was elicited. These students completed the research instrument on two occasions, once in English and once in Chinese. Half of these students completed the English version followed by the Chinese version a week later. The other half completed the Chinese version followed a week later by the English version. The degree of non-chance agreement between the two iterations was measured using the kappa coefficient (Cohen, 1960). This analysis revealed a kappa coefficient of 0.81 indicating that the two versions of the research instrument were equivalent.

Administration Preceding the 20 attitude statements was a cover page introducing the study which was described as a cross cultural research study into accountant attitudes. Following the 20 attitude statements was a brief exit questionnaire eliciting age, gender, work, and study experience. The instrument was completed anonymously[20]. In China, the research instrument was administered by the particular instructor (not either author) teaching the class. At the beginning of class, volunteers were called for and those volunteering completed the research materials. In Australia, one of the authors attended the beginning of classes and asked for volunteers. Those volunteering then completed the instrument in the first ten minutes of class. In both China and Australia, the research instrument took no longer than ten minutes to complete. Following the administration of the research instrument, a summary of the research question and findings was prepared and made available to those participants who were interested.

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Results Of the 100 first and final year Chinese students who participated in the study, five first year students returned incomplete data. Of the 83 Australian participants, one final year student returned incomplete data. The responses from these six subjects were excluded from the analysis. Table II reports demographic data for our sample. The demographic data reveals that the Chinese subjects were older than their Australian counterparts. In all samples, approximately two-thirds of the subjects were female which is representative of the entire student population from which the samples were drawn. The level of ambiguity tolerance was not correlated with age (r ¼ 0:06, p ¼ 0:418). Nor was there any difference in ambiguity tolerance between males and females (t ¼ 0:559, two tailed p ¼ 0:577). Reliability analysis on the responses in this study to the MacDonald AT-20 scale revealed an acceptable level of internal consistency. Analysis revealed a Guttman split-half reliability co-efficient of 0.615 and a Kuder-Richardson Formula 20 (KR-20) of 0.567. The ambiguity tolerance scores identified from our samples are reported in Table III. Analysis of variance revealed a significant country by stage of study interaction (F ¼ 6:401, p ¼ 0:012), but no significant country (F ¼ 1:229, p ¼ 0:269) or stage of study (F ¼ 2:293, p ¼ 0:132) main effects.

Chinese sample

Australian sample Age

Age Total useable Total useable responses Male/female Mean Range responses Male/female Mean Range First Yeara Final Yearb

64 31

18/46 10/21

19.23 18-21 22.19 20-24

48 34

15/33 13/21

17.73 20.85

17-19 20-22

Notes: a These are students studying in the first year of their undergraduate accounting program; These are students studying in the final year of their undergraduate accounting program. In China they are fourth year students. In Australia they are third year students b

Table II. Demographic data

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Table III. Observed ambiguity tolerance scores

Sample size

Mean

Standard deviation

95 percent confidence interval

Panel A – Chinese sample First year studentsa 64 Final year studentsb 31 Aggregate 95

10.08 9.71 9.96

2.438 2.559 2.471

9.47-10.69 8.77-10.65 9.45-10.46

Panel B – Australian sample First year studentsa 48 Final year studentsb 34 Aggregate 82

9.56 11.03 10.17

1.945 2.329 2.221

9.00-10.13 10.22-11.84 9.68-10.66

Notes: a These are students studying in their first year of their undergraduate accounting program; b These are students studying in their final year of their undergraduate accounting program. In China they are fourth year students. In Australia they are third year students. The table reports the ambiguity tolerance scores obtained from the MacDonald AT-20 Index for our sample of students in China and Australia. The AT-20 Index has a theoretical range of 0-20 with higher scores indicating a higher tolerance of ambiguity. See Table I and the text for further details of the index

Hypothesis Recall that we hypothesized that final year accounting students in Australia would be more tolerant of ambiguity than final year accounting students in China. In order to test our hypothesis, we compared the ambiguity tolerance score for final year students in Australia and China. The results supported our expectation. Australian final year students (11.03) were more tolerant of ambiguity than their Chinese counterparts (9.71) (t ¼ 2:18, one tailed p ¼ 0:017)[21]. Research questions In order to examine the research questions, we performed Tukey HSD multiple comparisons at the a ¼ 0:05 level. The results from this analysis are reported in Table IV. Consistent with the earlier discussion, there was a statistically significant difference between final year Australian and Chinese students. Research questions one and three are answered in the negative. There was no statistically significant difference in the level of ambiguity tolerance between Chinese first year students (10.08) and Australian first year students (9.56) suggesting that

Chinese first year Chinese final year Australian first year Australian final year Table IV. Tukey HSD Tests (absolute mean difference)

Chinese first year

Chinese final year

Australian first year

Australian final year

– 0.37 0.52 0.95

– 0.15 1.32 *

– 1.47*

–

Notes: * Significant at a ¼ 0:05. The table reports the absolute mean difference in observed ambiguity tolerance scores between the four research conditions in the study (first and final year students; China and Australia) and any significant differences using the Tukey HSD procedure. See Table III for mean ambiguity tolerance scores and Table I for details of the AT-20 Index which was used to measure ambiguity tolerance

cultural considerations do not explain the identified differences in ambiguity tolerance between final year accounting students in the two nations. While there was no statistically significant difference between Chinese first year (10.08) and final year (9.71) students (research question three), research question two is answered in the positive. Australian final year students (11.03) were more tolerant of ambiguity than Australian first year students (9.56). This finding suggests that the identified differences in ambiguity tolerance between final year accounting students in Australia and China arises from events occurring while students are studying toward their undergraduate accounting degree. The implications of this finding are discussed in the following section. Conclusion This study has investigated differences in ambiguity tolerance at the national level and provided evidence in this regard from Australia and China. Identifying differences in ambiguity tolerance at the national level is important in that it allows an achievable means of improving accounting judgments where ambiguity tolerance is a factor. We argued that factors specific to the accounting profession, in addition to broad cultural considerations, condition accountants in particular nations to be more or less tolerant of ambiguity than accountants in other nations. Our results revealed that accountants in China are, on average, less tolerant of ambiguity than Australian accountants. Our results further reveal that there were no differences in ambiguity tolerance at the time of university matriculation leading us to conclude that the differences identified are attributable to events occurring while students are studying for their undergraduate degree. There are several potential explanations for our findings that await future research. We feel that it is unlikely that there would not be national differences in ambiguity tolerance when the entire populations of China and Australia are considered. In light of our results, it would seem that those high in ambiguity tolerance, particularly in China, self select into an accounting program. The reasons underlying this await future research. Also of interest is what occurs during university study. There are at least two potential explanations for our findings. The curriculum taught in some nations might facilitate the development of a tolerance of ambiguity. Alternatively, students might self select, or more precisely de-select, out of an accounting program, such that those who complete an accounting degree are tolerant of ambiguity. These questions examining the source of our identified difference await future research. Given that ambiguity tolerance has been shown to affect a number of accounting related judgments, systematic differences between accountants from different nations, evidenced in this study by differences between Chinese and Australian accountants, have important implications for the harmonization of accounting practices throughout the world, the training of accountants, the comparability of accounting information, and the generalizability of results from prior behavioral studies. Before considering these implications in greater detail, a number of limitations should be noted. Of concern is the use of final year accounting students as surrogates for entry level accountants. While we feel that final year accounting students are appropriate surrogates for entry level accountants, there remains the possibility that students differ

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from entry level accountants on some characteristic that might interact with nationality (the variable of theoretical importance in this study). A further limitation impacting on our analysis of the research questions, but not our hypothesis, is our inability to identify those first year students who are not accounting majors. Given that students do not commit to a major until the second year of study, it is likely that first year students who are not accounting majors completed the research materials. This limits our ability to draw conclusions on the level of ambiguity tolerance exhibited by matriculation level undergraduate accounting students in Australia and China. These limitations, however, do not impact on our key finding that accountants in China are less tolerant of ambiguity than their colleagues in Australia. This finding has important implications for the harmonization of accounting practices throughout the world. Given the importance of ambiguity and judgment to extant accounting practices, national level differences in ambiguity tolerance have the potential to result in systematic differences in judgment and the financial information arising therefrom. For example, those accountants from nations low in ambiguity tolerance may focus on the 20 percent equity interest guideline when determining whether significant influence is present, while those accountants from nations high in ambiguity tolerance may totally ignore the guideline. In circumstances where accountants of different nations respond differently to the same situation, harmonized accounting standards could lead to less, rather than greater, comparability of accounting information between nations. Whether the national differences in ambiguity tolerance identified in this study translate into systematic variations in judgment across nations is an important area that awaits future research. In addition, the results highlight the caution that needs to be exercised when generalizing the results of behavioral research across nations. Where ambiguity tolerance directly affects judgment, or interacts with other variables thereby affecting judgment, research findings may not be generalizable to nations with significantly higher or lower average levels of ambiguity tolerance. Specifically, the research results of this study suggest caution when generalizing behavioral accounting research findings to the Chinese environment. As a final thought, the fact that it appears possible to change attitudes towards ambiguity while accounting students are studying towards their undergraduate degree, or at least allow students to self select out of an accounting degree, offers hope to nations such as China who will need to increase the levels of ambiguity tolerance if they are to successfully harmonize their accounting practices with those of more developed nations. In this regard, effort should be directed towards finding what circumstances (curriculum based or otherwise) arise during a university course that contribute towards or detract from the development of a tolerance for ambiguity. Notes 1. See also AICPA (1955), Mautz (1959), and Bamber et al. (1995) for further discussion on the importance of judgment in accounting. 2. See Zebda (1991) for further discussion on the pervasiveness of ambiguity in accounting settings.

3. Scores on the dimensions of uncertainty avoidance, power distance, and individualism, respectively, are 30, 80, 20 for China and 51, 36, 90 for Australia (Hofstede and Hofstede, 2005). The scores for China are estimates. 4. In China, it was not until the end of 1991 that the first CPA qualifying exam was conducted. Prior to this time, CPAs became qualified through government evaluation. Furthermore, it is not a requirement in China to have a University accounting degree before attempting the CPA exams. 5. Zhou et al. (1997) surveyed 21 overseas academics of Chinese origin with a view to eliciting their attitudes towards accounting education in China. Their view was that accounting education was too mechanical and overly structured. They expressed the need for more interactive teaching, case studies, and group discussion. 6. Consider also the accounting for bad debts. Although companies often carried significant bad debts, they could only provide up to a government approved percentage which ranged from 0.3 to 0.5 percent. 7. The Ministry of Finance reversed earlier provisions requiring the use of fair value accounting. 8. See Abbott (1988), Willmott (1986), and Allen (1991) for a discussion on the critical approach to the sociology of professions. 9. Analyzing 2,599 responses from a survey conducted in 63 Chinese cities, Xu (2000) report that accounting was the 36th most preferred occupation ranking behind lawyers (7th), doctors (14th) and even air hostesses (27th) and police (35th). Similar results were reported by Hu (2003). 10. Translated from Chinese. 11. In Australia, the two main professional accounting bodies are “CPA Australia” and “The Institute of Chartered Accountants”. A University’s accounting degree program must be accredited by these bodies before any graduates from the program can commence study towards their professional CPA or Chartered Accountant qualification. 12. Compared to Australia where students graduate after three years of study, Chinese students study for four years prior to graduating. In this regard, we also administered our research materials to 57 third year accounting students at the Chinese university. There were no differences between third and fourth year students and our statistical inferences were unchanged when the responses from third year students replace those of the final year students. From this point forward, we only discuss the results using fourth year students from China. 13. See Peecher and Solomon (2001) for a discussion on the appropriateness of student subjects. 14. Unlike final year students, first year students have not yet committed to a major in accounting. They may have already decided to pursue a different major or be undecided. 15. Both universities are “top tier” institutions in their respective markets with almost all accounting graduates securing employment in accounting related fields following graduation. 16. On ethical grounds, we did not seek to identify the nationality of participants when they completed the research materials. At the Chinese university, we were able to confirm with the particular instructors that all participants were local (i.e. Chinese) students. At the Australian university, a low proportion (less than 5 percent) of undergraduate accounting students are international students. While it is likely that non-Australian students completed the research materials, the small number of students in this category means that their inclusion would not affect our inferences.

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17. MacDonald (1970) reported reliability estimates of 0.63 (six month interval test-retest) and 0.86 (split half correlated by Spearman Brown). 18. In an accounting context, the AT-20 Index has been used by Gul (1984, 1986), Pincus (1990), Tsui (1993), Lowe and Reckers (1997), Johnson et al. (1998). 19. We are not aware of this instrument previously being administered in Chinese. Reliability measures obtained from the responses to the Chinese instrument were at acceptable levels and consistent with the English language version. 20. A complete version of the research instrument is available from either author on request. 21. Consistent results were obtained when a non-parametric Mann-Whitney test was used.

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Hall, C., Yetton, P. and Zimmer, I. (1982), “The assessment of payroll internal control systems and auditors’ experience, tolerance of ambiguity, and dogmatism”, Australian Journal of Management, Vol. 7 No. 1, pp. 49-60. Harding, N. and McKinnon, J. (1997), “User involvement in the standard-setting process: a research note on the congruence of accountant and user perceptions of decision usefulness”, Accounting, Organizations, and Society, Vol. 22 No. 1, pp. 55-67. Hofstede, G. (1980), Culture’s Consequences: International Differences in Work Related Values, Sage, Beverly Hills, CA. Hofstede, G. and Hofstede, G.J. (2005), Cultures and Organizations: Software of the Mind, McGraw Hill, New York, NY. Hu, R. (2003), “An analysis of college students occupational prestige rating”, Journal of Xiamen University (Arts and Social Sciences), Vol. 6, pp. 121-8 (in Chinese). Johnson, E.N., Kaplan, S.E. and Reckers, P.M.J. (1998), “An examination of potential gender-based differences in audit managers’ performance evaluation judgments”, Behavioral Research in Accounting, Vol. 10, pp. 47-75. Lowe, D.J. and Reckers, P.M.J. (1997), “The influence of outcome effects, decision aid usage, and intolerance of ambiguity on evaluations of professional audit judgement”, International Journal of Auditing, Vol. 1 No. 1, pp. 43-59. Lou, E.X., Wang, S.N., Chen, C.Y., Qian, J.F., Zhao, Y.L. and Enthoven, A.J.H. (1987), Accounting and Auditing in the People’s Republic of China: A Review of its Practices, Systems, Education and Development, The University of Texas, Dallas, TX. Lu, J.Q. (1998), “Sino-American culture differences and its implication for accounting standard setting in China”, Research on Financial & Economic Issues, Vol. 2, pp. 59-63 iIn Chinese). MacDonald, A.P. (1970), “Revised scale for ambiguity tolerance: reliability and validity”, Psychological Reports, Vol. 26 No. 13, pp. 791-8. McGhee, W., Shields, M.D. and Birnberg, J.G. (1978), “The effects of personality on a subject’s information processing”, The Accounting Review, Vol. 53 No. 3, pp. 681-97. Mautz, R.K. (1959), “Evidence, judgment and the auditors’ opinion”, Journal of Accountancy, Vol. 107 No. 4, pp. 40-4. Nilson, L.B. (1979), “An application of the occupational uncertainty principle to the professions”, Social Problems, Vol. 26 No. 5, pp. 570-81. Norton, R.W. (1975), “Measurement of ambiguity tolerance”, Journal of Personality Assessment, Vol. 39 No. 6, pp. 607-19. Oliver, J. and Flamholtz, E. (1978), “Human resource replacement cost numbers: cognitive information processing and personnel decisions: a laboratory experiment”, Journal of Business Finance and Accounting, Vol. 5 No. 2, pp. 137-57. Peecher, M.E. and Solomon, I. (2001), “Theory and experimentation in studies of audit judgments and decisions: avoiding common research traps”, International Journal of Auditing, Vol. 5 No. 3, pp. 93-203. Pichler, J.A. (1974), “An economic analysis of accounting power”, in Sterling, R.R. (Ed.), Institutional Issues in Public Accounting, Scholars Book Co., New York, NY. Pincus, K.V. (1990), “Auditor individual differences and fairness of presentation judgments”, Auditing A Journal of Practice and Theory, Vol. 9 No. 3, pp. 150-66. Ralston, D.A., Gustafson, D.J., Cheung, F.M. and Terpstra, R.H. (1993), “Differences in managerial values: a study of US, Hong Kong and PRC managers”, Journal of International Business Studies, Vol. 24 No. 2, pp. 249-75.

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Ralston, D.A., Gustafson, D.J., Terpstra, R.H. and Holt, D.H. (1995), “Pre-post Tiananmen Square: changing values of Chinese managers”, Asia Pacific Journal of Management, Vol. 12 No. 1, pp. 1-20. Ren, M.C. (1998), “Accounting transition in China: a socio-economic perspective”, unpublished PhD dissertation. University of Hull, Hull. Scho¨n, D.A. (1983), The Reflective Practitioner: How Professionals Think in Action, Basic Books, New York, NY. Trueblood, R.M. (1960), “Professional and technical practitioners in accounting”, The Journal of Accountancy, Vol. 110 No. 3, pp. 57-62. Tsui, J. (1993), “Tolerance for ambiguity, uncertainty audit qualifications and bankers’ perceptions”, Psychological Reports, Vol. 72 No. 3, pp. 915-9. Wang, Y.T. and Zhang, L. (2004), “The basis of auditing: responsibility or independence”, Auditing Research, Vol. 4, pp. 22-6 (in Chinese). Willmott, H. (1986), “Organizing the profession: a theoretical and historical examination of the development of the major accounting bodies in the UK”, Accounting, Organizations, and Society, Vol. 11 No. 6, pp. 555-80. Xiao, J.Z., Zhang, Y. and Xie, Z. (2000), “The making of independent auditing standards in China”, Accounting Horizons, Vol. 14 No. 1, pp. 69-89. Xu, X.X. (2000), “The change in China’s societal structure in terms of occupational preference and choice”, Sociology Research, Vol. 3, pp. 67-85 (in Chinese). Zebda, A. (1991), “The problem of ambiguity and vagueness in accounting”, Behavioral Research in Accounting, Vol. 3, pp. 117-45. Zhou, Q.W., Zhong, X.F. and Wu, A.N. (1997), “The status quo of accounting education and research in China: views and proposals from overseas Chinese accounting professors”, Accounting Research, November, pp. 34-40 (in Chinese). Zhu, G.H. and Sun, Z. (2004), “On the selection of accounting internationalization strategy from the prospect of accounting information quality”, Accounting Research, Vol. 3, pp. 16-21 (in Chinese). Further reading Yang, J.Q. and Xu, Y. (2003), “On accounting professional judgment”, Accounting Research, Vol. 10, pp. 43-6 (in Chinese). Corresponding author Noel Harding can be contacted at: [email protected]

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An analysis of current trends in accounting professional development in People’s Republic of China

Accounting professional development 25

P.W. Senarath Yapa School of Business, La Trobe University, Bundoora, Australia, and

Zhen Ping Hao School of Economics and Management, Tsinghua University, Beijing, China Abstract Purpose – With the introduction of open door policy in 1978 and recent entrance to the World Trade Organisation (WTO), there seems to be a continuous growth of world business between China and the rest of the world. The purpose of this article is to make a comparison between Chinese professionalisation of accounting with other Western countries focusing on three professional themes: profession and the state, entry qualification to the profession and the relationship between higher education and the profession. Design/methodology/approach – This study uses a qualitative method and it is based on using unstructured interviews with Chinese Institute of Certified Public Accountants (CICPA) (Beijing office), CPA Australia (Beijing Representative Office) and National Accounting Institute (NAI) (Beijing office) – all conducted in March 2005. Further information about the current accounting development in China is collected through secondary sources. Findings – The results show that current accounting professionalisation project in China has been derailed mainly due to lack of coordination among accounting educational institutions. It seems that the CICPA purposely exert control over the supply of accountants by limiting the membership only to those who complete its own examinations mainly to maintain the “local status” of its members. Originality/value – The professional accounting project should be closely linked with China’s entrance to the WTO and the World Bank initiatives on accounting development. The results indicate that the accounting profession in China has so far been failed to take appropriate measures to align the professional accounting development with that of parallel professions as found in Western countries. Keywords Accounting, China, Market economy, International trade Paper type Research paper

1. Introduction The accounting reforms in People’s Republic of China (PRC) seem to be a unique process when compared to Western accounting professional development. Chinese The authors wish to acknowledge the precious help offered by the officers of the Chinese Institute of Certified Public Accountants (CICPA), CPA-Australia, Beijing Office and National Accounting Institute (Beijing) for the support in the collection of data for this study. Financial support from the La Trobe University for this study is also acknowledged. This research is based on work carried out in Beijing – PRC while the first author was on Outside Study Program (OSP) and working as a Visiting-Fellow based in the Tsinghua University, PRC from February to April 2005.

Asian Review of Accounting Vol. 15 No. 1, 2007 pp. 25-44 q Emerald Group Publishing Limited 1321-7348 DOI 10.1108/13217340710763735

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professional accountants can be dated back to 1918, when Mr Xie Lin was granted the title of “certified accountant” by the government (Hao, 1999, p. 289). It could be said that the presence of a public accounting system in PRC resulted from Western public accountants coming to PRC along with their clients. The early CPA firms in some large cities came mainly from countries such as USA, UK and France, following Western capital and traders (Guo, 1988, p. 422; Hao, 1999). Since the founding of New China in 1949, modern accounting systems have been adopted almost every region in China. In the past, the focus was on maintaining financial reports for national planning and centralized control over the economy. Therefore, accounting was considered as an annual book-keeping process to provide data for national planning and the national accounting regulation called Uniform Accounting System (UAS) which laid down rigid and detailed rules emerging from the centrally planned economy. However with the policy of openness to the outside world in 1978, accounting development and role in PRC has been undergoing a radical transformation with a revolutionary reform in 1993[1] marking the start of a new era in Chinese accounting history (Scapens and Hao, 1995, p. 261). Compared with research on professional accounting development in the Western world, a little has been written about the professionalization of accounting in PRC, particularly in the post 1978 era and the subsequent development with the attainment of the membership to the World Trade Organization (WTO). It is not surprising that research into professionalization of accounting is rare. Motivated by the relative lack of attention to Chinese accounting professionalization projects this article analyzes the motivations for the recent development of profession in PRC and describes the current framework for professionalization project. For the purpose of this study, reference to “accounting profession” means Certified Public Accountants (CPAs). A possible comparison is made of the Chinese professionalisation of accounting and the professional projects taken place in the Western countries focusing on three profession-themes: profession and state, entry qualification to the profession and relationship between higher education and the profession in PRC. Why is our aim worth pursuing? First, in the new millennium, researchers in accounting are updating new information on globalization and internationalization with Chinese business activities. Secondly, PRC has recently entered the World Trade Organization (WTO) and its process of international trade practices. Consequently, with the commencement of exports to European Union (EU) PRC has become an important player in the world trade arena. Therefore these three broad areas of professionalisation are identified because they are fundamental to the credibility that can be placed on professionalisation project with ongoing globalization and internationalization perspective. The paper is organised as follows: the theoretical framework is outlined in the next section, followed by an analysis (with reference to the relevant theories outlined in the section on the theoretical framework) of the situation of professional accounting in PRC in light of the various issues between the state and the Chinese Institute of Certified Public Accountants (CICPA) (i.e. profession and state) in PRC during the past decades. The last two sections of the paper discuss the entry qualification to the accounting profession and relationship between higher education and the profession, and the concluding section highlights the importance of accounting professional development issues to improve the globalization and internationalization of Chinese economy.

2. Theoretical framework During the last few decades, there has been a growing awareness by accounting researchers of the relationship between states and accounting associations (Chua and Poullaos, 1993; Puxty et al., 1987; Willmott, 1986). In the Herbert Spencer Lecture delivered at Oxford in 1928, Carr-Saunders pointed out that:

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. . . [t]he story of the evolution of the professions is . . . an unwritten chapter in the social history of the last two centuries. No aspect of the matter has received the attention it deserves (in Vollmer and Mills, 1966, p. 4; Yee, 2001).

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Five years later, Carr-Saunders and Wilson (1933) published their seminal work The Professions. They contended (Carr-Saunders and Wilson, 1933, p. iii): Professional associations. . . have been almost entirely neglected; there has been no study of the historical development of professional association or of the social, economic, and ethical problems involved. This is all the more astonishing inasmuch as the greater skill and responsibility of professional men as compared with members of trade unions render their associations far more interesting and important. Willmott (1986, p. 556) also supported the historical approach and commented that “the organization of the profession cannot be adequately understood independently of an appreciation of the political, economic and legal circumstances that have supported and constrained its development”. The ability and the authority of the state to be a friend or foe take a pivotal dimension in professional development of a country. Johnson (1982, p. 190) argued that the historical characteristics of the British professions, though regarded in much of the literature as providing a model of the “classical” features of the professions in general, are in fact experiences specific to the British. In his work, The state and the professions: peculiarities of the British, Johnson (1982) indirectly questioned misguided attempts in sociology to derive a universal, “natural history” of professionalisation from the defining “classical” British experience. In addition, previous work by Johnson (1973) and Johnson and Caygill (1971) are path-breaking and important in this respect. They concluded that there had been a symbiotic coupling of interest existed between the imperial state and British professions generally. Johnson did not contemplate situations where this coupling of interest might not be so harmonious (Johnson, 1982, p. 208). His main attention was on British associations as imperial bodies with imperial interests (Johnson, 1982, p.182). Recent research on professionalisation have highlighted different context on different countries. Annisette (1999) points out that professional accounting association did not set up till the middle of the twentieth century in Trinidad and Tobago, after the country gained its independence from Britain. This phenomenon holds true for Malaysia (Susela, 1999), Brunei (Yapa, 1999), Sri Lanka (Yapa, 2006). This is consistent with Parker’s observation that professional accountancy bodies have developed most rapidly in the twentieth century after the attainment of political independence in ex-colonies of the British (Parker, 1989, p. 18). Another interesting study on profession-state dynamics has done in Nigeria. It critically examines the case of Nigeria that has helped shape the outcome of the various episodes in the accounting profession in there. As revealed in this study the most important influence in its dynamics is the nature of government in place (Uche, 2002). When these cases are compared with those of Australia, Canada, New Zealand and Africa, it would appear that the emergence of the British model of organised accounting labour does not

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always followed the British version and British capital. What explains this difference? As suggested by Annisette (1999) it is the development of a strong independent capitalist economy which could account for the different professionalisation projects of these countries (Chua and Poullaos, 2002). In addition Annisette (2000) has briefly suggested that the settler and non-settler colonies could also exhibit different professionalisation trajectories (Chua and Poullaos, 2002). Thus, state was seen as a mode of accessing opportunities by those who were previously left without access to the profession (Annisette, 1999; Susela, 1999). In the case of Brunei, ethnic factors prevented the professional association from acquiring state patronage for its members (Yapa, 1999, p. 333). Studies of other former colonies have identified a profound dependence on overseas qualifying associations for the training and certification of professional accountants, thus demonstrating the operation of contemporary imperialism and its continuities with nineteenth century British imperialism (Annisette, 2000; Chua and Poullaos, 2002). Annisette (2000, p. 655), for example, showed that the emerging accounting professions in Tobago and Trinidad consistently marginalised the indigenous university, which appeared eager to participate in the education and certification of the country’s accountants. The Institute of Chartered Accountants of Tobago and Trinidad (ICATT) instead surrendered control of its knowledge functions to the UK based ACCA. State intervention has been identified in the case of Sri Lanka (Yapa, 2006). It appears that over the past the Institute of Chartered Accountants of Sri Lanka (ICASL) had pursued an agenda of closure by seeking to restrict the public practitioners. Therefore, the profession in Sri Lanka can be characterized as being beset by cross-border competition between British institutions seeking to exert influence within a former colony and a local organization concerned with achieving closure over practitioners. These dynamics have created a tension between the ICASL and the Sri Lankan state. Researching the accounting regulation and organization in PRC, Hao (1999) discusses the incremental construction, of an accounting profession as a part of a larger program improvising a “socialist market economy” over the last two decades. It is important to understand that the re-emergence of the accounting profession in PRC was largely the work of the Chinese government. As Hao (1999, p. 293) pointed out the Chinese CPAs did not proactively organize themselves to become a self-regulated body. Any step forward was directed by state regulations. It is unlikely that a CPA association would have emerged at this time if regulations to constitute it and supportive market arrangements had not been established by the state. Hao (1999, p. 292) also compared the difference between PRC and other Western countries: In many Western countries the accounting profession has been promoted by practitioners and professional associations that are reasonably autonomous from the state. Even when the associations entered into “corporatist” arrangements with the state to regulate accounting practitioners or accounting practice, they did so as autonomous entities. It is important to understand that in PRC the situation is very different. It is the state which brings public accountants back into the limelight. Indeed, many important regulations affecting the development of the accounting profession were promulgated by the Chinese government between 1980 and 1985. A number of important events took place in 1980. On 6 January, the Accounting Society of China (ASC), comprised mainly accounting academics, was reorganized after having been suspended for a decade because of the Cultural Revolution. In September, the Standing Committee of the National People’s Congress issued the Income Tax Law for

Sino-foreign Joint Ventures. On 14 December, the Ministry of Finance promulgated the Detailed Principles for Implementation of Income Tax Law for Sino-foreign Joint Ventures. It was stipulated for the first time that an auditor’s report required for a tax return must be signed by a Chinese CPA (Hao, 1999, p. 292). In the same year, on 23 December, the Ministry of Finance issued the Provisional Regulations Concerning the Establishment of Accounting Consultancies. This marked the first step in the reestablishment of the CPA profession. On 1 January 1981, the first CPA firm to emerge as part of the revival of the certified public accountants system was the Shanghai Certified Public Accountants (then called Shanghai Accounting Consultants). More CPA firms were established in succession in other provinces of PRC (Hao, 1999, p. 292; Xu, 1995, p. 60). Given the review above, this study explores the professional development of a non-Western accounting profession. Some reviews of work within a model of critical perspectives in the sociology of professions indicate the need for two forms of future research, namely investigations of the profession-state axis and historical analyses of professionalisation which capture historical specificities (Collins, 1990; Uche, 2002). Despite such contributions having been made elsewhere to the body of knowledge of the accountancy professions, there seems to have been very little research into these areas in PRC. The next section of the paper will look at the profession-state dynamics in PRC under which professionalisation of the Chinese accountants occurred. 3. The profession-state dynamic in PRC This section analyses (with reference to relevant theories outlined in the previous section) the situation of professional accounting in PRC in light of various occasions on which issues arose between the state and the accounting profession during the past decades. The “state” refers to the “authority of hierarchical control, as operationalized by career civil servants for example, is vested in agreed rules and procedures backed up by the state’s monopoly of legitimate coercion” as explained by Puxty et al. (1987, p. 275). Description of the Chinese context will be included as part of the analysis. 3.1. The establishment of the Chinese Institute of Certified Public Accountants (CICPA) The accounting profession in PRC is very young and inexperienced to most Western countries. The CPA profession first emerged in 1918, but it had experienced very slow growth, in particular after the Chinese Communist party rose to power in 1949. From 1949 to the late 1970s, the development of the CPA profession suffered further setbacks. From 1949 to 1977, under the influence of the Soviet Union, PRC was run as a centrally planned economy. In this period, the opportunity for private accounting services was limited. The accountants were not regarded as a prominent group and consequently the accounting profession was not considered important. The national system of recognizing and supervising certified public accountants came to an end in 1951 (Gao, 1992, p. 15). During the 1950s, after the 1949 revolution, PRC carried out socialist reform and private ownership rights were transformed, gradually, into socialist public ownership. Isolated from Western countries, PRC allied itself with its large and powerful neighbor, the Union of Socialist Republics as they shared the social system and belief in communism. By 1956, the socialist transformation was basically complete (Xu, 1995, p.59; Wei and Eddie, 1996, p. 8). CPA firms gradually disappeared

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as they lost their social context in a centralized and planned economy (CICPA, 1999, p. 11; Xu, 1995, p. 59; Yee, 2001). During the past five decades, the political and economic landscape in PRC has undergone several reforms. Two major events, namely the “Great leap forward” (1958-1961) and the “Cultural revolution” (1966-1976), took place during this period. The former period saw the establishment of rapid collectivization and control of communal administration by the Party representatives. This period mostly considered the introduction of “accounting without books”. The Chinese accountants were considered intellectuals and belonging to the “bourgeois class”, and they suffered both physically and mentally. Consequently, development of the CPA profession was suspended in 1966. The latter period (i.e. the ten years of the Cultural Revolution 1966-1976), accounting in all state and collective enterprises was terminated, the accounting people were dismissed, and the accounting departments in universities were closed. Propaganda (e.g. movies, drama, and novels) during the Cultural Revolution denounced accounting personnel. This not only resulted in public prejudice against accounting and accounting personnel but also led to the ruin of accountants both physically and mentally (Van Hoepan, 1995, pp.363-364). Accounting records were not well kept and there were less than 100 people working in the Ministry of Finance (Liu and Turley, 1995, p. 206). Most universities were closed and faculty members sent to agriculture communes, factories, or the army and assigned to manual labor so they could re-develop the proper attitudes towards physical labor and the role of working people in their society. Unfortunately, accountants were among those targeted as they were considered as belonging to the bourgeois class. Accounting education at university almost vanished in these ten years (Yee, 2001). The Cultural Revolution eventually ended in 1976 with the death of Mao Zedong. This was followed by the rise to power of Deng Xiaoping starting from 1978. Under the leadership of Deng, the Chinese Communist Party began to focus on restructuring the Chinese economy. The first step to the economic reform was the introduction of the “Four modernizations” program. This reform involved modernizing the key sectors of the economy. In 1978, at the Third Plenary Session of the Eleventh Central Committee, the Chinese government determined the strategies for opening to the outside world. With the adoption of this open door policy, PRC attracted a huge amount of foreign direct investment. For the first time, the progressive move from a planned economy to market economy repositioned the State’s role in the economy and allowed the market mechanism to play a role in its economic development (Wei and Eddie, 1996, p. 12, Yee, 2001). It reappeared in the late 1970s, and began the process of re-establishment in 1980. From 1986 to 1993, the CPA profession continued to develop steadily. Chinese government promulgated the Accounting Staff Authorities Regulation 1978, which enabled all accounting staff to hold a professional title (Aiken et al., 1997, p. 52). The government also issued new laws and regulations that impelled the reestablishment of the certified public accountant system (Xu, 1995, p. 60). Given the above review it is clear that the re-emergence of the accounting profession in PRC was largely the direct involvement and the direction by the Chinese government. With this on going reforms in the Chinese economy, the Chinese Institute of Certified Public Accountants (CICPA) was set up in November 1988. In PRC there are 30 local provinces and each province has its own CPA institute. They are monitored and governed by CICPA. The CICPA is the first professional body set up in PRC since the establishment of the People’s Republic of China in 1949. Although the CICPA is

technically a private organisation, it is governed and regulated by the Ministry of Finance (MOF) and CICPA’s day to day functions are directly influenced by the state involvement (Chow et al., 1995; Macve and Liu, 1995; Graham, 1996). When the Law of the Certified Public Accountants came into operation at the beginning of 1994, the CPA profession formally moved into an era of recognition (Yee, 2001). In addition to CICPA, the Chinese Association of Certified Public Auditors (CACPA) was established in 1991. The CACPA also was governed and regulated by the National Audit Office of the People’s Republic of China (NAO). The parallel co-existence of CICPA and CACPA has led to many problems in the Chinese public accounting profession such as abnormal competition among firms (Li, 1991; Li and Lin, 1991). In order to alleviate this abnormal competition, a notification was issued by the MOF and NAO jointly in June 1995 and the two professional bodies were merged to form a new professional body by the name of CICPA, under the direct control of MOF. Apparently, this merger has created a significant unification in the Chinese public accounting profession. Following from this reorganization, there are 107 CPA firms qualified to do securities-related business by the end of 1998 (The Hong Kong Accountant, 2000). All those who have passed the National CPA Examination and their membership applications have been approved or those who were qualified through the former evaluation procedures eligible to become individual members of the CICPA. If recommended by relevant parties and approved by the CICPA Council, well-known figures at home and abroad may be awarded honorary membership. As the CICPA remains a government agency, unlike accounting professional bodies in the Western world, the question remains concerning the independence of the Chinese CPA. This has been examined by many researchers and for example, according to Macve and Liu (1995) in Aiken et al. (1997, p. 47), these government bodies are the real “power behind the throne” and in fact, all staff members of the CICPA are government officers and officials. Another major event in the development of accounting in PRC during this period is the enactment of the first Accounting Law by the National People’s Congress, which is the highest legislative body in PRC. In 1993, the Law of the Certified Public Accountants was promulgated by the Fourth Session of the Standing Committee of the Eighth National People’s Congress (Aiken et al., 1997, p. 45). This marked a new era for the accounting profession in PRC. It expanded the role of CICPA and escorted the CPA profession away from the state principle and towards becoming a communal organization (Hao, 1999, p. 293). The new law expanded the role of the CICPA and stipulated that CPA qualification was obtainable only by examination (Yee, 2001). It is important to note that the new CPA Law contains some adjustments which will have some influence on the state-profession relationship. For example, according to new law an accounting firm may be organized as a partnership or a corporate body with limited liability. This provision allows the separation of CPA firms from the state (Hao, 1999. pp. 294-295). The setting up of accounting firms must be approved by the MOF to be able to provide statutory services. CPAs may form an accounting firm on a partnership basis. Due to the lack of an unlimited liability concept and of a developed legal environment in which to apply this concept, most CPA firms in PRC are set up with limited liability (Chow et al., 1995: Graham, 1996). The registered capital of the CPA firm is not less than 300,000 RMB Yuan (approximately US $36,000) and that that the firm has at least five registered CPAs (CPA Law, art. 24). By the end of 1997, there were 62,460 practicing CPAs and 6,900 accounting and auditing firms and 67,715 non-practicing

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CPAs in PRC (Tang, 1999, p. 1). According to CICPA figures, it expects that the country needs 100,000 CPAs by 2000 and 300,000 by 2050 (Zhang, 1995). According to these figures the CICPA has become the second largest CPA association in the world, with a full membership of 130,135. 3.2. Role of “big four” in PRC Big four (KPMG, Ernst & Young, PriceWaterhouseCoopers and Deloitte Touche Tohmatsu) accounting firms are operating in PRC. The Big four takes up about 15 per cent of the total market share in PRC (Tang, 1999). The main reasons for big four operations are as follows: . More than 200 of the world’s top 500 companies have invested in PRC since 1993. . Since 1993, PRC has been for five consecutive years the second largest recipient of foreign direct investment (FDI), after US and FDI amounted to US$ 45 billion in 1998 (Beijing Review, 1999). PRC overtook the USA in attracting FDI in 2002, and it may well become the world’s largest economy in 2020 (Economist, 1994). . Effort to gain membership in the World Trade Organisation (WTO) and its trade implications. These international big four, however, are not allowed to do any statutory audit or accounting work under the Chinese CPA law. They can establish their presence in PRC through: . opening representative office to offer consulting services to foreign firms and can provide some consultancy services to Chinese clients; . setting up joint ventures to perform audits on multinational corporations and Chinese firms listed overseas; . accepting Chinese accounting firms as their member firms; and . applying for provisional operation licences to set up operations in PRC (Hong Kong Trade Development Council, 1999). At present there are 22 representative offices, 11 joint ventures and seven member firms of international CPA firms (The Hong Kong Accountant, 2000). However, the control of regulation concerning the establishment of accounting consultancy service is still in the hands of Chinese authorities (Ministry of Finance, 1980). For example, any effective legal documents, such as auditors’ reports to tax authorities, must be signed by CPAs registered and approved in PRC. Foreign accountants were not allowed to be registered in PRC. If the foreign investors in a joint venture wanted an auditor’s report to satisfy foreign requirements, they could invite foreign accountants to do the auditing subject to the approval by the board of directors. The joint venture could only pay the fees of Chinese CPAs. Foreign investors were required to pay the fees of the foreign accountants that they had invited (Hao, 1999, p. 293). This overview shows the establishment of support by the state to local accounting professional body. However, this practice differentiates PRC from the other Western countries. With the globalisation[2] move, and the liberalisation of state-run economy, PRC is in the process of privatising thousands of state enterprises and listing many of them in the overseas stock exchanges. In addition, there seems to be some discussion on setting up of a securities investors’ protection fund in order to protect investors in the Chinese

stock market. The fund initiated by the Chinese Securities Regulatory Commission (CSRC) and the Ministry of Finance, is mainly intended to give investors some compensation when they suffer from losses brought by misbehaviour or bankruptcy of securities companies. Since the early 1990s, the stock market has gained considerable momentum in PRC. A recent online survey made by Xinhuanet.com about the proposed fund during the annual meetings of National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) shows that the topic that draws most attention is how the capital market can be pulled out of the current lingering swamp. This topic received 72 per cent votes and it is ahead of the other current topics of CPPCC (China Daily, 2005a). Other interesting recent stock market development is the imminent public listing of state banks – Bank of PRC (BOC) and PRC Construction Bank (CCB) in the near future. These listings are basically in accordance with the PRC’s commitments to the World Trade Organization (China Daily, 2005b) The continuing economic reforms, as well as the development of stock market in PRC, necessitate a corresponding development in skills and reputation of international accounting firms. However, according to available information, despite the PRC’s openness to the outside world, it appears that “Big four” and other international accounting firms cannot be expected to play a prominent role in the development of Chinese accountancy profession in the near future. 3.3. How has PRC responded to challenges in terms of the development of accounting profession? According to a report submitted at the tenth National People’s Congress – Chinese People’s Political Consultative Conference (CPPCC) – the minister of the National Development and Reform Commission (NDRC) noted that rapid economic growth would help create more jobs, promote reforms and maintain social stability (China Daily, 2005a). It is clear from these circumstances that PRC has eased its restrictions on the establishment of branches by joint venture firms and overseas firms. For example, the deadline to transform joint ventures in PRC into member firms has been extended from 2001 to 2010 and the restriction on the maximum ownership of 33 per cent equity by overseas firms in joint ventures has also been lifted (Xindeco, 1998; Lin and Chan, 2000). There are over 300,000 private enterprises and 320,000 foreign investment enterprises in operation in PRC by the end of October 1998 (Beijing Review, 1998). Recent estimates show that about 73 per cent of industrial output was generated outside the state sector in 1999 (National Bureau of Statistics, 2000). With the ongoing development in the economy the growth of stock market seems significant in PRC and consequently, the establishment of the share capital system in 1992 has had a profound influence on the development of accounting profession. Since 1992, some Chinese companies have issued and listed Corporate Bonds and different categories of company shares namely: A-Shares, B-Shares, H-Shares and N-Shares. The category of A and B shares are available to Chinese citizens and foreigners. The category of H and N shares are listed on the Hong Kong and New York stock exchanges. These stocks are raising capital from domestic and foreign capital markets. Another important land mark in the development of the accounting profession in PRC is the attainment of membership of international bodies. For example, in October 1996, the CICPA joined the Confederation of Asian and Pacific Accountants (CAPA) and in May 1997 CICPA was admitted to membership of the International Federation

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of Accountants (IFAC) (Carnegie and Liu, 2000, p. 41). In the 15th CAPA Conference (2000) held in Manila, the Secretary-General of the CICPA, Li Yong, was elected to be the Deputy President of the CAPA. At the same Conference, the CICPA successfully bid for hosting the 16th CAPA Conference to be held in 2003 (CICPA, 2001a, p. 8). This paved the way for the CICPA to enter the international market and it is a significant step towards achieving international recognition and to meet the challenges ahead. 3.3.1. World Bank initiatives on accounting. The World Bank committed itself to supporting reform of PRC’s accounting system commencing from 1992. As cited in World Bank (2002), so far a good progress has been achieved under this project. The present project would acknowledge the progress, building further on the success already achieved. It would reinforce the role of the World Bank as a supporter of financial infrastructure in PRC. The current project comprises two related components. The first component consists of continuing support of the government’s ongoing efforts to develop and promulgate accounting standards predicated on internationally accepted accounting standards. The principal vehicle through which this is to be effected by the Chinese Accounting Standards Committee (CASC), the formation of which was approved by the State Council in February 1977. The committee, intended to be a permanent body, has been charged with a series of tasks which include the researching, drafting review and evaluation of accounting standards; coordination of accounting activities with international accounting bodies; and responsibility for the proposed World Bank Accounting project. The secretariat of the CASC is expected to be based on an existing Accounting Standards group of Accounting Department in MOF; however, the new group will have greater external expertise and greater independence. Assistance to the CASC would comprise: the development and publication of a series of accounting standards, additional to those already undertaken (including basic accounting standards, reporting standards, and selected sector and business standards); maintenance and revision of existing standards, development of an advisory/best practice service for users (including a web site), development of a staffing and training program, and supporting equipment and training materials (World Bank, 2002). The second component supports government efforts to familiarize, on a large scale, existing accountants with accounting, auditing and business administration principles and practices that are generally accepted in market economies. The approach to be adopted is to establish a large residential continuing education facility in Beijing which would offer a wide selection of short courses on specific accounting and business topics and issues. Such courses include, for example, accounting practices, auditing techniques, taxation, professional ethics, computerized management systems, and various functional management topics. This facility can accommodate 1,500 persons at a time. Based on courses of around two weeks, average, the throughput of the institution will be around 25,000 persons per year (World Bank, 2002). Under the CICPA component, it is proposed that the Bank would finance those parts of the training center that relate to the provision of training, such as classroom equipment, teaching materials, as well as consultant inputs for curricula design, preparation of course materials, and the provision of instructors in the start-up period, and provision of overseas training for Chinese trainers. The Bank does not propose to finance costs related to land, buildings, or their associated general equipment and infrastructure. Such costs would be met entirely through local counterpart funds.

Under the Accounting Standards component, the Bank proposes to finance costs related to the preparation, finalization, dissemination and monitoring of new accounting standards, and training for the members of the Accounting Standards Committee (World Bank, 2002). The Accounting Standards Committee, set up in association with the Accounting department of the Ministry of Finance, is responsible for the implementation of the Accounting Standards component. The CICPA (which is currently closely associated with and subject to the supervision of the Ministry of Finance) plans to draw on worldwide resources for professional educational materials, courses and instructors. This would include the resources such as the American Institute of CPAs (AICPA), major international CPA firms, and international universities for accounting and business (World Bank, 2002). 3.3.2. Accounting development with World Trade Organization (WTO). The WTO was established in 1995 as a successor to General Agreement on Treaties and Tariffs (GATT). Having gained the WTO membership, PRC has made a significant progress in the international trade and accounting fields. Consequently international accounting firms seemingly have oriented their services to a wider community to provide more services. With the accession to WTO Chinese senior officials have become increasingly aware that the PRC would be obliged to extend rights and privileges previously only granted to domestic private firms to privately owned foreign ventures. Membership of the WTO would oblige the PRC to revise countless rules and regulations in order to eliminate distinctions made on the basis of the nature and location of ownership (Asian Development Bank, 2003). According to an official CPA Australia, Beijing office pointed out the following: As a member of WTO, PRC has to abide by its commitments it made in prior negotiations. In terms of accountancy profession, PRC will open its market wider by allowing foreign nationals to run CPA firms in PRC. However, these foreign nationals should hold Chinese CPA certificate in order to practice in PRC. Also, International accounting firms have more freedom to expand their business geographically.

With respect to the accounting system is concerned, while all domestically listed firms are required to follow Chinese GAAP, overseas quoted companies base their accounts in IAS/IFRS. In this regard CPA Australia-Beijing official pointed out the following: Since 1992, PRC has been developing new set of accounting standards which is quite different from old USSR model of accounting system. The development of the new standards was assisted by experts of Deloitte Touche Tohmatu and funded by the World Bank. It is believed that these standards embody most principles of the IAS. However, due to different economic development level compared to the developed countries, PRC has not made a plan on when to adopt the IAS or IFRS.

Authors’ question on what quality of accounting information is required by the WTO to comply with international standards, the CPA Australia-Beijing official responded as follows: As far as I know, WTO does not place any control on the quality of accounting information of a member country and does not require any member to adopt IAS. IAS is not binding on any countries, including USA.

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At the moment there are no any significant changes that have been suggested by the WTO to the accounting regulation in PRC. This point was further reinforced by the CPA Australia-Beijing official as follows: WTO does not suggest any changes to PRC’s accounting regulation. However, as PRC needs to further liberalize its accounting sector, some of the existing regulations will be amended based on PRC’s commitments to the WTO. For example, the old regulation only allows Chinese nationals to become partner of Chinese accounting firms but now foreign nationals are also permitted to practice in PRC.

When raised the question on the opinion of the CPA Australia-Beijing official on the current development of accounting profession in PRC, he explained it as follows: Since PRC enters WTO, its economy integrates with the world in a fast pace. I have seen more FDI, more foreign trade volume and more foreign institutional investment in Chinese securities market. As a result, there has been a higher demand for quality accounting information and for strict implementation of IAS for companies seeking overseas capital. This will surely give an impetus to the improvement of the accounting profession as a whole.

Having analyzed the importance of gaining membership to the WTO, and presented the involvement of the state and the development of professional accounting over the last 50 years, it is significant to take a more detail look at the entry qualifications to the profession, seeking to validate the on going argument on professional accounting development in PRC. The next section explains this situation. 4. Entry qualification to the profession The entry qualifications to the accounting profession/practice has been widely criticized and reviewed in the Western professional bodies. Some scholars mainly focus on numerous barriers such as apprenticeship, examination and entry qualifications that professions have enforced in order to ensure social closure (Klegon, 1978; Larson, 1977; Parkin, 1979). According to Mo et al. (1995, p. 289), who quoted from the Official Teaching Guide of the Office of the National Examination Board: Before the promulgation of the Regulations (1986), CPAs in PRC were certified according to experience and educational background. Candidates could apply to be evaluated by local regulatory agencies through their affiliated CPA firms. Owing to the lack of standardized evaluation criteria, the granting of CPA qualifications was not consistently applied throughout different provinces. Under this certification system, practically all certified accountants were retired accounting or financial officers of government agencies. In 1990 the Ministry of Finance issued a regulation called Administration of Accountancy Certification, applicable to State-Owned Enterprises (SOEs), non-profit and government organizations. It established the Accountancy Certificate (AC) as the basic qualification for those seeking accounting positions in those organizations. In 1996, a revised Administration of Accountancy Certification extended the AC system to all organizations, including enterprises with foreign investment. The MOF is responsible for designing and printing the AC and local or industrial financial bureaus are responsible for its issuance and administration. Those who have obtained professional accounting titles or two or three year college diplomas involving examinations can acquire the AC directly. Others seeking the AC must take examinations on finance and accounting regulations, fundamental accounting,

accounting practice, and one or two options: abacus or basic computerized accounting. Those not involved in accountancy work can also take the examinations and obtain a preparative AC. The Trial Regulations of Professional Accounting Work Duties (issued in 1986) established a rating system applicable to salaried accountants in government organizations, not-for-profit organizations and state owned enterprises. The system established a range of professional titles divided in to the following four titles: Senior Accountant, Accountant, Assistant accountant and Junior Accountant. The MOF was responsible for implementing the regulation. Applications were assessed by committees according to the conditions stipulated in the regulation. The committees were organized once a year and their members were composed of top management and senior title holders in the particular organizations. Qualified applicants were given professional titles linked to specific accounting positions. Two or three year college graduates on one year’s probation and subject to other requirements could apply for the title of junior accountant. Four year university graduates on one year’s probation and subject to other requirements could apply directly for the title of Assistant Accountant. The criteria for senior accountant included a minimum experience requirement, the ability to control the whole accounting system in an organization, and mastery of a foreign language. The method of assessment by committee was replaced in 1992 by national examinations, held once a year (Ministry of Finance and Ministry of Personnel, 1992). The AC has become a condition for applying to take part in the exams for the professional titles. However, there is no direct relationship between the AC and CPA qualifications. Generally speaking, CPAs who want to take an accountancy job in an organization can get the AC very easily because they have passed the CPA exams which are more difficult than the AC papers and usually have at least a two or three year practice experience. However, AC holders cannot get the CPA title automatically; they have to sit the national CPA examination to obtain it. It appears that the state continues to play a dominant role with respect to salaried accountants, who have not been encouraged to organize themselves in the same way as CPAs (Hao, 1999, p. 298). 4.1. CPA national examinations In 1993, the Law of the Certified Public Accountants was promulgated by the Fourth Session of the Standing Committee of the Eighth National People’s Congress (Aiken et al., 1997, p. 45). This marked a new era for the accounting profession in PRC. The new law expanded the role of the CICPA and stipulated that CPA qualification was obtainable only by examination. For example, the government enforced that before a candidate obtains a CPA practice certificate, they are required to have a higher education degree followed by at least three years practical experience, thus ensuring that the CPAs are formally educated, knowledgeable and well-trained. Accordingly, the CICPA is currently conducting national examination to recruit CPAs for Chinese accounting market. Those students who are expecting to enter into CPA profession in PRC are taking five papers – namely Accounting, Auditing, Financial management, Taxation and Economic Laws. Before getting into practice students need to undergo training for two years in a CPA firm. The practice certificate is issued after completion of this training period. Irrespective of graduate or not they have to do CPA examination to practice as an accountant in PRC. This practice apparently differentiates PRC from the other Western countries.

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Chinese authority allows non-Chinese citizens to take CPA examination. Nearly 220 expatriates have passed the examinations and have obtained non-practicing membership of CICPA (Tang, 1999). Sooner they will enjoy the same practicing rights as Chinese CPAs after they have worked at least two years for a CPA firm in PRC. As per CICPA figures, over 600,000 candidates have applied to take the CPA examination in 2001 (CICPA, 2001b, p. 48). This suggests that CPA has become a popular career path for many Chinese. 5. Relationship between higher education and the profession The adoption of the open door policy in 1978 had not only transformed the Chinese economy, but created a huge demand for quality accountants and increased auditing services. The accounting profession began to undergo dynamic changes and development. Therefore, the Chinese accounting profession has rapidly developed over the last few decades. Accordingly, a large number of CPAs at the early stage were qualified through an evaluation process based on working experience. However, a nation wide CPA examination was introduced in 1991. There is a lack of continuing professional education for CPAs. A relatively low degree of professionalism is anticipated in PRC as many CPAs did not receive systematic academic education and possess experience with market economy transactions and international accounting practice (Graham, 1996). Presently, there are nearly 1,731 universities and colleges existing in PRC with a total student population of about 14 million. In 2002 universities produced 65 942 economics graduates and 193,239 management graduates. Before October 1991, there were two routes to become a registered accountant in PRC. One route is the written examination and the second is the evaluation process. The PRC’s national uniform examination of professional competence started in October 1991. However, in contrast, most Western countries the membership to the accounting profession is linked with the university degrees. In this regard several Western scholars have emphasized the importance of establishing close cooperation between educational institutions and professional accounting bodies. For example, Enthoven (1976) suggested that an educational planning model should be closely linked to the potential for more effective coordination between universities, with other disciplines, and with regional and international development organizations. In 1979, Enthoven examined the accountancy systems in developing economies in more detail and concluded that extensive efforts should be made to revise accounting education systems in these countries. He also pointed out that the focus should not be solely on training technicians or vague theorists. Academically-trained accountants should have an understanding of the broader dimensions of accounting and help spearhead future implementation models. Training for academically-oriented accountants should be evaluated thoroughly as part of overall accounting needs and training availabilities (Enthoven, 1979, p. 89). Enthoven (1981) devoted further attention to this aspect of accounting and evaluated the status of accounting education in five regions and 15 individual countries in the developing world. This evaluation enabled him to draw a picture of developing world accounting education and to come up with some valuable recommendations. He argued that a university’s major task is certainly to prepare students for a profession. As students generally, according to their talent and professional opportunity, reach positions of responsibility eight to ten years after completion of their studies, the education must have a prospective character, i.e. there must be included in the teaching programs those

problems with which the student will be confronted in ten years (Enthoven, 1981, p. 70). He presented four basic elements to be considered when designing new accounting curricula for universities in developing countries: the needs of the country; resources available; the direction in which the country wants to develop (socioeconomic planning); inventory or current courses and programs (Enthoven, 1981, p. 79). A discussion paper produced by the Education Committee of IFAC (1994) provides guidance to its member bodies and accounting educators in designing an education program suitable for the changing environment. This paper clearly shows the importance of the partnership that should be established between the university and the accounting profession in order to foster a more effective system of educating and training future accountants. It also highlights that professional bodies ought to rely on full-time educational institutions in providing education for their potential members. Furthermore, in view of the improved accounting professional development, IFAC paper suggests three basic strategies as follows: fostering change in accounting education will require the joint efforts of all stakeholders, working in harmony. Given the importance of the changes proposed in the accounting curriculum, the profession should undertake three basic strategies to assist those educational institutions which are implementing curriculum reform. First, since acceptance of the need for change is a prerequisite to bringing about change itself, the profession should seek to heighten interest among all stakeholders in the need for change. It should aim to act as a catalyst to encourage dialogue about accounting education issues. Second, the profession should provide incentives for change. Third, the professional bodies should campaign to reduce the influence of the barriers to change in universities and similar institutions (IFAC, 1994, p. 7). Subsequent to an amendment made by the Ministry of Education, degree awarding authority by the universities was allowed from 1990s and presently only Bachelor of Management degrees (B.Mgt) are awarded by universities in PRC. The subjects of accounting and commerce are included in the curriculum of this degree. Any graduate, whether social science or physical science, could take national CPA examinations to qualify as a CPA in PRC. According to an official at the CICPA, about 23 local universities are sponsored by CICPA. Accordingly CICPA has provided computer facilities for some sponsored universities. However, CICPA does not make any distinction or does not give any exemptions for graduates who have done B.Mgt degrees in any of the national CPA examinations. In PRC the partnership of accounting programs with higher education seems to be less developed. However in Western universities this situation is different. Relevant university degrees are considered in the process of awarding membership to accounting professional association. Further evidence is reported from New Zealand. Accordingly, New Zealand moved away from the traditional system and has established close co-operation between universities and the professional accounting body through an accreditation scheme. University accounting degree programs have been accredited by the New Zealand Society of Accountants (NZSA) (Moores and MacGregor, 1992). A similar situation of cooperation has been in existence in Australia (Wijewardena and Cooray, 1995). 5.1. Other education and training providers In PRC several other international accounting qualification providers are operating for the last few decades. Over the past few decades British, Australian and Canadian accounting professional bodies such as the Association of Chartered Certified

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Accountants (ACCA), Certified Practising Accountants (CPA) in Australia, Certified General Accountants (CGA) – Canada have achieved about 1,500, 700 and 400 membership levels respectively in the mainland PRC. The ACCA is one of the largest British accounting qualification providers in the world. The ACCA advertises itself as the largest and fastest growing international accountancy body, with over 300,000 students and members in 160 countries. The ACCA has also an extensive network of over 70 staffed offices and other centres around the world (www.accaglobal.com/ services/). One possible reason for this success is the “branding” of their training courses internationally. These professional accounting bodies emphasised their international standing and contribution to off-shore recruitment as a growth strategy. Hence, cross-border competition among international bodies for more market share is a clearly defined goal. In this context, the Chinese accounting market is not an exception. Moreover, Chartered Institute of Management Accountants (CIMA) has drawn up a plan to embark its educational programs in PRC in the near future. For instance, the CIMA’s focus is to qualify students, support members and employers, and protect the public interest. The CIMA represents the voice of over 77,000 students and 60,000 members in 155 countries (www.cimaglobal.com/). Those who qualified in ACCA are working in PRC as auditors and accountants in multinational corporations and other international firms. Due to these circumstances, those who qualified with British, Canadian and Australian accounting qualifications are able to get access to accounting jobs in various sectors of the Chinese economy. Most these qualified accountants are hired by multinational firms operating in PRC. 6. Conclusion With the open door policy embarked by PRC in 1978, there seems to be a continuous growth of world business. Especially the WTO membership, the World Bank assistance in various development programs including assistance on accounting development programs and the commencement of exports to European Union accounting profession has gained a great momentum and demands for quality accountants to perform highly developed accounting functions to comply with global standards. In this article a comparison is made of the Chinese professionalisation of accounting and the professional projects taken place in other Western countries focusing on three profession-themes: profession and state, entry qualification to the profession and relationship between higher education and the profession in PRC. As mentioned in the theoretical discussion, a professional accounting planning model should be closely linked to the potential for more effective coordination with the state, universities and higher educational institutions. Therefore, the importance of preparing students for a profession by providing full-time broad-based education through a systematic partnership between the university and the accounting profession was highlighted. Eventually most Western countries, including the UK, have changed their admission policies to attract more graduate entrants into the accounting profession. Therefore, they have utilized locally-available accounting educational facilities effectively to foster their profession and positively contributed to their county’s economic needs. As pointed out in the literature, the needs of the country, resource availability and socio-economic planning are key elements to be considered when designing accounting education and training systems. Apparently, there are no such systematic arrangements available in PRC. This might of itself help to account for the derailed nature of professional development in accounting in PRC. This paper has,

however, shown that the lack of coordination among educational institutions has created a demand for overseas professional qualifications (such as ACCA-UK, CPA-Australia, and CGA-Canada etc.). However, it is apparent that the CICPA purposely exerts control (for example, any effective legal documents, such as auditors’ reports to tax authorities, must be signed by CPAs registered and approved in PRC) over the supply of accountants by limiting membership only to those who complete its own examinations mainly to maintain the “local status” of its members. Therefore, the accounting profession in PRC has so far failed to take appropriate measures to align the professional accounting development with that of parallel professions as found in Western countries. The paper has further shown how British, Australian and Canadian accounting bodies have competed among themselves to recruit students, taking advantage of the unbalanced nature of the supply of accountants by the CICPA to different sectors of the economy. In the light of above facts, it is important for educational authorities in PRC to consider more seriously that the partnership between the university and the accounting profession is extremely important for producing competent accountants who can contribute effectively to the nation’s development process. Notes 1. As a result of the severe demand for revision in the accounting system, PRC released a set of Accounting Standards for Business Enterprises (ASBE) which became effective on 1 July 1993. The issuance of the Chinese accounting standards made an important milestone in the development of the Chinese accounting profession. In summary this has brought Chinese accounting practice in harmonization with internationally accepted accounting principles which is based on many common aspects on Western accounting frameworks (Davidson et al., 1996). 2. The “globalization” concept has received much attention in the past ever since Levitt’s seminal article on global strategy (Levitt, 1983). References Aiken, M., Ji, X.D. and Lu, W. (1997), “The certified public accounting profession in PRC: its development and impact on financial control of business operations”, Australian Accounting Review, Vol. 7 No. 2, pp. 45-53. Annisette, M. (1999), “Importing accounting: the case of Trinidad and Tobago”, Accounting, Business & Financial History, Vol. 9 No. 1, pp. 103-33. Annisette, M. (2000), “Imperialism and the professions: the education and certification of accountants in Trinidad and Tobago”, Accounting, Organizations and Society, Vol. 25, pp. 631-59. Asian Development Bank (2003), People’s Republic of PRC: The Development of Private Enterprise, Asian Development Bank, Manila. Beijing Review (1998), “Foreign investment achievement exhibited”, Beijing Review, Vol. 41 No. 50, p. 5. Beijing Review (1999), “FDI Rises in 1998”, Beijing Review, Vol. 42 No. 6, p. 5. Carnegie, G. and Liu, Z.W. (2000), “From Russia with love”, Charter, August, pp. 40-1. Carr-Saunders, A.M. and Wilson, P.A. (1933), The Professions, Oxford University Press, Oxford. Chinese Institute of Certified Public Accountants (CICPA) (1999), “The development process of the Chinese CPA profession (I)”, The Chinese Certified Public Accountant, Vol. 3, pp. 10-12.

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Chinese Institute of Certified Public Accountants (CICPA) (2001a), “Meeting the challenges of the new century: an interview with Li Yong, Secretary-General of CICPA and Assistant Minister of MOF”, The Chinese Certified Public Accountant, Vol. 1, pp. 6-8. Chinese Institute of Certified Public Accountants (CICPA) (2001b), “Brief News”, The Chinese Certified Public Accountant, Vol. 5, p. 48. China Daily – The National English Language Newspaper (2005a), “Protection fund in the limelight”, China Daily – The National English Language Newspaper, 7 March, p. 11. China Daily – The National English Language Newspaper (2005b), “Listing of two big State banks imminent”, China Daily – The National English Language Newspaper, 8 March, p. 1. Chow, L.M., Chau, G.K. and Gray, S.J. (1995), “Accounting reforms in PRC: cultural constraints on implementation and development”, Accounting and Business Research, Vol. 26 No. 1, pp. 29-49. Chua, W.F. and Poullaos, C. (2002), “The empire strikes back? An exploration of centre-periphery interaction between the ICAEW and accounting associations in the self-governing colonies of Australia, Canada and South Africa, 1880-1907”, Accounting, Organizations and Society, Vol. 27, pp. 409-45. Collins, R. (1990), “Market closure and the conflict theory of the professions”, in Burrage, M. and Torstendahl, R. (Eds), Professions in Theory and History, Rethinking the Study of the Professions, Sage, London, pp. 24-43. Davidson, R.A., Gelardi, A.M.G. and Li, F. (1996), “Analysis of the conceptual framework of China’s new accounting system”, Accounting Horizons, Vol. 10 No. 1, pp. 58-74. (The) Economist (1994), “The global economy”, (The) Economist, 1 October, pp. 3-46. Enthoven, A.J.H. (1976), “The scope for accountancy planning in developing countries”, Accounting and Business Research, Vol. 22 No. 2, pp. 135-9. Enthoven, A.J.H. (1979), Accountancy Systems in the Third World Economies, North-Holland, Amsterdam. Enthoven, A.J.H. (1981), Accounting Education in Economic Development Management, North Holland Pub. Co., New York, NY. Gao, S.S. (1992), “The accounting profession in the People’s Republic China”, Pacioli Journal, October, pp. 15-18. Graham, L.E. (1996), “Setting a research agenda for auditing issues in the People’s Republic China”, The International Journal of Accounting, Vol. 31 No. 1, pp. 19-37. Guo, D.Y. (1988), Chinese Accounting History,Vol. 2, PRC Finance and Economics Publishing House, Beijing (in Chinese). Hao, Z.P. (1999), “Regulation and organisation of accountants in PRC”, Accounting, Auditing & Accountability Journal, Vol. 12 No. 3, pp. 286-302. (The) Hong Kong Accountant (2000), “International Accounting Firms in PRC”, The Hong Kong Accountant, August, p. 45. Hong Kong Trade Development Council (1999), Services Liberalization in PRC, Hong Kong Trade Development Council, Wanchai, pp. 8-10. International Federation of Accountants (1994), “2000 and beyond, a strategic framework for prequalification education for the accountancy profession in the year 2000 and beyond”, Discussion Paper, June, Education Committee, International Federation of Accountants, New York, NY. Johnson, T.J. (1973), “Imperialism and the professions: notes on the development of professional occupations in Britain’s colonies and the new states”, in Helmos, P. (Ed.), Professions and Social Change, Sociological Review Monograph 20, University of Keele, Keele, pp. 281-309.

Johnson, T. (1982), “The state and the professions: peculiarities of the British”, in Giddens, A. and Mackenzie, G. (Eds), Social Class and the Division of Labour, Cambridge University Press, Cambridge. Johnson, T.J. and Caygill, M. (1971), “The development of accountancy links in the Commonwealth”, Accounting and Business Research, Vol. 1, pp. 155-73. Klegon, D. (1978), “The sociology of professions: an emerging perspective”, Sociology of Work and Occupations, Vol. 5 No. 3, pp. 259-83. Larson, M.S. (1977), The Rise of Professionalism, University of California Press, Berkeley, CA. Li, R. (1991), On Auditing and Social Economic Structure, PRC Financial and Economic Publishing House, Beijing (in Chinese). Levitt, T. (1983), “The globalization of markets”, Harvard Business Review, May-June, pp. 92-102. Li, Y. and Lin, X. (1991), “A discussion for establishing an audit-work system of sino-foreign enterprises in Xiamen Special Economic Zone”, Fujian Electronics Accounting, Vol. 1, pp. 4-8 (in Chinese). Lin, K.Z. and Chan, X. (2000), “Auditing standards in PRC – a comparative analysis with relevant international standards and guidelines”, The International Journal of Accounting, Vol. 35 No. 4, pp. 559-77. Liu, Z. and Turley, S. (1995), “A comparison of international and Chinese accounting standards”, in Blake, J. and Gao, S. (Eds), Perspectives on Accounting and Finance in PRC, Routledge, London. Macve, R. and Liu, Z.Y. (1995), “A proposal to form a unified Chinese public accountancy profession: an academic perspective”, International Journal of Accounting, Vol. 30 No. 11, pp. 48-61. Ministry of Finance (1980), Provisional Regulations Concerning the Establishment of Accounting Consultancies, Ministry of Finance, Beijing. Ministry of Finance and Ministry of Personnel (1992), Provisional Regulations for the Examination of Professional Skill Levels in Accounting, Ministry of Finance and Ministry of Personnel, Beijing. Mo, P.L.L., Tam, W.H., Lui, M.C.G. and Shum, C.M.Y. (1995), “PRC’s CPA examination”, in Blake, J. and Gao, S. (Eds), Perspectives on Accounting and Finance in PRC, Routledge, London. Moores, K. and MacGregor, A. (1992), “Accounting education in New Zealand”, The International Journal of Accounting, Vol. 27 No. 1, pp. 69-79. National Bureau of Statistics (2000), PRC – The Statistical Abstract, PRC Statistics Press, Beijing. Parker, R.H. (1989), “Importing and exporting accounting: the British experience”, in Hopwood, A.G. (Ed.), International Pressure for Accounting Change, Prentice Hall, London, pp. 7-29. Parkin, F. (1979), Marxism and Class Theory: A Bourgeois Critique, Tavistock, London. Poullaos, C. (1993), “Making profession and state, 1907 to 1914: the ACPA’s first charter attempt”, Abacus, Vol. 29 No. 2, pp. 196-229. Puxty, A.G., Willmott, H.C., Cooper, D.J. and Lowe, E.A. (1987), “Models of regulation in advanced capitalism; locating accountancy in four countries”, Accounting, Organizations and Society, Vol. 12 No. 3, pp. 273-91. Scapens, R.W. and Hao, Z.P. (1995), “Chinese accounting reform: reason and effects”, in Blake, J. and Gao, S. (Eds), Perspectives on Accounting and Finance in PRC, Routledge, London and New York, NY, pp. 261-84. Susela, S.D. (1999), “‘Interests’ and accounting standard setting in Malaysia”, Accounting, Auditing & Accountability Journal, Vol. 12 No. 3, pp. 358-87.

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Tang, Y.W. (1999), “Issues in the development of the accounting profession in PRC”, Accounting and Finance Review, Vol. 1 No. 1, pp. 6-20. Uche, C.U. (2002), “Professional accounting development in Nigeria: threats from the inside and outside”, Accounting, Organizations and Society, Vol. 27, pp. 471-96. Van Hoepan, M.A. (1995), “Accounting in PRC: a case of vanishing cultural influence”, in Blake, J. and Gao, S. (Eds), Perspectives on Accounting and Finance in PRC, Routledge, London. Vollmer, H.M. and Mills, D.L. (1966), Professionalization, Prentice-Hall, Englewood Cliffs, NJ. Wei, L. and Eddie, I. (1996), “Accounting reform in the People’s Republic of China: background and current developments”, Accounting Research Study No. 15, AFM Scholarships and Publications Fund, University of New England, Armidale. Wijewardena, H. and Cooray, S. (1995), “Accounting education in Australia and Japan: a comparative examination”, Accounting Education: An International Journal, Vol. 4 No. 4, pp. 359-77. Willmott, H.C. (1986), “Organizing the profession: a theoretical and historical examination of the development of the major accountancy bodies in the UK”, Accounting, Organizations and Society, Vol. 11 No. 4, pp. 555-80. World Bank (2002), World Bank Report, World Bank, Washington, DC. Xu, Z.D. (1995), “The development of the certified public accountant system in the People’s Republic of China”, in Tsuji, A. and Garner, P. (Eds), Studies in Accounting History, Greenwood Press, Westport, CT. Xindeco (1998), Business Information, Xindeco, Beijing. Yapa, P.W.S. (1999), “Professional accounting environment in Brunei Darussalam”, Accounting, Auditing and Accountability Journal, Vol. 13 No. 3, pp. 328-39. Yapa, P.W.S. (2006), “Cross-border competition and professionalisation of accounting: the case of Sri Lanka”, Accounting History, Vol. 11 No. 4, pp. 447-73. Yee, H. (2001), “The concept of profession: a historical perspective based on the accounting profession in China”, Proceedings of Accounting History second International Conference, Osaka, Japan. Zhang, Y.C. (1995), speech at the News Press on the Release of PRC independent Auditing Standards (in Chinese). Further reading Greenwood, E. (1957), “Attributes of a profession”, Social Work, Vol. 2, July, pp. 45-55. Corresponding author P.W. Senarath Yapa can be contacted at: [email protected]

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How do the Chinese management accountants cope with changes from a planned economy to a market economy

Chinese management accountants 45

Xu-dong Ji Department of Accounting, School of Business, La Trobe University, Bundoora, Australia

W. Lu Department of Accounting and Finance, Faculty of Business and Economics, Monash University, Caulfield East, Australia, and

M. Aiken School of Accounting and Law, Faculty of Business, RMIT University, Melbourne, Australia Abstract Purpose – Since the Chinese government implemented its reform and open-up policies in 1978 many western management accounting concepts and techniques have been introduced into China. The purpose of this paper is to investigate how Chinese management accountants have coped with the changes in the new economic environment and absorbed new ideas into their own practices. This paper also discusses the differences between the current Chinese management accounting system and the management accounting systems used in the western countries, and the obstacles in implementing western management accounting systems in China. Design/methodology/approach – Both field study and survey approaches were used in this project. Six selected Chinese enterprises were visited. A questionnaire was distributed to all accountants in these companies. Findings – This paper has found that the main obstacle for implementation of western methods is not political sensitivity, but the extent of technical constraints. The management information system (MIS) is under development in most Chinese enterprises, while the essential data for using western techniques, such as activity-based costing, cannot be collected easily in the current situation. Nevertheless, changes in management accounting can be seen in some areas, such as the quality of products being promoted; the use of the responsibility accounting; and profitability as the key criterion for selecting investment projects. Originality/value – This paper provides a comprehensive study about Chinese management accounting systems. The findings in the study will help western investors to be better prepared if they have set up a business in China or are going to enter the Chinese market. Keywords Management accounting, China, Economic reform, Planned economies, Market economy Paper type Research paper

The authors wish to acknowledge comments made by Dr D. Henry of La Trobe University and the financial support from the International Federation of Accountants

Asian Review of Accounting Vol. 15 No. 1, 2007 pp. 45-61 q Emerald Group Publishing Limited 1321-7348 DOI 10.1108/13217340710763744

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1. Introduction The Chinese economy has changed significantly from a planned structure towards a market economy since China implemented economic reforms and international policies in 1978. Subsequently, western management accounting concepts and techniques have been introduced into China via various channels (Skousen and Yang, 1988). The objective of this research project is to investigate how Chinese management accountants have coped with the changes in the economic environment and absorbed new ideas into their own practices. A case study approach was used for this paper. Five leading Chinese enterprises were selected to assess the following: . changes in processes that have occurred in management accounting in these enterprises; . the approaches to dissemination and implementation of management accounting innovations in these enterprises; . the attitudes of Chinese management accountants towards western management techniques; and . the main obstacles that Chinese accountants have faced while implementing western management accounting innovations. The paper provides important information to management accountants both in China and overseas. First, it provides details of changes in management accounting in Chinese enterprises, and the political, economic and cultural impact of such changes. Secondly, it reveals the dissemination of approaches associated with management accounting innovations among Chinese enterprises, whether from coercive enforcement by government or from their own initiatives, or influences by its joint venturers (JVs) or foreign partners. Finally, the research assesses whether Chinese management accountants are well prepared for the changes to their environment, whether they have been well trained and educated, whether they have sufficient knowledge about contemporary management accounting and the obstacles facing them in practice. This information will be useful to Chinese management accountants who wish to improve their practices and also to western management accountants who wish to introduce their ideas and practices into China, remembering that strong government control is pervading the whole of accounting practice in China. Changes in accounting standards are governmentally sponsored and are used here to introduce a survey of management accounting changes. These will be understood to be part of the total governmental system of financial control in this context. A number of academic scholars have studied the development of Chinese management accounting from different perspectives, as in Maschmeyer and Yang’s (1991) “Responsibility accounting during the economic transformation of The People’s Republic of China”. Those authors reviewed the management accounting methods which had been used under the planned economy in China from 1949 to 1979 and the features of the contract responsibility system used in the mid 1980s. They suggested that the concept of profit should be emphasized for the practice of Chinese management accounting. In Bromwich and Wang (1991) “Management accounting in China: a current evaluation”, Chinese management accounting methods were compared with western methods and the possibility of adopting western methods in Chinese enterprises was evaluated. Bromwich and Wang (1991) conclude:

Western management accounting has been used and studied in China for a decade, and can be said to have contributed greatly to Chinese accounting practice and thought. However, management accounting in China does have problems. Most of these problems result from the perceived unsuitability of western techniques for the Chinese environment and/or the failure of the Chinese environment to meet the underlying assumptions necessary for these techniques to operate.

Chinese management accountants

Scapens and Hou (1995) analysed the evolutionary process of responsibility accounting in China. They observed that the development of management accounting in China was closely linked with its socio-economic environment and that responsibility accounting played an important role in the development of the Chinese economy and the transformation of operational structures of the State-owned enterprises (SOEs) since the 1950s. Firth (1996) has been one of the few authors who used empirical methods to analyse Chinese management accounting. He investigated the approaches to diffusion of western management accounting innovations in China. The function of JV and foreign partners in the diffusion process may have been over-emphasized in the literature overall. It is common knowledge that the main approach to dissemination of management accounting techniques in China is through its promotion by governmental agencies rather than by foreign partners and JVs. So far most research about Chinese management accounting is generally descriptive or based on information collected from surveys (Thomas et al., 2000; Han and Yang, 1998; Meng et al., 1997; Qiao, 1997). This paper is aimed at the enterprise level and has adopted a case study approach. Even though generalisability of results from case studies is limited, this research provides vivid information about the current practices of management accounting in China.

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2. Development of accounting system in China In December 1992, The Chinese Accounting Standard for Enterprise, was formally promulgated by the Ministry of Finance (MOF) in China (MOF, 1992). Compared with International Accounting Standards and the standards in Australia, the USA, and the UK, the first Chinese Accounting Standard is more like a conceptual framework. Strictly speaking, this accounting standard is a guideline about how to set accounting standards and not a set of standards as in the west. Since the promulgation of the first Chinese accounting standard in 1992, the Ministry of Finance has endeavoured to set up the new accounting regulation system by issuing the specific accounting standards. However, this procedure is more complicated because of the co-existence of the unified accounting systems and accounting standards (Chen et al., 1997). So far 30 specific accounting standards have been drafted and circulated for public comment. The major criticism of those drafts of accounting standards is that they are not suitable for the Chinese situation because they mainly copied the International Accounting Standards and the GAAP in the USA. The Ministry of Finance planned to establish the accounting standards system in three years with 32 specific standards in 1993 (Aiken et al., 1995). However, so far only 13 specific standards have been formally promulgated. They are: (1) Accounting for changes of accounting policies and estimations and mistakes. (2) Accounting for revenues. (3) Accounting for investments.

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(4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Accounting for construction contracts. Accounting for reorganization of debt. Accounting for intangibles. Accounting for contingencies. Accounting for borrowing costs. Accounting for leasing. Accounting for non-cash transactions. Accounting for after-balance date events. Cash flow statement. Disclosure of related-party transactions.

Now accounting academics and practitioners are facing several major problems under the accounting regulation framework. The first is how to deal with the relationship of the Accounting Law and the accounting standards. The Accounting Law is an accounting administrative framework and a code of professional conduct. It is concerned on the duties and rights of accountants. It is also a direct regulation on how the accounting organization should be set up and how staff in an enterprise should be appointed and removed. There are few references to accounting standards. Therefore, the claim that Accounting Law is the highest regulation in the legislative structure[1] for accounting is not sustainable. The reason is the Accounting Law is not on how to set up accounting standards or the theoretical basis for setting up such standards, e.g. the conceptual framework. The Accounting Law actually reflects many administrative control methods used under the traditional planned economy (Winkle et al., 1994). The second problem is how to deal with the relationship between the new accounting standards system and the old uniform accounting regulations system. There are two views: the old uniform accounting regulations system should be abolished or else the new accounting standards and the old uniform accounting regulations should co-exist. Uniform accounting systems have been implemented since the establishment of the People’s Republic of China. The revised uniform accounting systems for 13 industries were issued with the promulgation of Basic Accounting Standard in 1992. And more uniform accounting systems for other industries have been issued since then. When discussing the relationship between the accounting standard system and the uniform accounting regulation system, many scholars neglected the existence of another set of regulations, financial regulations (Caiwu Zhidu). In 1992, while the first accounting standard was promulgated by the MOF, A General Rules of Financial Management for Enterprises was also issued. Even under the planned economy, a uniform accounting system alone cannot be used to record an economic transaction, because the uniform accounting system only stipulates the recording rules for economic transactions. Most recognition and measurement rules were specified in the financial regulations. Accountants completed accounting records by reference to both the uniform accounting systems and the relevant financial regulations. When comparing the accounting standard system used in western countries to the uniform accounting system and the financial regulation system (represented by the General Rules), it is found that the functions of western accounting standards are more

similar to the functions of Chinese financial regulations: both are concerned about how to recognise and measure economic transactions and events. They are not concerned about how to record the economic transactions and events. Therefore, the relationship between accounting standards and uniform accounting systems are supplementary, they are not mutually exclusive. There is no argument that the accounting standards should replace the uniform accounting systems. If something has to be replaced by the accounting standards in the future it is the set of financial regulations. The issue of whether the uniform accounting systems should be abolished or not is not because the uniform accounting system contradicts to the accounting standard system. The issue is whether the recording of financial transactions should be regulated. An accounting procedure is to recognise, measure, record and present (disclose) economic transactions. In western countries, only the recognition, some of measurement rules and disclosure requirements are regulated by the means of accounting standards. The recording function is librated and vested to individual enterprise. In China, the whole accounting procedure is regulated by the uniform accounting systems and financial regulations (accounting standards in the future). Before abolishing the uniform accounting systems used in China, more empirical studies are needed to be urgently undertaken to study whether the Chinese system can provide more rigid, reliable and comparable financial information; whether uniform accounting systems are the plus or the minus for improvement of the quality of accounting information. Part of management accounting information system is incorporated into the uniform accounting systems. The procedures on how to calculate of product costs are explicitly described in uniform accounting systems. However, generally speaking, Chinese enterprises enjoy much more freedom in generating management accounting information than in providing financial accounting information for external purposes. 3. Research design The purpose of this study is to show the functions of management accounting systems in China and to highlight the differences between the Chinese management accounting system and the management accounting systems used in the western countries. Six selected Chinese enterprises were visited. During visits, the researchers talked to the chief accountants and managers of the respective finance departments. Most of the conversations conducted have been taped. A questionnaire was also distributed to all accountants in these companies. The questionnaire consists of 20 questions. Most questions are about their subjective attitudes and evaluations on the development of management accounting systems in their own enterprises as well as the development of management accounting systems in China generally. The questionnaire covered most aspects of management accounting, including cost systems, decision-making models and the latest innovations. Answers from 117 participants were received and analysed. All participants can be classified into different groups based on their working units, age, gender and professional qualifications. Responders come from five working units: (1) Nanjing Iron and Steel Co. Ltd (2) Nanjing Panda Electronics Co. Ltd (3) Yangzi-BASF Styrenics Co. Ltd

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(4) Wuxi Weifu Group Co. Ltd; and (5) Hisense Group Ltd. They can be divided into male (0) and female (1) groups according to their gender. There are five age groups: (1) under 20; (2) 21-30; (3) 31-40; (4) 41-50 and (5) over 51. Participants are also classified into five groups based on their professional qualifications: (1) other qualifications; (2) Account clerk; (3) Assistant accountant; (4) Accountant; (5) Senior accountants. There are 20 questions in the questionnaire and each question should be answered based on 1-7 scales (1 – totally disagree; 2 – mostly disagree; 3 – partly disagree; 4 – neutral; 5 – partly agree; 6 – mostly agree; 7 – totally agree). 4. Results and discussions The following are the observations and discussions from the field research conducted in six enterprises and during the visit to Jiangsu Finance Bureau. Chinese enterprises have more bureaucratic departments at company level than those in Western companies. The management accounting functions are shared by many departments, such as the planning department, production department, accounting department, quality control department, and long-term investment department. The importance of accounting department in the enterprise management has been constrained for this reason. The main function of management accounting in the management process is collecting information of costs and expenses for compliance purposes; and controlling the production process. The functions of collecting of information for competitive support and quality control belong to other departments, such as the marketing department, production department and quality control department. Management accounting staff does get involved in strategic management decision-making and with the implementation process even though their role is a supporting one. It seems there is no urgent need to enlarge the scope of management accounting to other non-traditional areas in China, since the main tasks for management accountants are cost information collection and control. However, according to the survey result, most accountants have some disagreements and reservations about their roles in the enterprises. Accountants argued that most information is collected by them as evidenced by the results (3.2308, Question 1 Table I).

Numbers

Minimum

Maximum

Mean

Standard deviation

Question 1: Are the major functions of accounting department cost information collection and cost management? Have the collections of other information been fulfilled by other departments? 117 1.00 7.00 3.2308 1.9493 Question 2: Besides collecting cost information, does the enterprise start to collect and utilize other strategic information such as product quality and share of the market? 117 1.00 7.00 5.6068 1.3128 Question 3: Is product quality the key issue that affects the existence of an enterprise? 117 2.00 7.00 6.2991 1.0444 Question 4: Is product cost the key issue that affects the existence of an enterprise? 117 1.00 7.00 5.6838 1.4363 Question 5: Are the innovation and development of products the key issues that affect the existence of an enterprise? 117 1.00 7.00 6.1538 1.1493 Question 6: Is the cost information produced by your cost accounting system accurate in that it reflects the actual situation of the enterprise? 117 2.00 7.00 4.7863 1.4670 Question 7: Does the enterprise budget have a positive influence on controlling costs and clarifying the responsibilities of different departments and persons? 117 1.00 7.00 5.4359 1.4644 Question 8: Are the goals of departments consistent with the strategic goals of the enterprise? 117 1.00 7.00 4.6410 1.8451 Question 9: Are the methods and procedures used in enterprise’s long-term decision-making process efficient and up-to-date? 117 1.00 7.00 4.5214 1.4948 Question 10: Has the internal banking system less influence on clarifying the departments’ responsibilities and accountability? 117 1.00 7.00 4.9316 1.7056 Question 11: Is the current accounting system in the enterprise too complicated, cannot clarify the responsibilities among different departments and persons? 117 1.00 7.00 4.6325 1.6167 Question 12: Is the quality management in the enterprise based on spoilage ratio, spoilage amount and other traditional indictors? Does calculating the costs of product quality separately have significant effects on management? 117 1.00 7.00 4.5812 1.6413 Question 13: Do the enterprise’s evaluation and reward systems reflect the actual situation and are these systems efficient? 117 1.00 7.00 4.1111 1.6230 Question 14: Does the enterprise evaluation system depend heavily on financial indicators, do non-financial indicators play less important role in such a system? 117 1.00 7.00 4.7350 1.5833 Question 15: Is the use of western management accounting methods widespread in Chinese enterprises, and are there cultural and technical obstacles on introducing western methods into China? 117 1.00 7.00 4.3675 1.7646 Question 16: Are there substantial differences between Chinese management accounting methods and western management accounting methods? 117 1.00 7.00 5.1624 1.3769 Question 17: Is it true that the management accounting theories and methods prescribed in textbooks do not reflect the real world and cannot be used in practices? 117 1.00 7.00 5.4872 1.4599 (continued)

Chinese management accountants 51

Table I. Statistical results of the questionnaire

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52

Question 18: Does management accounting information play a very helpful role in the decision-making process of the enterprise? 117 1.00 7.00 6.0769 1.3655 Question 19: Does the success of the management accounting system in an enterprise depend mainly on the enterprise’s leaders’ attitudes and endeavours? 117 1.00 7.00 5.2137 1.7948 Question 20: Do the means of collecting of information in the enterprise need to be improved and a network need to be established for exchanging information among departments and divisions? 117 1.00 7.00 6.2991 1.0444

Table I.

Minimum

Maximum

Mean

Standard deviation

Most enterprises in China now realise that reducing costs of products is not the only strategy in competition. Quality, innovation, diversification and post-sale services are other key factors affecting the competitive ability of companies. As shows in the following results, most enterprises start to collect other strategic information such as product quality and market shares (5.6068) as shown in the answer for Question 2 in Table I. Enterprises regard cost (6.2991, Question 3 Table I), quality (5.6838, Question 4 Table I), innovation and development (6.1538, Question 5 Table I) as key issues in competition. Cost accounting system The traditional cost system is still popular in China. The costs are calculated at two levels, workshop level and enterprise level. Planned cost or standard cost is used in the calculation of the cost of products at workshop level. The variances are normally transferred to the enterprise accounting department, and the accounting department then converts the product cost to be calculated by using standard cost into actual cost. Some enterprises also conducted variance analysis. Most accountants learned other cost systems, such as activity-based costing and direct costing. But no enterprise has adopted these methods exclusively. According to the results, the cost information produced by the current system is useful and accurate (4.7863, Question 6 Table I). On the other hand, accountants claimed that the scope for reducing product costs is wide. As the chief accountant in Wuxi Weifu Group Co. Ltd said: Our company uses the target costing system. The controllable costs are allocated to the workshops and departments, and uncontrollable costs are calculated by the accounting department. The degree of reducing costs in our company is significant. It is about 10 per cent each year. During last year, the costs were reduced by 10 million yuans.

Budgeting The budget approach in China is similar to that in Western companies. Both financial and non-financial measures are used in evaluating performances at different levels. Management accountants in China are aware of the impact of the budgeting process on ordinary workers. According to the results, most budgets are effective (5.4359, Question 7 Table I) and can clarify the responsibilities and motivate employees.

However, there may be some obstacles to make the departmental goals in line with overall goals of the enterprises (4.4610, Question 8 Table I). Long-term and short-term decision making methods The authority for making final decision on long-term investments now has been entrusted to enterprises themselves. Most evaluation methods, especially the simple return on investment method, are used in evaluating a long-term investment project. Non-financial factors are sometimes over-emphasized in the decision making process. According to the survey, the methods and procedures used in the long-term decision making process are relatively sound (4.5214, Question 9 Table I). Some companies are more concerned with the percentages of market share rather than the economic returns in the short-term. The importance of financial measures is emphasized less in Chinese enterprises than in western companies. Short-term decision methods, such as cost-profit-volume analysis and target costs, are widely used in Chinese enterprises. Others are not so popular, such as value engineering, and just-in-time management. Business responsibility accounting system Business responsibility accounting is an area that Chinese accountants have put much effort into since the 1950s (Kwang, 1966). They have made many innovations in this area and the internal banking system provides the greatest contribution in responsibility accounting (Li, 1988). It was designed first in a chemical company in Liaoning province and spread over almost all Chinese enterprises in the 1980s (Scapens and Hou, 1995). However, the internal banking system became less popular, and some companies have no longer used it. In some companies the department of internal banking has still remained as such in the Nanjing Iron and Steel Company but the functions of this department have been changed and used as a settlement and clearing house for internal transactions. As indicated in the results, the internal banking system has become less popular in practice (4.9316, Question 10 Table I). According to these results, the responsibility accounting system used in China still needs to be improved in some areas such as clarifying the duties and responsibilities among divisions and departments; and the alignment of departmental goals with enterprises’ goals (4.6325, Question 11 Table I). Most enterprises visited use the internal profit target to measure the performances at workshop level. Internal profit is an artificial figure calculated separately from the cost system by each workshop and also the accounting department. Income is based on the volume of products transferred among workshops multiplied by the internal transfer price. The costs of production as well as the virtual interest on the working capitals utilised by the workshop are deducted from the income. At beginning of the year, the target of internal profit is set up for each workshop and then monitored throughout the whole year. Quality management Most Chinese enterprises realise the importance of the quality of their product. Government authorities also promoted quality of Chinese products and improved competitiveness of their enterprises in the world market. Although the quality of most Chinese products is still lower than that in western countries, great improvements can

Chinese management accountants 53

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be seen in recent years. The most popular approach to improve enterprise quality is to obtain the accreditation certificate from quality recognition authorities. For example, Yangzi-BASF Styrenics Company Limited has got the ISO9002/ISO 14001 certificates. All enterprises have the quality management departments in charge of the quality and an overall quality control system is implemented in each company. However, the influence of accountants on quality management is limited. Accountants’ tasks are to collect the information about the quality. The monitoring indicators used by many enterprises are still based on traditional measurements such as the spoilage ratio and absolute spoilage amount. Some enterprises, such as Hisense Croup Ltd, have started to calculate the costs of product quality separately. The results are not currently known (4.5812, Question 12 Table I). Evaluation of management performance Evaluation of management performance is the key element in responsibility accounting. The evaluation and reward systems are operating relatively well in Chinese enterprises (4.111, Question 13 Table I), because the goals and incentives in the evaluation system are the results of negotiations between top management and its subordinators, and between departmental managers and workers. The Chinese accountants are concerned about how the external influences on the evaluation system are controlled. The business operations environments change more frequently than in western countries. Therefore, there are more unforeseeable factors that can have positive or negative effects on the evaluation and reward system in Chinese enterprises. Both financial and non-financial indicators are used in the evaluation system. Non-financial indicators are the essentials in such a system and are regarded as important as the financial indicators (4.7350, Question 14 Table I) Western influences on accounting systems In some companies, western management systems and accounting techniques have been introduced through joint-ventures and foreign companies. For example, Yangzi-BASF Co Ltd are using the German BASF management system. In this system, both financial and management accounting information can be generated and shared through the same entries. However, generally speaking, the communication between Chinese enterprises and joint ventures and between Chinese enterprises and foreign companies are not so frequent and useful for the dissemination of management accounting techniques (4.3675, Question 15 Table I). Most accountants believe that there are substantial differences between Chinese management accounting methods and the Western methods (5.1624, Question 16 Table I). However, based on the conversations with Chinese accountants, they also believe that from the technical point view, these differences can be overcome and Western methods can be adopted into Chinese enterprises. The challenges for the overall adoption of Western methods are from the differences of ownerships, governing structures and leadership. These factors make the Chinese system unique (4.3675, Question 15 Table I). There is a common understanding for both Chinese accountants and Western accountants that the management accounting theories and methods prescribed in textbooks do not reflect the real practices (5.4872, Question 17 Table I).

Overall evaluation of Chinese management accounting system The role of governments in managing enterprises has been changed. Government became less involved directly in enterprise’s management and in accounting affairs. Now government financial departments are concentrating on establishing a fair competitive environment for all enterprises. They issue more and more accounting standards and disclosure requirements. These create extra burdens for enterprises. As accountants in some enterprises said they have been distracted from internal management to meet more and more external reporting requirements from governmental authorities. Nevertheless, most accountants agree that management accounting information has become more and more important in the decision-making process (6.0769 Question 18 Table I). However, the degree of importance of management information for decision-making depends on the attentions given by the top executives in the enterprise (5.2137, Question 19 Table I). Accountants themselves seem to be passive in the process of innovation and improvement of management system. It appears that Chinese management accounting in general needs to be improved. Based on the conversations with Chinese accountants, they believe that the urgent tasks are not the implementation of some western management accounting methods, such as activity-based costing or just-in-time management. The urgent issue for Chinese accountants is still to construct the infrastructure of a management information system. There are several accounting softwares developed in China and some are used in enterprises, but most Chinese enterprises have not yet established an overall management information system at enterprise level. In such a management system important information can be collected accurately and timely and be shared and utilised by different departments. There is a potential market in the software developing companies helping out the Chinese enterprises to build up their own MIS system; and the accounting system should be treated as a sub-system in the MIS system. This demand can be reflected in the results of the survey. Most respondents said that their enterprises needed to establish a network for exchanging information among departments and divisions. And also the staff’s skills also need to be improved (6.2991, Question 20 Table I). Another issue raised during the survey is the enforcement of financial and accounting regulation. In some enterprises, there are well-developed and detailed regulations about accounting procedures and the duties and responsibilities of staff. However, these regulations have never been strictly enforced. As the vice-chief accountant from Nanjing Panda Electronic Company said: Our company has a well-designed accounting system. There are volumes of accounting and cost regulations on the shelves. Our company was a model in designing accounting procedures and cost systems. Many other companies came to here to learn how a proper and efficient system can be set up. However, we still have some problems in calculating product costs and clarifying the responsibilities between difference entities. The very important reason is that these regulations have not been strictly followed.

5. Statistical analysis of the data The data from the survey have been analysed to assess whether the answers from participants are significantly different because of their ages, sexes, professional qualifications and working experience. The following hypotheses will be tested:

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H1. The answers of a question in the survey are statistically the same irrespective of the age of respondents. H2. The answers of a question in the survey are statistically the same irrespective of the gender of respondents.

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H3. The answers of a question in the survey are statistically the same irrespective of the working units of respondents. H4. The answers of a question in the survey are statistically the same irrespective of the qualifications of respondents. The answers from two enterprises: Nanjing Iron & Steel Co. Ltd and Nanjing Panda Electronic Co. Ltd have been compared. No significant differences have been found in the results except in Question 6 and Question 8. The results of non-parametric test for these two questions are consistent with the results of parametric test. As the results show in Table II, the cost information from Nanjing iron & Steel Co. Ltd is interpreted as being more accurate than that from Nanjing Panda Electronic Co. Ltd. And the results in Table III indicate that the goals of departments in Nanjing Panda Electronic Co Ltd are more consistent with its overall goal of the enterprise. This may be the result of the responsibility system in this company which is much superior. If all the participants are divided into two groups based on their gender, we did not find any significant differences in all 20 questions answered by male and female participants. The answers have been tested from three groups based on their qualifications of account clerks, assistant accountants and accountants. There was only one significant

Question 6: Is the cost information produced by cost accounting system accurate and reflect the actual situation of the enterprise? t-test for equality of means Std. Std. error Sig. Mean Units N Mean deviation mean t (two-tailed) difference

Table II. Statistical analysis of Question 6

Nanjing Iron & Steel Co. Ltd 71 4.9437 Nanjing Panda Electronic Co. Ltd 42 4.3333

1.3616 1.5088

0.1616 0.2328

2.154

0.034

0.6103

Notes: Equal variances not assumed. Mann-Whitney U ¼ 1132.000; Wilcoxon W ¼ 2035.000; Z ¼ 22.174; Asymp. Sig. (two tailed) ¼ 0.030

Question 8: Are the goals of departments consistent with the strategic goals of the enterprise? t-test for equality of means Std. Std. error Sig. Mean Units N Mean deviation mean t (two-tailed) difference

Table III. Statistical analysis of Question 8

Nanjing Iron & Steel Co. Ltd 71 4.4085 Nanjing Panda Electronic Co. Ltd 42 5.1429

1.9315 1.4745

0.2292 0.2275

22.274

0.025

2 0.7344

Notes: Equal variances not assumed. Mann-Whitney U ¼ 1185.500; Wilcoxon W ¼ 3741.500; Z ¼ 21.849; Asymp. Sig. (two tailed) ¼ 0.064

different answer between account clerks and accountants in Question 9 and one significant different answer between account clerks and assistant accounts. There are no any significant differences in the results from assistant accountants and accountants. According to results in Table IV, account clerks have more confidence in the methods and procedures used in the enterprise’s long-term decision making process that that of accountants. This may imply that senior accountants are involved more frequently and deeply in the long-term decision making process than their junior colleagues. Therefore, they became more critical. According to the results shown in Table V, account clerks are more optimistic than their elder fellows on the suitability of western management methods for the Chinese enterprises. It may be because they are younger and have a greater willingness to accept the new ideas. It can be foreseen that over future generations the management philosophies and styles in Chinese enterprises shall be changed significantly. Finally, the F-test is used to check whether answers are different among the participants because of their ages. It was found that only in three questions, that their answers were different. The first is about the methods and procedures used in an enterprise’s long-term decision-making process. It reveals that participants become more critical with the increase of their age as shown by the results in Tables VI and VII. The second difference in the results is the evaluation and reward systems used in the enterprises. The satisfactions with the current evaluation and reward systems vary among different age groups. The most satisfactory group is the people in 40-50 years

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Question 9: Are the methods and procedures used in enterprise’s long-term decision-making process sound and up-to-date? t-test for equality of means Qualification N Mean Std. deviation Std. error mean t Sig. (two-tailed) Mean difference Account clerks 21 5.0953 Accountants 50 4.2000

1.3381 1.4708

0.2920 0.2080

2.497

0.017

0.8952

Notes: Equal variances not assumed. The results of non-parametric test: Mann-Whitney U ¼ 348.5000; Wilcoxon W ¼ 1623.500; Z ¼ 22.279; Asymp. Sig. (two tailed) ¼ 0.023

Table IV. Statistical analysis of Question 9

Question 15: Is the use of western management accounting methods widespread in Chinese enterprises, and are there cultural and technical obstacles on introducing western methods into China? t-test for equality of means Std. Std. error Sig. Mean Qualification N Mean deviation mean t (two-tailed) difference Account clerks Assistant accountants

21 25

5.0000 3.8800

1.7607 1.7156

0.3842 0.3431

2.174

0.035

1.1200

Notes: Equal variances not assumed. The results of non-parametric test: Mann-Whitney U ¼ 170.500; Wilcoxon W ¼ 495.500; Z ¼ 2 2.057; Asymp. Sig. (two-tailed) ¼ 0.040

Table V. Statistical analysis of Question 15

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old, however, accountants over 50 years have the lowest satisfactory scores (shown in Tables VIII and IX). The third difference is in the results (Tables X and XI) about the leadership role in the management accounting system. Self-motivation in improving current

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Question 9: Are the methods and procedures used in enterprise’s long-term decision-making process efficient and up-to-date? Source Type III sum of squares df Mean square F Sig. Eta squared

Table VI. Statistical analysis of Question 9

Table VII. The Kruskal-Wallis test results

Intercept AGE Error Total

1244.008 21.137 238.060 2651.000

1 4 112 117

1244.008 5.284 2.126

585.269 2.486

0.000 0.048

0.839 0.082

Notes: R Squared ¼ 0:082 (Adjusted R Squared ¼ 0:049)

Age

N

Mean rank

Chi-square

1 2 3 4 5 Total

33 52 16 5 11 117

54.76 59.78 57.00 29.70 84.27

10.891

Kruskal-Wallis Test df Asymp. sig 4

0.028

Question 14: Do the enterprise’s evaluation and reward systems reflect the actual situation and are these systems efficient? Source Type III sum of squares df Mean square F Sig. Eta squared

Table VIII. Statistical analysis of Question 14

Table IX. The Kruskal-Wallis test results

Intercept AGE Error Total

997.295 38.344 267.212 2283.000

1 4 112 117

997.295 9.586 2.386

418.010 4.018

0.000 0.004

0.789 0.125

Notes: R Squared ¼ 0:125 (Adjusted R Squared ¼ 0:094)

Age

N

Mean rank

Chi-square

1 2 3 4 5 Total

33 52 16 5 11 117

52.58 59.82 61.78 23.10 86.68

14.773

Kruskal-Wallis Test df Asymp. sig 4

0.005

management accounting systems increases with the increase of the age. Elder accountants are more positive about their role in the process of improving an enterprise’s situation. 6. Conclusion With the opening of the door to the outside world and the rapid development of the Chinese economy, the accounting systems in China have changed substantially. Changes can be observed in both financial and management areas (Lu, 1999). In the financial accounting area, new accounting standards have been issued and old uniform accounting systems have been reduced and simplified. Although both accounting standards and uniform accounting systems may co-exist for a foreseeable period, the trend of harmonisation of Chinese accounting with international accounting standards and practices cannot be deferred. From the results of field research and a survey conducted by the researchers, management accounting in China has also undergone significant changes. Western management accounting theories and practices are understandable to the Chinese accountants. The main obstacle for implementation of western methods is not political sensitivity, but the extent of technical constraints. The management information system (MIS) is under development in most Chinese enterprises, while the essential data for using western techniques, such as activity-based costing, cannot be collected easily in the current situation. Nevertheless, changes in management accounting can be seen in many areas. This is demonstrated by the quality of products being promoted; use of the responsibility accounting systems which have become widespread; and profitability has become the key issue for selecting investment projects. There are several benefits of this research for business community in general as well as for accounting professionals and academics. First, this paper provides a

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Question 19: Does the success of the management accounting system in an enterprise depend mainly on the enterprise’s leaders’ attitudes and endeavours? Source Type III sum of squares df Mean square F Sig. Eta squared Intercept AGE Error Total

1707.563 34.842 338.817 3554.000

1 4 112 117

1707.563 8.710 3.025

564.456 2.879

0.000 0.026

0.834 0.093 Table X. Statistical analysis of Question 19

Notes: R Squared ¼ 0:093 (Adjusted R squared ¼ 0:061)

Age

N

Mean rank

Chi-square

1 2 3 4 5 Total

33 52 16 5 11 117

55.24 62.78 63.88 81.80 34.95

9.650

Kruskal-Wallis Test df Asymp. sig 4

0.047 Table XI. The Kruskal-Wallis test results

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comprehensive study about Chinese management accounting systems, the current activities which the management accountants undertake and their attitudes towards improvements from outside. This gives foreign accounting practitioners a better understanding of the nature of Chinese management accounting systems as they enter into this market. Second, this study provides a detailed analysis about the differences from both a financial and a management accounting point of view. This information will help western investors to be better prepared if they have set up a business in China or are going to enter the Chinese market. Finally, this paper shows accounting researchers how significant are the differences in the management accounting systems and the capacity for changes. The conclusion overall is that management accounting system in china starts becoming less compliant with legality and rules and more relevant to economic decision-making, although not uniformly among enterprises on topic areas. Note 1. Some scholars argued that in China there exists three tiers of regulation framework for accounting: the highest level is the Accounting Law, the middle level is Accounting Standards, the lowest level is the Uniform Accounting Systems. References Aiken, M., Lu, W. and Ji, X.D. (1995), “The new accounting standard in China: a critical analysis”, in Black, J. and Gao, S. (Eds), Perspectives on Accounting and Finance in China, Routledge, Oxford, pp. 159-77. Bromwich, M. and Wang, G. (1991), “Management accounting in China: a current evaluation”, The International Journal of Accounting, Vol. 26 No. 1, pp. 51-66. Chen, Y., Jubb, P. and Tran, A. (1997), “Problems of accounting reform in the People’s Republic of China”, The International Journal of Accounting, Vol. 32 No. 2, pp. 139-54. Firth, M. (1996), “The diffusion of managerial accounting procedures in the People’s Republic of China and the influence of foreign partnered joint ventures”, Accounting, Organisation and Society, Vol. 21 Nos 7/8, pp. 629-54. Han, J.Y. and Yang, J.L. (1998), “Cost management in Han Dan Iron and Steel Corporation (Chinese)”, Accounting Research, August, pp. 38-42. Kwang, C.W. (1966), “The economic accounting system of state enterprise in mainland China”, The International Journal of Accounting, Vol. 2 No. 1, pp. 61-99. Li, W.Z. (1988), “System of cost and management accounting in Shanghai University of Finance and Economics and Centre for International Accounting Development”, Accounting and Auditing in the People’s Republic of China: A Review of its Practices, Systems, Education and Development, The University of Texas at Dallas, Dallas, TX, pp. 31-52. Lu, Z.F. (1999), “China’s state enterprise reforms and formation of high financial leverage in state enterprises”, Chinese Accounting and Finance Review, Vol. 1 No. 1, pp. 65-97. Maschmeyer, R.A. and Yang, J. (1991), “Responsibility accounting during the economic transformation in the People’s Republic of China”, in Wallace, R.S.O., Samuels, J.M. and Briston, R.J. (Eds), Research in Third World Accounting, JAI Press, London, pp. 1, 141-156. Meng, F.L., Wang, C.C., Wang, J. and Yang, G.S. (1997), “Management accounting: current situation, problems and improvements needed (Chinese)”, Accounting Research, April, pp. 37-41.

Ministry of Finance (1992), Accounting Standards for Enterprises, Chinese Economy and Finance Publish, Beijing. Qiao, Y.J. (1997), “The reasons of lack of efforts on using management accounting methods in the state-owned enterprises (Chinese)”, Accounting Research, April, pp. 33-6. Scapens, R.W. and Hou, B.L. (1995), “The evolution of responsibility accounting systems in China”, in Wallace, R.S.O., Samuels, J.M. and Briston, R.J. (Eds), Research in Third World Accounting,Vol. 3, JAI Press, New York, NY, pp. 206-31. Skousen, C.R. and Yang, J. (1988), “Western management accounting and the economic reforms of China”, Accounting, Organisations and Society, Vol. 13 No. 2, pp. 201-6. Thomas, W.L., Lu, D.H. and Wu, A. (2000), “A survey of management accounting in China”, paper presented at the 3rd Biennial International Accounting Research Conference of International Association for Accounting Education and Research (IAAER), October, Japan. Winkle, G.M., Huss, H.F. and Chen, X.X. (1994), “Accounting standards in the People’s Republic of China: responding to economic reforms”, Accounting Horizons, Vol. 8 No. 3, pp. 48-57. Further reading Chen, Y.Q., Zheng, P.J. and Chen, J.Z. (1993), New Industrial Enterprise Accounting (Chinese), Lixing Accounting Publishing. Ji, X.D. (2001), Development of Accounting and Auditing Systems in China, Ashgate, Aldershot. Corresonding author Xu-dong Ji can be contacted at: [email protected]

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Accounting education in modern China: an analysis of conditions and observations

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Gordon Francis Woodbine School of Accounting, Curtin University of Technology, Perth, Australia Abstract Purpose – The object of this paper is to analyze and discuss the form and substance of accounting education in the People’s Republic of China during the period 1998-2003 as observed by an educator during his employment as a foreign expert with a major university in a Special Economic Zone. Design/methodology/approach – The paper discusses education policies in China and applies this knowledge in a descriptive fashion to an explanation of curriculum processes used in a modern regional university. Curriculum content is compared with equivalent Australian courses of study. Findings – Accounting education programs in China are highly regulated. Methods of teaching and assessment are also inadequate and rely on tried and trusted teacher-centred methods that encourage rote learning and plagiarism. Reforms in education are occurring at an incremental rate, but underlying administrative and curriculum management issues reflect mindsets that appear reticent to change in the short term. Originality/value – China’s centrally managed business curricula for university studies provides substantial challenges which, when combined unique administrative practices and cultural differences, presents issues of concern for education researchers and practitioners. Keywords China, Higher education, Comparative tests, Curricula, Teaching Paper type Case study

Asian Review of Accounting Vol. 15 No. 1, 2007 pp. 62-71 q Emerald Group Publishing Limited 1321-7348 DOI 10.1108/13217340710763753

Introduction The demand for accounting services and accounting education in the People’s Republic of China exploded, following the emergence of the Central Government’s “Opening Up Policy” after 1978 (Nowak and Dew, 1996). The pace of change has quickened significantly since 1990 as international business connections blossomed and local and foreign companies operating inside China needed to apply western accounting and reporting principles and practices. The focus of accounting reform shifted to include provision of information for external market decision-making (Chan and Rotenberg, 1999, p. 41). Internal pressures associated with the reform of struggling state owned enterprises (SOEs) and the moves towards international acceptance (e.g. membership of the World Trade Organization) resulted in the replacement of Soviet style accounting systems with Anglo-American type accounting standards. In 1992 the Ministry of Finance introduced a range of new standards affecting most business enterprises. The Accounting Standards for Business Enterprizes (ASBE) and General Financial Principles for Enterprizes (GFPE) provided the basis for a new accounting and financial regulatory framework (Chen and Tran, 1995). Reform with respect to accounting education is proceeding relatively slowly, despite the radical changes in policy and regulations. Chan and Rotenberg (1999) identify a

lack of qualified public accountants in China represents a significant impediment to growth. According to them: Significant obstacles remain. These include a lack of human and financial resources in the educational system, an inadequate curriculum, the low status and poor living of teachers and a lack of belief in the importance of education when immediate returns are available from other investments (Chan and Rotenberg, 1999, pp. 44-45).

Education reform across a country the size of China differs according to the funding provided by local and provincial governments (including the occasional private benefactor), with universities along the wealthier east coast (including those located in specially designated economic zones) receiving most attention. However, political expediency is a factor guiding the direction of all institutions. For example, the Communist Party of China (CPC) established the Ministry of Education to administer policy and promulgate directives to its approximately 1,400 regular institutions of higher learning aimed at preserving socialist policies concerned with safeguarding internal stability and security (Ministry of Education, 2003). Allowing institutions to experiment with curricula that encourage independent critical thought or the dialectic evaluation of alternative systems is an anathema to a government committed to socialist ideology. Government announcements associated with education reform continue to reflect these concerns. For example, Vice Premier Li, in a statement relating to the reform of higher education, stated that “the theoretical study of Marxism must be enforced in colleges and universities, which should also make efforts to improve students’ practical abilities as well as academic standards” (Ministry of Education, 2001). This issue continues to stifle real progress, despite the infusion of funds aimed at developing world-class institutions (Lawrence, 2001). It is these policies that have encouraged what Tang (1997, p. 220) refers to as “departmentalism”, a concept that involves the administration of systems via line ministries, observant of government policy which he contends has resulted in four further obstacles to progress: (1) Over-specialization of curricula to meet narrowly defined industry needs. (2) The employment of large numbers of staff whose training is limited to pre-reform principles and practices. (3) The continued use of locally produced textbooks that are vocational and regulation-oriented and which ignore theoretical and conceptual issues. (4) Late development of accounting departments within comprehensive universities. The aforementioned issues need to be kept in focus in the ensuing analysis the education system observed by the author while employed as a foreign expert at a relatively wealthy university in the Guangdong Province in southern China, namely Shenzhen University, during the period 1998 to 2003. Significant changes were witnessed during the period, changes that affected the veneer (or appearance) of the university as the campus benefited from the astronomical 30 per cent plus annual growth in the local economy. The period 2000 to 2003 saw a rapid growth in building infrastructure and resources that benefited students as well as the administration generally. Many of the campuses air-conditioned classrooms were adorned with new furniture, electronic

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media (opaque transparency devices, computer displays) and whiteboard facilities. During the same time, the university experienced the impact of Ministry of Education directives to reform higher education (Minstry of Education, 2000). College entrance requirements were lowered and rules relating to the enrolment of students from outside the Shenzhen Special Economic Zone altered to permit a doubling of enrolments (i.e. from 5,000 to 10,000 full time students). Shenzhen University, which was established in 1983, is the only comprehensive campus serving a local population in excess of six million. In recent years a polytechnic college was opened nearby and universities from other provinces have begun to provide external undergraduate and postgraduate programs to eligible students from within the region. Although considered one of the most beautiful campuses in China, the university fails to receive a mention in the overall 100 rankings for general or science schools in the nation (Minstry of Education, 2003). Analysis of education practices Curriculum issues The College of Economics is the largest in the university (over 1,600 fulltime undergraduates) and consists of four departments, namely Finance, Economics, Accounting and International Trade and Finance. Undergraduate and graduate programs are taught (up to a Masters degree, excluding Accounting). Accounting majors are not significant in number and records held since 1985 show an average of 80 students graduating from the four-year degree program each year. The four-year program is rigidly structured and enrolments in 2003 accommodated two classes (A and B) of around 70 students in each of the compulsory units. Students have little choice about which subjects they can enrol in, although approximately eight of the 40 or so undergraduate units are electives. The electives include the specialized English units in accounting, which a foreign expert (if available) is employed to teach. The Accounting curriculum is difficult to describe, but appears to vary little from other Chinese universities. For example, a comparison with the curriculum for the Shanghai University of Finance and Economics (SUFE), (described in Xu and Lu, 1997) shows striking similarities to that provided at Shenzhen University. Using the SUFE model as a guide, the following five categories of subjects are identified in Table I. Ideological units include Military Theory and Practice, Moral Cultivation, Marxist Philosophy, Introduction to Mao Zedong Thought, Introduction to Deng Xiaoping Theory and Political Economy. Students are usually not unfamiliar with the content of these units as they are introduced in Middle School and reinforced at every stage of their education. PhD candidates are also required to complete similar units at a higher level as a compulsory component of their graduate program. Most of the Category of subjects

Table I. Accounting curriculum

Ideological subjects General knowledge and skills Business related units Accounting units Final business project Total

Number of subjects

Percent

Credits

5 18 7 10

13 45 17 25

40

100

36 46 26 43 12 163

aforementioned units are completed in the first two years of every undergraduate program. There are no equivalent mandatory units taught in any typical Australian accounting program, except perhaps within the Catholic university, where some religious studies units are required to be completed. General studies as well as physical training subjects (e.g. Sports Club) make up a number of the second category of units. It is during the first two years that students are exposed to four semester units in College English, which are intensive and useful, especially as they need to make frequent use of the University’s quite expansive English section of the library. Students also apply these skills when using the internet services that are now readily available on campus. Nowak and Dew (1996, p. 172) commented that accounting students should continue to be exposed to English courses in their final two years of study as it is during this period they need to research English texts or undertake demanding specialized English courses provided by foreign experts. Many of the students are unable to cope with the difficulties associated with using business English to describe or understand complex conceptual accounting terms and issues in financial accounting and auditing. As indicated in Table I, this general studies course component contributes almost one-half of the overall program. Xu and Lu (1997) reported that the typical Australian accounting major provided for an average of 16 per cent of it content to general studies units (usually as electives) Business related units include Advanced mathematics, Economics, Statistics, Marketing, Finance and Management information systems. Accounting subjects include Accounting principles, Intermediate financial accounting, Cost accounting, Management accounting, Auditing and Accounting theory. Most of the Chinese texts used in teaching accounting are limited in terms of content and coverage of modern accounting issues. They are mainly instructional in format with relatively few illustrations and examples. Most of the texts were published over ten years ago. A few teachers attempt to use American texts, but find the going difficult. Even the Dean of the College of Economics, who taught Auditing, found it easier to teach the unit in Chinese and sets student readings and questions from the American text. A typical Australian accounting major devotes close to one-half of its program content to accounting units, compared to only one-quarter in the equivalent Chinese course (refer Table I). In addition, the paucity of attention given to financial and management accounting concepts and practices (Chan and Rotenberg, 1999) implies that students are poorly prepared for public practice. These issues may also explain why so few applicants for membership to the Chinese Institute of Certified Public Accountants (CICPA), pass the entrance examinations in a first attempt. The report on Financial Management and Governance Issues in the People’s Republic of China (2000) indicated that in 1999 only 15 per cent of applicants passed the entrance examinations for accounting and auditing. Of the eight elective units available an accounting major may enrol in units from other colleges, such as English, another foreign language or even sports/arts based units. They can select one of the few specialized English courses in accounting and business studies offered by visiting scholars. During the period 2002-2003 the author taught Company accounting, Auditing, Financial statement analysis and Business ethics. In the Autumn Semester, 2002 the Dean insisted all students select Company accounting, however it was extremely difficult to work with two classes of 70 students

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(four hours each per week) and the failure rate was high. Enrolments dropped by more than half in the following semester, but the number of failures at the end of Spring Semester was minimal. During the first three years students spend between 25 and 30 hours a week in class, and complete anything from six to 12 units a semester. This is much more than the hours spent by undergraduates in equivalent Australian courses, partly because of the ideological subjects Chinese students undertake, and also because of the College English courses covered in early years. There is also evidence of overlapping of course content. For example, some of the concepts covered in the specialized English units had been covered in Chinese in other units. The final (fourth) year of study is less demanding. Students have few units to complete and devote themselves to completing the final business project and applying for jobs. The choice of topic for the final assignment is confined to those determined by the College and usually has a finance or economics bias. Administration and assessment procedures Much of China’s education policy and practice is determined by the Ministry of Education and uniformly applied to all institutions of higher learning. Ideological and policy matters are managed by Communist Party officials appointed to every department and college. Party secretaries and vice secretaries are appointed to ensure policy directives are properly promulgated in every department. Appointees are often academics with additional administrative duties. Party officials are permitted to question or veto the decisions or actions of the departmental heads, where these have policy implications. Chinese teaching staff members are supported by a large administrative staff section and deal directly with most student issues. Student monitors (one male and female) are appointed for each class and these report directly to the administration about student and teaching issues. Staff meetings are commonplace and instructional in nature. Foreign teachers are not invited however the author was able to sit in on one meeting where teachers sat like attentive students listening to a series of lectures provided by their superiors. After negotiating what subjects are to be taught, the foreign teacher is provided with a 20 week semester outline (in Chinese), indicating important dates, including holidays and examination periods. Apart from being told to make the special English courses relevant and practical, the author was left to determine his own course outlines, which were generally based on one or more American texts. The length of the semesters made it possible to construct programs that were somewhat equivalent to units taught in Australia, but delivered at a markedly slower pace. Copies of intended outlines and timetables were passed to the College Dean, which were never subject to amendment or question. There was no peer review from other academics. A high level of trust was presumed. Problems usually only arose if students made complaints about some aspect of the teaching. Interaction with students outside class was minimal. The author made a point of making himself available each week for “Office hours” at a convenient location within the administrative section of the office. Students provided very useful interpreter services at these times. Foreign teachers were also encouraged to organize and

participate in “English corners”, where students from all faculties may attend and practice their language skills. Although the content of the unit curriculum was rarely questioned, a rigid system of class management was the norm. Reputations were quickly tarnished if the administration discovered teachers turning up late or missing classes without approval. Missed classes had to be made up, sometimes over the weekend if necessary. The long semester is broken only by a three-day holiday (e.g., National Day week), but the average teaching load rarely exceeded 12-14 hours a week. There are no breaks for Easter or Christmas although from 2000, foreign teachers were permitted to cancel classes on Christmas Day, so long as the course program was not disrupted. New foreign teachers took time to adjust to the two-hour break over the lunch period, at which time almost every facility except the campus dining rooms closed down. As reported by Chan and Rotenberg (1999) and Jin and Li (2002) the major assessment for most accounting units is the final examination. A 30/70 rule was permitted for English business courses, although the author was able to reduce this to meet the perceived learning objectives (e.g., 50/50). Two examination papers (A and B) are submitted about six weeks before the end of semester. There is no co-examiner review and the College Dean determines which paper will be used. Exams follow immediately after the last week of classes and continue for approximately two weeks. There are no supplementary examinations and the second paper is used for those students who (for an approved reason) were permitted to defer the examination until the following semester. Levels of assessment for graduation are determined by the Ministry of Education and contrast significantly with Australian universities. One-half of all units must have been passed with a score of 80 or better, two-thirds of all units must have been passed with a grade of 75 or above, and a score of 60 or more must be gained on a foreign language examination. (DEET, 1996, p. 22) The author graded according to the 50 per cent pass principle for all assessments and generally moderated them all up ten points when determining the final grade. Relatively few students fail to graduate eventually, although they may be required to repeat units or substitute other units in order to accumulate the necessary credits. Chinese teachers are fearful about failing students as this is believed to reflect directly on their teaching ability. Classroom management and teaching methodology Chinese students can bring the best and worst out in a teacher. Even assuming they understand the English language to an acceptable degree, they are generally extremely passive, a product of the teacher centred approach to instruction (Chan and Rotenberg, 1999). The author often observed Chinese teachers reading from a book for extended periods, while 50 to 100 students sat silently, seemingly entranced by the monologue. Relatively few Chinese teachers made full use of the modern facilities available to them (e.g. transparencies and Powerpoint software). In 2000 Shenzhen University installed an elaborate intranet service that permits teachers to post lectures and other materials online, but the author found that he was one of a small number of academics that made extensive use of the facility. Class management for the foreign teacher was rarely a problem, especially when working with smaller groups. However, with the doubling of student numbers in 2001, classes went from 40 to 70 (the capacity of most rooms) and it was necessary to

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drastically alter the teaching mode. Group work and other forms of interactive processes (e.g. presentations, discussions, debates etc.) were impossible under the circumstances and it was necessary to fall back to lecturing as the means for managing progress. In some classes, the numbers were small (15 to 20) allowing for the adoption of student centred approaches to teaching and learning, which were much appreciated, although they involved more time and effort to organize. Under these circumstances it was possible to provide a variety of interesting and challenging assessments. It is important to recall that many of the students had difficulty dealing with complex English business terms and concepts, necessitating an adjustment of didactic style. The author was continually rephrasing terms and paraphrasing concepts, making extra use of the whiteboard to explain words that one would take for granted within a western context. Student texts were invariably smothered with Chinese characters, reminding the author that most of them had to make mental adjustments from English to Chinese in most instances. Many persevered and their knowledge of business English blossomed over a year of instruction. It was understandably difficult to judge how much students had previously learned about accounting principles and practices. Although majoring in accounting it soon became apparent that most of their compulsory units concentrated on practical processes, such as recording and reporting, with a major emphasis on management and cost accounting. Auditing and corporate accounting issues were not well understood, possibly reflecting a lack of knowledge on the part of their Chinese teachers (many of who had never worked in an accounting environment or travelled overseas) (Chan and Rotenberg, 1999). The author is also inclined to agree with the comments of Chow et al. (1995), that accounting education in China glosses over or avoids mention of important theoretical and conceptual issues. Students were generally courteous and responsive to encouragement. It took time to teach them how to speak out in class and they had great difficulty questioning propositions, although the more courageous would make the attempt. Every class had its own male and female monitor, who were responsible for taking care of the students’ needs (personal as well as administrative), assisting the foreign teacher and a major source of information about what was happening within the College. These same students are also responsible for reporting on the nature and content of the teacher’s discussions. On more than one occasion during the first year of employment the author was reminded by the Dean to avoid discussions on contentious issues, even when they were initiated by students. The author did notice a change in many students during the last year of employment at Shenzhen University (2003). They appeared less reticent about making comments regarding their government’s policies in some areas and were especially critical of the way it dealt with the SARS misinformation campaign late in 2002. The Communist Party is active in its recruitment of good quality students, and its current strategies include material enticements (e.g. job opportunities) that many students find attractive. Plagiarism (i.e. copying and misrepresenting the works of others, including published authors and students) is an issue that the author had to deal with frequently. Jiang Xueqin (2002) reported that plagiarism amongst students and academics was rife, even within the most prestigious Chinese universities. It was easy to notice when students handed in work purporting to be their own, but which had been copied from

some English text. The author often discussed the issue of plagiarism with students and administered warnings and reprimands on numerous occasions. Students seemed little phased by the issue, which they saw as the lesser of many evils confronting them in life (analogous to purchasing pirated CDs). They explained that it was commonplace among students in many of their units and usually accepted without question by their teachers. After the first semester of teaching the author gave up administering take-home assignments and concentrated on other forms of in-class assessment. The copying of another student’s work during a class test was also common and both parties were usually scored zero on such occasions. No attempt was made to take these matters further. Discussions with senior administrators gave the author the impression that they really did not want the matter pursued, although they agreed that the infringements were serious. Students were weak at listening and speaking English, but better at reading and (to a lesser degree) writing. Most wanted to improve their English language skills by undertaking other courses of certification (e.g. Band 4 or 6 levels examinations, IELTS or TOEFL) where many of the assessments involve the use of multiple choice tests. They tended to score relatively highly in such tests and preferred them to essay-type questions. Special care was taken when wording test questions in order to avoid confusion and misunderstanding. Many students had difficulty dealing with open-ended questions involving elements of analysis and evaluation. As noted by most Chinese education commentators, teachers are perceived to be fountains of knowledge that provide all the information necessary to meet the learning requirements of students, and most end-of-semester examinations involve the regurgitation of this knowledge. This fact made the teaching of such units as Ethics, Auditing and Financial analysis challenging for the author. Path to reform Curriculum and other related education issues discussed in this paper refer to experience gained at one major university in China over a period of five years employment however there is a high degree of uniformity in the way accounting programs are administered within major institutions of higher learning. The Ministry of Education determines much of the policy for its tertiary institutions but it is evident that economic reform issues are generating change and that this is impacting the form and content of university programs. This is likely to continue as China’s involvement in the international scene is expanding and evolving. Apart from the reforms in accounting and finance policy described earlier, other factors are putting pressure on accounting education reform include the following. Growth in demand for suitably qualified accountants By unofficial standards, China will need 150,000 new qualified accountants a year to maintain the pace of economic reform (Chan and Rotenberg, 1999, p. 47). As the economy continues to expand and privatise, and as direct foreign investment and corporatization expand, so the demand for professionals, trained to apply international standards and practices grows and further impacts government policy.

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The reestablishment of an accounting profession and of professional certification An independent body representing the accounting profession, namely the Chinese Institute of Certified Public Accountants (CICPA), is responsible for oversighting the certification process for accounting graduates entering the field and thereby encouraging the growth of CPA firms and establishing links with foreign institutions. Although not a Standards setting body in its own right, the Institute will have a growing influence on the design of accounting curricula used in universities. Universities setting up accounting courses administered in English and using western texts The author was invited to participate in the establishment of such a course at the Shantou University, Guangdong Province in 2000. Partnerships with foreign universities A number of well respected universities in China are forging partnerships with overseas institutions, which include agreement to direct local undergraduate and postgraduate students into accounting courses administered by the latter and which result in CPA or equivalent accreditation. Academic exchanges between institutions are also being encouraged. Exposure of Chinese academics to western training and experience More and more Chinese students and academics are travelling abroad to further their tertiary education in foreign institutions. Some find employment overseas, but many are making a conscious decision to return to China and apply their advanced knowledge and training in universities and international enterprises. Conclusions It would appear certain that the steamrolling affect of the issues described above will force the Central government to place greater emphasis on the need to reform its related education practices and policies. These changes are necessary if modern first and second tier universities are to produce good quality graduates, capable of accommodating the needs of the rapidly expanding number of local and international business entities. The author had the privilege of working with a significant number of very talented and highly committed students, who would compare favourably with the best of their western educated counterparts. Most of these, however, were cognizant of the apparent deficiencies of their local accounting programs and were looking for opportunities to extend their knowledge by enrolling in postgraduate courses in countries like Australia and the USA. In the interim, campuses like Shenzhen University continue to seek the employment of suitable academics willing to contribute their services towards the enrichment of local business education programs, while progressing slowly, but steadily to improve the focus and content of their existing curricula. A number of Chinese academics who had studied abroad voiced concern about the deficiencies in their current education programs, in that they were failing to adequately prepare students for employment in the growing number of companies in China with international connections, who were quickly adopting appropriate accounting policies

and practices. Most are optimistic about the future, but few appreciated the urgent need to reform education practices, to provide a more efficient means for disseminating knowledge. However, problems will continue while higher education processes is centrally directed by administrators committed to serving interests that secure a particular political agenda.

Accounting education in China

References Chan, M.W. and Rotenberg, W. (1999), “Accounting, accounting education and economic reform in the People’s Republic of China”, International Studies of Management & Organization, Vol. 29 No. 3, pp. 37-53. Chen, H. and Tran, A.V. (1995), “Recent accounting reform in China”, Asian Review of Accounting, Vol. 3 No. 1, pp. 3-24. Chow, L.M., Chau, G.K. and Gray, S.J. (1995), “Accounting reforms in China: cultural constraints on implementation and development”, Accounting and Business Research, Vol. 26 No. 1, pp. 29-49. Department of Employment, Education and Training (1996), Country Education Profiles: China, 2nd ed., Department of Employment, Education and Training, Canberra. Financial Management and Governance Issues in the People’s Republic of China (2000), available at: www.adb.org/Documents/Books/Financial_Mgt/China/default.asp#contents Jin, M. and Li, F. (2002), “The recent development of accounting education in China”, working papers (50/02) delivered at Charles Sturt University, Bathurst. Lawrence, S.V. (2001), “In hot pursuit of excellence”, Far Eastern, Economic Review, Vol. 164, pp. 32-9. Ministry of Education (2000), “China to accelerate higher education reform”, People’s Daily, Beijing, available at: http://fpeng.peopledaily.com.cn Ministry of Education (2001), “Improve Party work style, push higher education reform: Vice Premier”, People’s Daily, Beijing, available at: http://english.peopledaily.com.cn Ministry of Education (2003), Education issues. China Education and Research Network, available at: www.edu.cn/HomePage/english/index.shtml Nowak, L.S. and Dew, K. (1996), “Reforming finance education in China: a case study of Shanghai University’s College of International Business”, Journal of Education for Business, Vol. 71 No. 3, pp. 169-73. Tang, Y. (1997), “The recent accounting development and internationalization of accounting education in China”, Issues in Accounting Education, Vol. 12 No. 1, pp. 219-27. Xu, D.J. and Lu, W. (1997), “Comparison research on the accounting education systems in China and Australia”, Working papers delivered at Curtin University of Technology, 1-9. Xueqin, J. (2002), “Chinese academics consider a ‘culture of copying’”, The Chronicle of Higher Education, Vol. 48 No. 36, pp. 45-8.

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Corresponding author Gordon Francis Woodbine can be contacted at: [email protected]

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Determinants of disclosures of A-, B- and H-share companies Jinghui Liu

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School of Commerce, The University of Adelaide, Adelaide, Australia

Ian Alexander Eddie School of Business and Governance, The University of Canberra, Canberra, Australia Abstract Purpose – This study attempts to examine the issues relating to corporate financial reporting of Chinese listed companies under specified institutional settings as companies with different share-categories are required to prepare annual reports under various General Accepted Accounting Principles (GAAP). Design/methodology/approach – This study selects Chinese companies that issue negotiable shares to examine whether corporate disclosure patterns are different under various institutional settings. Negotiable shares can be traded on stock exchanges and are divided into A-, B- and H-shares. The extent of corporate disclosure is obtained from the content analysis of annual reports for 191 sampled Chinese listed companies with various share categories. The association are hypothesized and tested between the level of corporate disclosure and the following corporate determinants: company size, profitability, auditor, leverage, industry and ownership structure. Findings – The extensive regulations and different standards influence on disclosures of companies with foreign investment participation and overseas listing status. By reconciliation of their annual reports according to the IFRSs or the GAAP of the listing country, these companies increased information disclosure voluntarily in order to enhance their reputation and credibility. Some corporate factors, such as company size, profitability and the size of auditor, have influenced the level of corporate disclosure in annual reports of domestic and foreign share-based companies. Ownership structure has positive impact on the level of disclosure for companies with domestic investors. Originality/value – This study advances knowledge of the influence that legislative circumstances and ownership structures can have on disclosure decisions made by management in their annual reports. This information is of high interest to domestic and foreign investors and regulators in understanding of financial reporting in Chinese listed companies. Keywords China, Disclosure, Securities markets, Shareholders, Corporate ownership Paper type Research paper

1. Introduction The purpose of this paper is to examine how the political costs impact on disclosure patterns of companies incorporated in China that have attracted foreign shareholders by listing on domestic and overseas securities markets. This comparative study of Chinese companies listed on domestic and overseas securities markets examines the differences in listing methods and corporate disclosure. The extent of corporate disclosure is empirically measured using a disclosure index applied to 191 Chinese Asian Review of Accounting Vol. 15 No. 1, 2007 pp. 72-92 q Emerald Group Publishing Limited 1321-7348 DOI 10.1108/13217340710763762

Helpful comments and suggestions from the participants at the 3rd Financial Markets in Asia-Pacific Conference, 26-27 May 2005, are gratefully appreciated. Any remaining errors are the authors’.

listed companies with various shareholder categories. This study finds that political cost influences the extent of corporate disclosure in both foreign-share based companies and domestic-share based companies. Choosing an international accounting firm as auditor is found to be the method that is used to improve the credibility and worthiness of companies to foreign investors. Further, ownership structure is found to be significantly associated with the extent of corporate disclosure which indicated that governmental influence is strong on corporate disclosure issues in order to attract domestic investors’ involvement in domestic-share based listed companies. These results provide an understanding of corporate disclosure as an effective tool for Chinese listed companies to reduce exposure to potential political costs and as a results, to manipulate earnings are a strategy for them to deal with potential political pressures. The contributions of this study are fourfold. First, the study not only assists management in selecting an appropriate course of action to achieve strategic performance but also benefits investors’ knowledge of significant factors that explain the variability of disclosure quality in annual reports. Second, the study adds to the literature of international accounting research by extending the knowledge and discussions of corporate information reporting to a developing country, namely China. Previous studies have focused less on the accounting system classification in developing countries. Due to difficulties in data collection previous studies that focused on corporate disclosure studies in China were concerned mostly with conceptual discussions. In contrast, this study conducts an empirical analysis on the quality of corporate disclosure from qualitative and quantitative perspectives in Chinese listed companies. Third, this study facilitates investors’ ability to assess their investment decisions in share-based Chinese listed companies. Finally, the findings of this study provide recommendations to regulators of relevant stock exchanges and securities markets relating to activities and credibility of listing entities. Foreign investment has show attention to the Chinese fast growing transitional economy either in joint venture or by holding shares in listed companies. Foreign capital companies include Sino-foreign capital joint ventures, Sino-foreign partner enterprises and foreign investment enterprises. Corporatisation, a process to convert state-owned enterprises (SOEs) into companies with limited liabilities, is considered as an effective way to clarify property rights, facilitate raising capital, restructure ownership and carry out other reforms (Xiang, 1998). However, most listed Chinese firms have originated as SOEs and are mandated to have three separate classes of ownership shares that distinguish them from those in more mature economies. State-owned shares are held by the central government, government ministries, or provincial, and municipal governments. Institutional shares (also called legal person shares) are owned by separate legal entities, such as investment institutions, other enterprises, and the foreign partners of a corporative joint venture. These two types of ownerships of shares cannot be traded on domestic stock exchanges – Shanghai and Shenzhen (SHSE and SZSE) Stock Exchanges, though the latter can be sold to other legal entities by agreement and on approval by the government. Finally, shares issued to individuals can be further classified into A-, B- and H-shares. A-shares restrict to domestic trading by Chinese citizens and B-shares can be sold to foreign individuals and entities. While some Chinese companies issue both A- and B-shares, the number is

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relatively small. Additionally, H-share companies are listing on Hong Kong and other foreign stock exchanges. The different institutional settings suggest the need for more extensive studies on corporate disclosure of Chinese listed companies, since financial reports are less accessible or comparable for far distance and inconvenient foreign listings/share ownerships against domestic standards. In general, it is argued that foreign shareholders are likely to face higher levels of information asymmetry that lead to adverse market consequences (Inchausti, 1997; Lin and Wang, 2001). Lev (1988) found that disclosure regulations are intended to mitigating adverse effects resulting from such market inequity. The coexistence of domestic accounting standards alongside International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs) means that Chinese companies with different share categories can create information asymmetry. Lin and Wang (2001) argue that this information asymmetry is affected by the degree of government involvement, the strength of the equity market and the effect of accounting professionals. As compared to firms with A-shares, Chinese companies issuing B- or H-shares are required to also follow IASs/IFRSs or the local accounting standards of foreign countries where their shares are listed. These additional disclosures tend to encompass a broader scope than the domestic one (Xiao et al., 2004). In addition, the reports for B- and H-share companies are required to be audited by international auditors, which should increase the likelihood of monitoring cost. This study seeks to test hypotheses based on political costs and agency costs as explanations of corporate financial reporting under specified institutional setting of Chinese listed companies. Positive accounting theory or the political costs has been suggested in previous studies to explain why firms make voluntary social disclosures. Several studies (e.g. Belkaoui and Karpik, 1989; Ness and Mirza, 1991; Deegan and Hallam, 1991; Inchausti, 1997; Xiao et al., 2004) have directly attempted to empirically examine the relationship between voluntary disclosures and the political cost hypothesis, based on the original studies of Watts and Zimmerman (1978). Companies with foreign shareholders who are more politically visible and subject to more public scrutiny, may potentially improve information transparency in order to reduce political costs – for example, increased regulation, the pressure from labour unions for increase wages, consumer boycotts and higher taxes. Given foreign shareholders’ ability to price-protect themselves against potential losses that arise from information asymmetry, positive accounting theory implies that Chinese firms with foreign shareholders would voluntarily disclose more transparent information to foreign investors for their economic decision making. More extensive voluntary disclosures and a widened dissemination of financial information also can create an impression of greater transparency, confidence of investors and creditworthiness of companies. Researchers (e.g. Schipper, 1981; Raffournier, 1995; Hossain et al., 1994; Cooke, 1998; Ferguson et al., 2002) report that firms that are quoted on several stock exchanges make more information disclosures. The rest of the paper is organised as follows. Following the introduction, the study provides a review on previous studies focusing on share-based companies and comparisons of corporate disclosure and listing methods of Chinese companies. Section three presents the hypotheses discussed in the study. Section four outlines the sample selection, data collection and model development. The results of statistical analysis of

corporate disclosure in foreign-based companies are given in section five, where evidence of associations between some corporate characteristics and the extent of corporate disclosure is also given. In the last section, discussions and limitations of the study are provided.

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2. Comparisons of listing on domestic versus overseas markets The rapid development of securities markets and the opening up of Chinese markets has encouraged local SOEs to obtain funds from domestic and overseas securities markets. In particular, with China’s entry into the World Trade Organisation (WTO), more companies began to seek capital from overseas markets, especially the Hong Kong and USA securities markets. A total of 1,232 A-share and 109 B-share companies are listing on the Shenzhen and Shanghai Stock Exchanges to the end of June 2006 (CSRC, 2006). The market valuation of listed companies in the domestic market was about 45 per cent of China’s gross national product in 2002 (Xiao et al., 2004). After the establishment of stock exchanges in Shanghai and Shenzhen in 1990, some companies have promulgated B-shares to foreign investors on the Shanghai and the Shenzhen Stock Exchange since 1992. From 1993 many companies applied to obtain capital from overseas capital markets. In 1993 Tsingtao Brewery Company Ltd was the first Chinese IPO listing on the New York Stock Exchange (NYSE) and the Hong Kong Stock Exchange (HKSE) respectively. There were 12 Chinese companies listed on the NYSE, two on the Singapore Stock Exchange (SPSE), five on the London Stock Exchange (LOSE), and 117 on the HKSE by the end of 2006 (CSRC web site: www.csrc. gov.cn). A comparison of listing methods, listing requirements and corporate disclosure on various stock exchanges can be made on the basis of their unique institutional settings. The requirements of listing rules are similar for the two domestic stockmarkets and the HKSE in that they have similar requirements regarding the type of business, capitalisation, financial ratio requirements, number of shareholders, public float and accuracy of financial reports for the three years preceding a share issue. Although the NYSE does not require newly issued shares to be accompanied by information about the type of business, financial ratios, and number of shareholders, it does require disclosures regarding higher levels of capitalisation, pre-tax earnings and the public float. For example, NYSE request that pre-tax earnings of listed companies must total at least US$100 million in aggregate for the last three fiscal years with a minimum of $25 million in each of the most recent two years. Further operational cash flow is required to be at least US$100 million in aggregate for the last three fiscal years, where each of the two most recent years is reported at a minimum of US$25 million, for a company with no less than US$500 million market capitalisation and US$100 million revenues in the most recent 12-month period. For companies with no less than US$1 billion total worldwide market capitalisation and with not less than US$100 million revenues in the most recent fiscal year, there are no additional financial requirements. For an affiliated company the NYSE requires disclosures about market capitalisation (if US$500 million or greater), the minimum of months of operation, whether parent or affiliated company is a listed company in good standing, and whether the parent/affiliated company retains control of the entity or is under common control with the entity (NYSE web site: www.nyse.com).

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The co-existence of different share types in the Chinese market has attracted researchers’ interest regarding corporate financial measurement and disclosure issues. Chen et al. (2002) reported factors that are responsible for the differences between Chinese General Accepted Accounting Principles (GAAP) earnings and IASs/IFRSs earnings. These factors include inventory/temporary investment valuation, allowance for bad debt, long-term investment valuations and consolidations, deferred tax and depreciation and revaluation. The profits calculated under the PRC GAAP are more significant in relation to share prices. Lin and Wang (2001) stated that financial report provided limited information to reconcile the differences between the different accounting methods used. The corporate reporting of Chinese listed companies with different share-categories is complicated for international investors and has had an impact on investment decisions in the domestic and overseas securities markets. The listing methods and corporate disclosure requirements in domestic and overseas securities markets are discussed below. 2.1. Comparisons of listing methods The listing rules affect the listing choice of companies. This section discusses the factors influencing Chinese listed companies on the domestic securities markets – the SHSE and the SZSE, and the foreign securities markets – the HKSE and the NYSE. There are several ways to develop a public trading market in the domestic markets for equity securities: . sponsor shares; . private placement of legal person shares; . employee shares; . second offering; . an IPO of negotiable shares; or . buying a “shelf” company. Sponsor shares are shares that purchased by sponsors. Foreign direct investment (FDI) may be involved in three types of investment: Sino-foreign capital, Sino-foreign contract and foreign investment. According to the company law, sponsors are not allowed to hold lower than certain proportion of the company’s total shares (China Securities Regulatory Commision, 1993). Employee shares are shares issued to employees. Before 1992 many companies raised equity capital from employees, but they were not allowed to list on the stock exchange for the first three years after issuing. This restriction was withdrawn in 1993. Many companies raise capital through IPO – issuing negotiable shares including A-, B- and H-shares. A second offering is a way for listed companies to raise capital. Finally, companies can exchange their equity for shares of a shelf company that has already been registered and listed on the securities markets. There were problems in the early stage of Chinese securities markets: shareholders could not access annual reports; there were no regulations for share issues and dividends policy; first day abnormal returns occurred; and poor liquidity existed in that there was no formal market for share trading (Xiao, 1997). With the enactment of the securities law, activities were standardised and regulated under the supervision of the CSRC.

The Chinese companies that traded on the HKSE included H-shares and red chips. H-shares are Chinese companies that are incorporated in Mainland China, listed on the HKSE and can be traded by overseas investors. The Chinese government owns no more that 35 per cent of the total shares of the red chip companies that are incorporated overseas. Chinese listed companies have been included in the Heng Seng index since 1997. Chinese companies issue equity securities in the USA in three ways: (1) through an IPO or American Depositary Receipts (ADR) in combination with a stock exchange listing which is reviewed by the US SEC; (2) by facilitating secondary trading in securities that USA investors purchased in overseas markets or that foreigners issued stocks to USA investors in private placement through the establishment of various ADR programs; (3) so-called “back door” transactions. The latter transactions involve a business combination where the shareholders of a Chinese company exchange their shares for shares in a USA shelf company that has already been registered under the Exchange Act (Luk, 2001). 2.2. Comparisons of corporate disclosure requirements An equity share issued in Mainland China must comply with the securities law, the company law and other regulations. The PRC Securities Law stipulated that when a Chinese enterprise directly or indirectly offers securities overseas and lists on a secondary market, it must be subject to the approval by the domestic securities regulatory authorities. First, listed companies must disclose their quarterly, half-yearly and annual financial reports within 45 days, two months and three months respectively after the end of each financial period. Second, the format and content of financial reports is to be compiled according to Chinese accounting standards and corporate disclosure requirements. Third, to enhance the overseas listing of Chinese enterprises, China has enacted legislation to protect investor which includes the “Special Regulation of the State Council on Raising Capital and Listing Overseas by Joint-Stock Company Limited” (1994), the “Compulsory Provisions of Companies for Overseas Listing” and the “Notice on Further Strengthening the Management of Overseas Equity Offering and Overseas Listing” (1997). To reinforce communication and regulatory cooperation, the CSRC has entered into a memorandum on regulatory cooperation with a number of overseas securities supervisory institutions and set up a regular liaison meeting system with Hong Kong securities regulation authorities. China is now working with relevant agencies on practical policies overseeing the operations of overseas listed companies. For the companies listed on the HKSE, issuers from the mainland are required to present a financial report conforming to applicable PRC rules, and containing a statement of the financial effect of material differences with the Hong Kong GAAP (Charltons, 2003). Chinese listed companies should publish annual reports and half-yearly reports within five months and three months respectively after the end of each fiscal year. Foreign private issuers need to file a special series of forms (called “F forms”) for those who publicly offer securities on the NYSE. However, the “F” form provides a slightly more liberal set of disclosure rules than the domestic requirements. The

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periodic reporting requirements applicable to foreign private issuers are more limited than those applicable to a USA issuer. First, foreign private issuers may report six months after the end of the fiscal year (rather than 90 days as the USA counterparts do). Second, they need not file quarterly reports on Form 10-Q or current reports on Form 8-K; they are only required to file “home country” reports annually under the cover of Form 20-K. Third, foreign private issuers are exempt from proxy rules and from the “short swing profits” rules applicable to USA issuers (Luk, 2001). Thus, the disparities are evident between regulations and listing choices that are faced by Chinese companies listed on domestic and foreign trading markets.

3. Hypothesis development 3.1. Earnings management and political costs Watts and Zimmerman (1986, p. 230) argue that, because corporations are particularly vulnerable to wealth-extracting political transfers in the form of legislation and/or regulation, companies may use earnings management to decrease net income in periods of increased political sensitivity. Leftwich (1994) contends that increased regulations and implementing of new regulatory policies will increase relevant costs associated with produced accounting information. He contends that restricting management’s choice of accounting rules for external reporting can impose costs on shareholders. A number of recent studies (Jones, 1991; Cahan et al., 1997; Han and Wang, 1998) provide evidence that firms use income reducing techniques to avert adverse public, legislative, or other political attention in periods of increased political exposure. Earnings management relates to the use of discretionary accounting accruals to manipulate reported earnings figures (Schipper, 1989; Jones, 1991). Income smoothing averts stakeholders’ concerns which arise from low reported operating profits. These concerns can relate to investors seeking dividends, lenders concerned about loan security, employees concerned about future employment prospects, suppliers and customers assessing future stability, or governments investigating unviable industries (Godfrey et al., 1999). Some studies (Aharony et al., 2000; Lin and Wei, 2000; Liu and Li, 2000) examined the evidence of earnings management and financial packaging prior to an Initial Public Offering (IPO) in Chinese listed companies. Aharony et al. (2000) revealed that earning returns peaked in the year that companies issued shares to the public and declined significantly thereafter in unprotected industries, but not in protected industries (e.g. energy, petrochemicals and raw materials) in the process of financial packaging in H-share and B-share companies. The results suggested that the protected industries are favoured by the state in the corporatisation selection process. The study of Lin and Wei (2000) found that reported earnings peaked one or two years before an IPO year and declined significantly in the IPO year. In addition, the study revealed that manufacturing firms had significant earnings management before an IPO. In contrast, utilities firms had significant less earnings management. It is speculated that multi-share status in Chinese listed companies has made companies experience dual corporate reporting systems which enables them to engage in income smoothing for capital raising purpose, as well as reduce political costs.

3.2. The impact of political costs on disclosure A number of recent studies argue that financial report disclosure is used as a tool to reduce sensitivity to political pressure as results of political costs hypothesis and earnings management (Patten, 1992; Blacconiere and Patten, 1994; Walden and Schwartz, 1997). In support of this claim, prior research (Deegan and Rankin, 1996; Patten, 2000, 2002) gives evidence that corporations appear to use disclosure to offset negative political reactions to poor environmental performance. In addition to the use of disclosure as a response to increased pressures, disclosure may also be used as a proactive policy tool. As discussed by Preston and Post (1975, p. 4), economic and social concerns, including corporate environmental responsibilities, are addressed through the public policy process. Within this context, Godfrey et al. (1999) assert that disclosure may be made with the intention of gaining an influential voice in public social policy decisions. In essence, firms may believe that by projecting an image of environmental concern and awareness they can reduce the likelihood of having negative government actions initiated or passed. Consistent with such claims, there is evidence of an association between market returns and higher levels of financial report environmental disclosure at the time of increased potential regulatory costs (Blacconiere and Patten, 1994; Patten and Nance, 1998). China has a tradition of direct government involvement in accounting regulations and financial policies-making as a result of a centrally planned economy. The autonomy of the accounting professional body is weak so that the Chinese Accounting Standard Committee (CASC) established in 1998 is viewed as a consultative body largely influenced by the Ministry of Finance (MOF) (Xiao et al., 2004). The influential power of a majority government or legal person shareholding (e.g. the State-Asset Management Bureau, or other departmental agencies) in listed companies, suggests that state ownership has a dominant place in listed companies’ business operations and resources allocation decisions. Therefore, the government is regarded as the main user of accounting information. Consequently, accounting standards and corporate disclosure regulations are developed to satisfy the demands of both internal institutional settings and external investors’ pressures. Accounting standards are intended as a mean of reducing government intervention into business affairs and implementing its open door policy (Xiao et al., 2004). The pressures for international accounting harmonization advocate that corporate disclosure practices of foreign-share companies incorporate internationally prevailing concepts and conventions and improve reporting understandability. 3.3. Hypotheses development This study investigates whether there are disclosure differences between A-share, AB-share, B-share and AH-share companies during the period 1992-2000. These multi-share categories confuse investors at times, because companies obey diverse accounting standards and follow various disclosure requirements. Companies that issued shares to foreign investors were required to adjust their annual reports according to the IFRS or the GAAP of overseas listing place. Therefore, there are observed earnings differences in annual reports of Chinese multiple share-type companies due to different GAAPs. There is also expected to have differences in the levels of corporate disclosure. More extensive disclosure requirements are expected by

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companies that issue B-shares and H-shares than those that issue A-shares because of competition for equity funds of foreign investors. Hence, H1 is: H1. The levels of disclosures are significantly different between A-share, AB-share, B-share and H-share companies.

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Prior research has found that certain corporate characteristics are associated with the level of disclosure in annual reports (Cooke, 1989; Raffournier, 1995; Mirshekary, 1999; Patton and Zelenka, 1997; Inchausti, 1997, Xiao et al., 2004). Corporate characteristics developed in this study include: company size (LOGASS), return on equity (ROE), leverage (LEVE), auditor size (AUDIT), industry (INDUS) and ownership diffusion (OWDI). Whether disclosure levels are associated in the same way to these corporate characteristics for Chinese listed companies with domestic compared to foreign shareholders – that is A-share, foreign-share including AB-share, B-share and AH-share companies – is a research question that has not been previously tested. The hypothesised relationship between corporate disclosure and corporate characteristics for Chinese listed companies is: H2. There are different associations between the levels of disclosures and corporate characteristics for A-share, AB-share, B-share and AH-share companies. 4. Research design Sample companies In this study observations of all Chinese companies that listed on domestic and overseas stock exchanges were carried out in the first stage. Listed companies have been selected because they are likely to attract the attention of investors who are interested in the quality of corporate disclosure in China and because financial reports and other data are publicly available. The sample is restricted to non-banking/finance companies and to those with a primary or significant interest in manufacturing activities in order to control for non-comparable financial structures or characteristics across industries. The sampled companies were classified into four groups: A-share, B-share, AB-share and AH-share companies. A-share companies are companies that issued A-shares only and are listed on domestic stock exchanges. AB-share companies are companies that issued A-shares and B-shares with an initial offering of A-shares. B-share companies are companies that issued B-shares only or A-shares and B-shares, but B-shares were initially issued. AB- and B-share companies are listed on domestic stock exchanges. AH-share companies are companies that issued A-shares and H-shares and are listed on both domestic and overseas stock exchanges: H-shares were an earlier issue. A total number of 191 sample companies were selected: A-share companies (69), AB-share companies (52), B-share companies (44) and AH-share companies (26) during 1992-2000. Data collection The CSRC required that all IPO companies must publish their information concerning stock issuing, half-yearly-report, annual report and reports of important events through particular newspapers, the stock exchange and the government web site. The prospectuses and annual reports of the sample companies in this study were collected

from government web sites (www.csrc.gov.cn, www.cnlist.com and www.cninfo.com. cn). Moreover, the prospectuses and annual reports can be sourced through the government nominated newspapers The Securities and the Chinese Securities Times. In addition, some companies provide databases of financial data relating to their securities trading and issuing – for example, Shenzheng Guotaian Co Ltd. For the purpose of consistency to compare information between companies, the prospectuses and annual reports collected in this study were in Chinese. Disclosure Index (DI) An unweighted dichotomous DI of 147 items, including mandatory and voluntary disclosure was categorised to measure the extent of disclosure. Items of DI are observed to determine whether or not they are disclosed in prospectuses and annual reports in order to calculate the disclosure score of assets. If the item was included in a prospectus or an annual report, the disclosure score was 1; otherwise the score was 0. By aggregating the number of disclosed items for each particular company the disclosure score was obtained. The extent of disclosure is the figure of the actual disclosure score (TD) divided by the maximum possible score (M). Independent variables Size. Company size has been regarded as the proxy of political costs. First, investors are likely to increase the credibility and mobility of securities if the disclosure level is improved. Diamond and Verrecchia (1991) found that greater disclosure reduced the transaction cost and increased the demand for a firm’s securities by enhancing stockmarket liquidity. Hossain et al. (1994) considered that larger organisations tended to be listed on a stock exchange and listing status motivated organisations to make greater disclosure in order to maintain or create demand for their securities. Second, larger corporations are more likely to voluntarily disclose financial information because they are more visible to the public and may potentially faced extra political costs – for example, increased regulation, the pressure from labour unions for increase wages, consumer boycotts and higher taxes (Watts and Zimmerman, 1978). Jensen and Meckling (1976) suggested that voluntary disclosure reduced a firm’s agency costs that are otherwise incurred to have bonding and monitoring arrangements. Agency theory predicts that voluntary disclosure by larger corporations will assist to reduce the potential of wealth transferring from outside capital suppliers to managers. Third, smaller corporations are reluctant to disclose full information to their competitors for strategic reasons so that they prefer to raise capital from inside fund providers and profit retentions. Small corporations are more likely to endanger their competitive position in the market relating to obtaining materials, reducing costs and improving production than their larger counterparts (Raffournier, 1995). Therefore, a company with larger size is likely to provide more financial information than a smaller company. Profitability. Raising capital from capital markets incurs significantly increased costs as opposed to raising capital from profit retention. There has been evident that corporations with a higher profitability have a greater ability to absorb increasing costs and a better competitive position from which to improve future performance (Singhvi and Desai, 1971; Wallace et al., 1994). In addition, corporations with higher returns would have a more stable and successful position which provides investors with more confidence in their price competitiveness. Henderson et al. (2004) have

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argued that companies with a higher rate of return have a greater ability to support the continuance of operations including management compensation, thereby increasing the worthiness of the company. Moreover, a higher rate of return gives a favourable perception of the quality of the company’s management. Watts and Zimmerman (1986) employing agency theory hypothesised that managers might voluntarily disclose more information to investors when a corporation had a higher rate of return in order to reduce agency costs by connecting their compensation plan with corporations’ performance. Hence, it is likely that a company with a higher rate of return is likely to provide more financial information. Leverage. The agency costs are higher for firms with higher level of leverage in their capital structure than those with lower leverage (Jensen and Meckling, 1976; Myers, 1977; Watts and Zimmerman, 1986; Hossain et al., 1994; Inchausti, 1997; Henderson et al., 2004). These studies observed that the owner-manager might potentially employ accounting policies to transfer wealth from debt-holders because of opportunistic behaviour under positive accounting theory. Consequently, debt-holders might include appropriate covenants in the debt contract concerning debt restriction and asset restriction. Since there is no separate reporting other than annual reports to demonstrate a company’s debt covenants compliance, including the credibility of its investing and borrowing activities, to debt-holders, the company management might disclose relevant and sufficient information in their annual reports to increase debtors’ confidence in a company with a higher debt ratio. In addition, in order to enhance the marketability of securities, companies that publicly issue shares might increase the information disclosure (Singhvi and Desai, 1971; Courtis, 1979). The higher the level of information disclosure, the easier it was for corporations with a higher leverage of public bond to trade their securities. Choi (1973), in particular, found that the level of company disclosure increased prior to entering the Euro-capital market. Salammon and Dhaliwal (1980) showed that companies with long-term external capital were most likely to disclose segmental information voluntarily. Courtis’s (1979) study showed a significant association between leverage and the level of annual report disclosure. Thus, it is expected in this study that a company with a higher level of leverage will disclose more information than one with lower level of leverage. Auditor. Agency theory holds that auditing helps to alleviate the interest conflicts between management and investors. Generally, because they have more to lose from damage to their reputations, larger audit firms have a stronger incentive to maintain their independence and to impose more stringent and extensive disclosure standards (DeAngelo, 1981; Malone et al., 1993). Hence, larger auditor firms are more likely to be hired by managements that can get greater potential gains from external monitoring. The reasoning is that managers are cognizant of larger auditors’ incentives to demand higher quality disclosure, and engagement of such auditors is a signal of their acceptance of such demands (Datar et al., 1991; Healy and Palepu, 2001). The findings of Craswell and Taylor (1992) and Inchausti (1997) support this inference of a positive relationship between firms employing larger auditors and their levels of disclosure. Given this literature, it is argued that large auditors, especially the Big four international audit firms, are more likely to elicit the confidence of investors as compared to smaller or Chinese domestic auditors. First, these large auditors’

reputations can provide some protection against the uncertainty and loss of control from disclosing via the reports. Second, they can both serve as role models and provide implementation assistance. Combining agency theory, signalling and political costs considerations, it is argued in this study that the extent of corporate disclosure will be greater among Chinese companies audited by the big international audit firms. Industry. Many studies have discussed the influence of industry on the extent of information such as Cooke (1992), Djoko (1992), Wallace et al. (1994), Raffournier (1995), Inchausti (1997), Patton and Zelenka (1997) and Owusu-Ansah (1998). Cooke (1992) reported that the levels of disclosure in corporate annual reports are not likely to be identical throughout all sectors of the economy. Different countries promulgate industrial development policies that lead to an uneven development in their industrial sectors. In the case of Japan, Cooke (1992) found that manufacturing companies disclosed more information than non-manufacturing companies. The international exposure of a country’s manufacturing sector may affect the level of disclosure in annual reports, and this facet differs from other sectors. Wallace et al. (1994) stated that companies in a particular industry might adopt additional regulations in disclosure practices that were not mandatory for companies in all industries. Owusu-Ansah (1998) reported that the disclosure in certain industries might be different depending on the nature of the work involved. For example, oil companies are known to have difficulty in recording depreciation, depletion and exploration of land. In addition, the type of product line and the diversity of product might also influence differential disclosure. Owusu-Ansah (1998) considered that a company dealing with many products might tend to disclose more information than one with a small line and few products. Hence, it is expected that companies in the manufacturing industry will disclose more information that non-manufacturing industry. Ownership structure. Agency theory investigated by the studies of Jensen and Meckling (1976) and Fama and Jensen (1983) showed that companies with widely held shares attracted more potential interest than whose shares are closely held. Since annual reports are the main source of information for investors, management may have an incentive to provide more information to show that they are acting in a manner consistent with the interests of shareholders. In addition, the costs brought about by the separation of ownership and control have generated conflicts of interest between managers and shareholders. Owusu-Ansah (1998) reported that the costs of making information for internal decision-making purposes tend to be transferred to outside users. Therefore, it is expected that a widely held company is likely to have the ability to reduce the preparation cost and, therefore, increase information disclosure in its financial reports. There has been a mixture of findings relating to ownership diffusion. Ruland et al. (1990) found that there was a significant relationship between voluntary disclosure, manager forecast and ownership structure. Djoko (1992) revealed that the extent of voluntary corporate disclosure was greater for foreign-based companies than their domestic counterparts. Mirshekary (1999) discussed the influence of government ownership on disclosure. Xiao et al. (2004) found that internet-based disclosure of Chinese listed companies were negatively associated with domestic share-ownership, positively related to legal person ownership and foreign-based ownership, and no relationship with individual shareholders.

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5. Results 5.1. Hypotheses testing Student F-test was used to test the differences of levels of disclosure between various shareholder categories in this study. The F-test compares the observed differences between the means of sample groups. The t statistic and probability values are produced to indicate significant differences between groups. The probability value is critical at the 0.05 level. The study rejects the null hypothesis when the probability value is less than the 0.05 level, indicating that there are significant differences in disclosure between companies with different shareholder categories. Figure 1 shows the mean of overall disclosure levels among the four types of companies in three periods. During 1992-2000 the average disclosure level for the entire sample companies was 26.95 per cent. The average disclosure levels were 23.95 per cent for A-share companies and 30.78 per cent for AH-share companies. The highest disclosure level was for B-share companies (31.50 per cent). During 1992-1996 the average of overall disclosure level was 23.18 per cent. The highest disclosure levels were AH-share companies (28.39 per cent), and the lowest disclosure was for A-share companies (20.06 per cent). The average disclosure level during 1997-2000 was 34.48 per cent. The disclosure levels for B-share (34.43 per cent) and AH-share (35.86 per cent) companies were higher than those of A-share companies (29.49 per cent). There were no AB-share companies in the sample during this period. Table I reveals the result of Student’s F-test to examine the disclosure by sample companies according to different categories of shareholders. The average disclosure level of B-share and AH-share companies was higher than that of A-share companies. Furthermore, the study observed the divergences in detail for the periods 1992-1996 and 1997-2000. To eliminate the effect of time of issue, the sample companies were

Figure 1. Mean disclosure levels of companies with various shareholder categories (1992-2000)

Table I. Mean differences and F-test between companies

1992-1996 1997-2000 1992-2000

A-shares

AB-shares

B-shares

AH-shares

20.0573 29.4931 23.9533

22.2322

27.7755 34.4303 31.4956

28.3937 35.8559 30.7771

22.2322

One-way ANOVA test F statistics Significance 33.092 12.015 47.015

0.000 0.000 0.000

classified into two groups: those issuing equity before 1997 and those after. The results of Student F-test in Table I show that there are significant differences in the disclosure levels between A-share, AB-share, B-share and AH-share companies in the three periods at the 0.01 level. Therefore, H1 that the levels of disclosures are significantly different between A-share, AB-share, B-share and AH-share companies, is accepted.

Determinants of disclosures

5.2. Multi-regression analysis Model development. The dependent variable in this study is the extent of asset disclosure. To investigate the impact of political costs, earning management and institutional setting on corporate disclosure, the dependent variables in the model are divided into three disclosure indices: indices of overall companies, domestic-share companies and foreign-share companies. The independent variables in this study are corporate characteristics: company size (LOGASS), return on equity (ROE), leverage (LEVE), auditor size category (AUDIT), industry category (INDUS) and ownership diffusion (OWDI). A multi-regression model is established based on the development of dependent and independent variables.

85

DI ¼ a þ b1 LOGASSi þ b2 ROEi þ b3 LEVEi þ b4 AUDITi þ b5 INDUSi þ b6 OWDIi þ1 where: DI

¼ disclosure index.

LOGASSi

¼ log of total assets.

ROEi

¼ return on equity, ratio of net profit after tax to shareholders’ equity.

LEVEi

¼ ratio of total debts to the book value of total assets.

AUDITi

¼ 1 if company is audited by international accounting firm, otherwise 0.

INDUSi

¼ 1 if company is manufacturing, otherwise 0.

OWDIi

¼ ratio of the number of shares held by the top ten shareholders to the number of ordinary outstanding shares.

1

¼ residual error.

a

¼ the constant.

bi

¼ regression coefficients of impendent variables 1 to 6.

i

¼ 1, 2, . . . , N and indicated the ith IPO in the sample.

Tables II –IV presents the results of multi-regression analysis of the relationship between asset disclosure and corporate characteristics. Model 1 tests the relationship for all sampled companies. The independent variables explain 41.3 per cent of the variance in the level of overall disclosure through the coefficient of adjusted R-squared. The relationship between dependent and independent variables is significant since the F statistic (21.594) is significant at a probability level of 0.001. The results indicate that

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Table II. Multi-regression results for asset disclosures – Model 1 – total sample: the results of single-step entry regression for DI

Table III. Multi-regression results for asset disclosures – Model 2 – Domestic share-type only: the results of single-step entry regression for DI

Table IV. Multi-regression results for asset disclosures – Model 3 – foreign share-type only: the results of single-step entry regression for DI

LOGASS, ROE and AUDIT are significantly related to the level of overall disclosure for sampled companies at the 0.05, 0.001 and 0.001 levels respectively. Model 2 tests the relationship in sampled companies for domestic-share based companies only. The independent variables explain 24.7 per cent of the variance in the level of overall disclosure through the coefficient of adjusted R-squared. The relationship between dependent and independent variables is significant since the F statistic (4.219) is significant at a probability level of 0.001. The results indicate that LOGASS, ROE and OWDI significantly influence the level of overall disclosure for domestic companies at the 0.005, 0.05 and 0.01 levels respectively.

Variable

Coefficients

Beta

T

p-value

Constant LOGASS ROE LEVE AUDIT INDUS OWDI

10.075 4.418 20.353 4.637E-02 9.469 1.236 2.219E-02

0.179 2 0.225 0.076 0.404 0.058 0.029

1.224 2.580 23.801 1.283 5.906 1.023 0.478

0.223 0.011 0.000 0.201 0.000 0.308 0.634

Notes: Model 1 DI¼10.08þ0.042LOGASS 2 0.004 ROE +0.0947 AUDIT; R square¼0.643, Adjusted R square¼0.413, F¼21.594, p-value¼0.000, Durbin-Watson¼1.174

Variable

Coefficients

Beta

T

p-value

Constant LOGASS ROE LEVE INDUS OWDI

2 27.319 10.923 2 0.357 1.731E-02 1.788 0.146

0.346 2 0.233 0.032 0.095 0.190

21.543 3.002 22.083 0.279 0.865 1.711

0.128 0.004 0.041 0.781 0.391 0.092

Notes: Model 2 DI¼ 2 0.273þ0.109 LOGASS 2 0.004 ROEþ0.0001 OWDI; R square¼0.497, Adjusted R square¼0.247, F¼4.219, p-value¼0.000, Durbin-Watson¼1.407

Variable

Coefficients

Beta

T

p-value

Constant LOGASS ROE LEVE AUDIT INDUS OWDI

14.652 3.531 20.250 5.995E-02 13.272 0.867 24.348E-02

0.144 2 0.161 0.091 0.575 0.039 2 0.058

1.606 1.893 22.221 1.375 7.265 0.607 20.820

0.111 0.061 0.028 0.172 0.000 0.545 0.414

Notes: Model 3 DI¼0.147þ0.036 LOGASS 2 0.003 ROE þ0.113 AUDIT; R square¼0.531, Adjusted R square¼0.507, F¼21.737, p-value¼0.000, Durbin-Watson¼1.495

Model 3 tests the relationship in sampled companies with foreign-share based companies. The independent variables explain 50.7 per cent of the variance in the level of overall disclosure through the coefficient of adjusted R-squared. The relationship between dependent and independent variables is significant since the F statistic (21.737) is significant a probability of 0.001. The results indicate that LOGASS, ROE and AUDIT significantly relate to level of overall disclosure for sampled foreign-share companies at the 0.01, 0.05 and 0.001 level respectively. The results in Tables II-IV support H2 that there are different relationships between the levels of disclosures and corporate characteristics for A-, AB-, B- and AH-share companies. But the acceptance of H2 applies for the corporate characteristics of LOGASS, ROE and to a lesser extent, AUDIT and OWDI. 6. Discussions and conclusions The evidence of H1 suggested systematic differences in financial disclosure and reporting among various groups of companies. For instance, B- and AH-share companies disclosed 31.5 per cent and 30.78 per cent of investigated items in their annual reports. In contrast, A- and AB-share companies disclosed 23.95 per cent and 22.23 per cent respectively. Therefore, B-share and AH-share companies provided more transparent information than A- and AB-share companies. Companies with foreign shareholders disclosed more information (36.49 per cent) than those with domestic investors only (32.79 per cent). The findings can be explained as follows. First, firms with both B- and H-shares disclose more information than those with only A-shares because the state has incentives to showcase the former on international capital markets (Ferguson et al., 2002). Second, companies with foreign investment participation and overseas listing status will employ the IFRSs or the GAAP of the listing country to adjust annual reports, these companies increased information disclosure voluntarily in their annual reports in order to enhance their reputation and credibility. Several factors have been identified by the extant literature as being relevant to voluntary disclosure levels. Firm size (LOGASS) was included because larger firms are subject to more public and regulatory scrutiny (Watts and Zimmerman, 1986) and thus are likely to voluntarily disclose more information to muster public support for reducing political costs and to raise capital (Chow and Wong-Boren, 1987; Lang and Lundholm, 1993). The finding of H2 is consistent with the results of prior studies by Ettredge et al. (2002), Debreceny et al. (2002), and Ferguson et al. (2002) relating to Chinese listed companies’ financial disclosures in annual reports. Firm profitability was included because managers of profitable firms have greater incentives to disclose information to support the continuance of their positions and compensation arrangements (Wallace et al., 1994; Inchausti, 1997) and to attract capital or to reduce the risk of being undervalued by the market (Grossman and Hart, 1980). The results in Tables II-IV provide evidence that the higher the firm’s ROE, the less its disclosure. This result was found in the annual reports of both domestic share-category companies and foreign share-category companies. It is an unexpected result because it is in the opposite of that predicted traditional information economics theorems. A possible reason is that firms with foreign shareholders and overseas listing status faced more political exposure due to increased corporate disclosure regulations and

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political influence may intend to minimise that costs by choosing ways to smooth operating profit and manage earnings. The findings in Tables II-IV also show that for companies employing international accounting firms are likely to provide more transparent information in reports. This result is consistent with agency theory that auditing helps to alleviate the interest conflicts between management and investors in companies. It is more apparent in companies with the involvement of foreign investment because they are more distant and have difficulties in understanding domestic standards. The larger audit firms have a stronger incentive to maintain their independence and to impose more stringent and extensive disclosure standards (DeAngelo, 1981; Malone et al., 1993). In addition, larger auditors are more likely to be hired by managements who are cognizant of the signal of disclosure quality that larger auditors generate in the securities market (Datar et al., 1991; Healy and Palepu, 2001). The study’s final finding applies to companies with domestic investors only – the higher the level of ownership concentration, the higher the level of disclosure. The reason is that Chinese listed companies traditionally have more state-owned shares and legal or institutional-shares than individual owned shares. Thus, the greater availability of corporate information serves to improve the confidence of state in its power over the company’s resources allocation, while showing the efficiency of business operations in order to increase the willingness of other current and potential domestic investors to entrust their resources to the corporate sector. References Aharony, J., Lee, C.J. and Wong, T.J. (2000), “Financial package of IPO firms in China”, Journal of Accounting Research, Vol. 38 No. 1, pp. 103-26. Belkaoui, A. and Karpik, P.G. (1989), “Determinants of the corporate decision to disclose social information”, Accounting, Auditing & Accountability Journal, Vol. 2 No. 1, pp. 36-51. Blacconiere, W.G. and Patten, D.M. (1994), “Environmental disclosures, regulatory costs and changes in firm value”, Journal of Accounting and Economics, Vol. 18 No. 3, pp. 357-77. Cahan, S.F., Chavis, B.M. and Elmendorf, R.G. (1997), “Earnings management of chemical firms in response to political costs from environmental legislation”, Journal of Accounting, Auditing & Finance, Vol. 12 No. 1, pp. 37-65. Charltons, L. (2003) Vol. 24, ‘Introduction to the listing of H shares of PRC companies on the Stock Exchange of Hong Kong Limited”, available at: www.google.com.au (accessed 24 April 2003). Chen, G., Firth, M. and Kim, J. (2002), “The use of accounting information for the valuation of dual-class shares listed on China’s stock markets”, Accounting and Business Research, Vol. 32 No. 3, pp. 123-31. China Securities Regulatory Commission (CSRC) (1993), Company Law (The People’s Republic of China – revised in 1999 and China Securities Regulatory Commission, Beijing, available at: www.csrc.com.cn/cn/jsp/detail.jsp?infoid=1059824136100&type=CMS.STD&path= ROOT %3ECN%3E%B7%A8%C2%C9%B7%A8%B9%E6%3E%B9%FA%BC%D2% B7%A8%C2%C9 (accessed 23 November 2004). China Securities Regulatory Commission (CSRC) (2006), available at: www.csrc.com.cn/cn/ statinfo/index.jsp?path=ROOT . CN . %CD%B3%BC%C6%D0%C5%CF%A2 (accessed 20 July 2006).

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Further reading Milne, M. (2002), “Positive accounting theory, political costs and social disclosure analyses: a critical look”, Critical Perspectives on Accounting, Vol. 13, pp. 369-95. Patten, D.M. and Trompeter, G. (2003), “Corporate responses to political costs: an examination of the relation between environmental disclosure and earnings management”, Journal of Accounting and Public Policy, Vol. 22, pp. 83-94. Winkle, G.M., Huss, H.F. and Zhu, X. (1994), “Accounting standards in the People’s Republic of China: responding to economic reforms”, Accounting Horizons, Vol. 8, pp. 48-57. Corresponding author Jinghui Liu can be contacted at: [email protected]

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