China Is Known as an Awakening Giant Country

As a matter of fact, China is known as an awakening giant country. With the current population, accounting for 1.2 billion, there will be twenty Chinese people for each Great Britain citizen. During more than fifty years, the nation has undergone a sequence of main transformations in terms of economics, politics and society, specifically, in 1949 with the Communist foundation of Chinese Republic of People, in period of 1958-1962 with the Great Leap Forward, in period of 1966-1976 with the Great Proletarian Cultural Revolution and the reforms of economics alongside open-door policy since 1979 (Kirkbride et al., 1991; Solas and Ayhan, 2007; Zhu and Ma, 2010). Accounting, originated in the emergence of Chinese society, cannot keep immune from its significant transformations. Actually, it is estimated that now there are about 10 million of Chinese persons who work within the accounting-related professions (Eccher and Healy, 2000, pp. 98). Moreover, because China is a quick-developing nation, thus the occupations of accounting has been also experiencing via a period of fast development. Virtually, the environment of society, culture and economics where firms run their businesses has great impact on Chinese accounting. Furthermore, when China has been a centrally controlled economy (Wu and Kao, 2006, pp. 98), there have considerable differences between its accounting practices and those in Western nations.

The purpose of this essay is to provide firstly a brief history of accounting and its traditional use in China associated with thorough discussions of some considerable changes that happened and reasons resulting in such main changes. After that, the essay also analyze the institutional and cultural factors which consequence in the implementation of International Financial Reporting Standards (IFRS) with regarding to Hofstede model.

First and foremost, the essay will discuss the brief history of accounting development in China. According to ICAS (2010), since China reformed its economy from planned to market in 1978, Chinese accounting system has changed dramatically. Before the beginning of the economic reform, Chinese uniform accounting system took counsel from the one of Soviet Union and it was built to mainly boost its planned economy system. A real accounting system of external financial reporting does not exist as believed. After the economic reform in 1978, Hwang (1987) believed that sudden transformations happened in the economy of China. Initially, there has been significant decrease in its government intervention, specifically, the current management of the state focuses merely on macro-economy instead of both macro and micro-economy (Hwang and Staley, 2005). Secondly, there has been redefinition in the relationship concerned with ownership amongst state-owned firms and local government. Thus, the Chinese state has become aware of a specific investor within the firms and made responsibility for the debts of firms that is limited by the number of capital (Solas and Ayhan, 2007). Otherwise, companies seem to have their own legal position with property rights and independence of civil liabilities. Thirdly, there has been a growth in the market’s role. The flourish is happening amongst thousands of Chinese firms, ranging from joint ventures, share-owned organizations to township companies. As a consequence, Xu and Xu (2003) see that such transformations have made remarkable changes for Chinese accounting. The accounting system was increasingly demanded so a lot of investors and shareholders were attracted to China. Firms have become free, in lots of cases, anxious to follow the adaption to the management techniques in Western regions. In 1990, there appeared the first stock exchange in Shanghai, more information was demand to make decision; therefore, Chinese accounting system was somewhat liberalized though being selective (Tang et al., 1999).

As for Tang (2000), accounting was also historically reformed in 1992 in China. Market based approach was permitted along with China's Ministry of Finance's promulgation of the Enterprise Accounting System which mainly originated from western accounting for external reporting that help users to make investment decision (Solas and Ayhan, 2007). That is how Chinese accounting regulation started. Responding to the difficulty to develop market, China issued new accounting standards. Its accounting standard was believed to be the most important factor as it was kept updated and similar to IASs of western accounting (Rich, 2011). Through Enterprise Accounting System starting in 2000, China aimed to become a WTO member in 2001 and get more chances to enter the international market as well as practice. Moreover, in 2007, so as to attract the investment and help its companies enter the world capital market, Chinese New Accounting System for Business Enterprises was harmonized and reviewed so practice harmonized with IFRS and become similar to Western accounting (Zhu and Ma, 2010). That is hoped to gradually converge with IASs in the future.

        In addition to the history of Chinese accounting development, it is necessary to highly concern about its institutional and cultural factors which result in the implementation of IFRS in China. The first factor needed to be strongly-focused is “institutional”. Xiao et al. (2004) propose that in the context of global harmonization, China desires its accounting system to be closer to IFRS. The harmonization, nevertheless, does not always succeed in China due to the accounting environment, unqualified accountant and the way that new accounting standards are implemented (Tang, 2000). These problems are believed to make accounting information distorted, the profit manipulated, socialist market economy order and long-term development of businesses destructed.

A lot of research indicates accounting information in China is made less reliable due to its political and institutional factors (Wu and Kao, 2006; Lehman, 2009). As China is a country of high centralization and has only one party, its accounting standards was politically built and controlled mainly by government. Its CICPA is also affected by government and independent less on IASs. Furthermore, almost local auditing companies and listed firms in China are state-owned and government agency, so auditors do not concern much about independence which is a cause of corruption and the overstating of earnings to make up the financial statement when assessing state-owned firms' performance (Lin et al., 2001; Sun, 2010). Nevertheless, since it is a nation with public ownership system and stated-owned economy, accounting and its information are mainly used by the State in China. Because the accounting standards and policies need to harmonize with the government need and macroeconomic decision, Roberts et al. (2008) think that the government should be the one to set up the standards of accounting controlled by accounting profession. Moreover, it is proved to be the most effective way and suitable with the Chinese condition for the government to be the key body of the accounting form. At the moment, Ding and Su (2008) proposed that China had better maintain a strong and centralized planning system instead of the independence of accounting standards in western countries for successful implementation and growth. In terms of economic system, it is recommended by Wei (2012) that the IFRS/IASs are mainly based on the context of the developed and private market economy in western countries while China has just changed to market economy and still a developing country (ICAS, 2010). It is not always suitable to apply the IFRs/IASs in particular economic environment in China. For instance, if the “fair value” of the IASs was imported when China's market economy is not perfect, the profit would be manipulated (Nobes and Parker, 2010).