Every four years, the International Federation of Accountants (IFAC) organizes the World Congress of Accountants.1 Accountants from across the globe attend this meeting to share their views on major issues and challenges facing their profession. In November 2002, the People’s Republic of China hosted the World Congress of Accountants for the first time in the nation’s history. Premier Zhu Rongji, the second-highest ranking official in the Chinese government, delivered the welcoming speech during the opening ceremonies. In his remarks, Premier Zhu, long known for his candid, if not blunt, manner, spoke openly of the embarrassing series of financial scandals that had created a major credibility crisis for the worldwide accounting profession over the previous decade. Premier Zhu pointed out that many of those accounting scandals had involved Chinese firms, a fact that Western journalists had largely ignored.

Similar to political leaders in many Western countries in recent years, Premier Zhu called on the accounting profession to reform itself and restore its credibility with the investing and lending public. He reminded the participants in the conference that “honesty and trustworthiness” are the lifeblood of the accounting profession.2 Premier Zhu also assured those present that China was committed to “the cultivation of professional ethics among accountants” and, even more importantly, to creating a modern and transparent financial reporting system. For several millennia, a series of family dynasties ruled China; these included most notably the Han, Ming, and Qing Dynasties. The collapse of the Qing Dynasty in 1912 led to the creation of the Republic of China that was dominated by a political party known as the Kuomintang or National Party. For four years following the end of World War II, a bloody civil war ensued between forces loyal to Chiang Kai-shek, the leader of the National Party, and the increasingly popular Communist Party led by Mao Zedong and his top subordinate, Zhou Enlai. In 1949, the Communist Party gained control of the country, forcing Chiang Kai-shek and his followers into exile on the island of Taiwan. On October 1, 1949, the Communist country was renamed the People’s Republic of China.
Mao immediately installed a Marxist regime in China under which the central government controlled practically all of the nation’s economic resources. To revitalize China’s economy that had been decimated by World War II and the Chinese civil war, Mao implemented a series of economic programs, most notably the “Great Leap Forward,” that were intended to convert the nation’s largely agricultural economy into a modern industrial economy. These programs were dismal failures, leaving China’s economy in disarray and the country’s citizens with a miserable standard of living.

In 1966, Mao launched the “Great Proletarian Cultural Revolution,” more commonly referred to by historians as the “Cultural Revolution.”4 This sweeping set of social and economic reforms was intended to rid China of the “liberal bourgeoisie” that was allegedly undermining Mao’s efforts to establish a utopian, Communistic society controlled by the working class. In reality, the Cultural Revolution was a desperate attempt by Mao to divert attention from his failed economic policies, while at the same time reaffirming his position as China’s supreme leader. From 1966 through 1976, an estimated 500,000 Chinese citizens were executed and millions more exiled and persecuted at the hands of Mao’s supporters. Following Mao’s death in 1976, several political figures wrestled for control of the country. Eventually, Deng Xiaoping established himself as China’s unchallenged new leader, although he never officially held the top position in China’s central government. Deng renounced the economic and social policies implemented by Mao during the Great Leap Forward and the Cultural Revolution. To raise China’s standard of living, Deng replaced the nation’s Soviet-style “command economy” with a “socialistic market economy.” Under China’s new economic system, the nation’s central government, which was still controlled by the Communist Party, would allow private enterprises to compete with state-owned enterprises (SOEs) across many sectors of the economy. Another critical element of Deng’s economic blueprint was encouraging foreign companies to invest in China, a complete reversal of Mao’s “closed door” policy. Deng especially encouraged large multinational corporations based in the United States and other Western countries to finance joint business ventures with Chinese SOEs.

In 1980, Deng emphatically endorsed his new economic plan for China, while at the same time shocking Communist allies and democratic societies around the world, when he proclaimed that “to be rich is to be glorious.” Over the next three decades, Deng’s economic policies, which remained in effect after his death in 1997, triggered an explosion of economic activity within China. By 2005, state-controlled enterprises accounted for only one-third of the nation’s annual gross domestic product (GDP). Although still “poor” relative to common economic benchmarks, most Chinese citizens experienced a dramatic improvement in their standard of living under their nation’s new “mixed” economy. Economists predict that by 2020 China’s GDP will surpass that of Japan, making it the second-largest economy in the world. Those same economists project that by the midpoint of the twenty-first century, China’s GDP will overtake that of the United States........

Questions 

1. Research relevant databases to identify important recent developments within China’s accounting profession, including the nation’s independent audit function. Summarize these developments in a bullet format.

2. Since ethical and moral values vary from culture to culture and nation to nation, does this mean that a global profession, such as the accounting profession, cannot have a uniform ethical code? Explain.

3. How, if at all, do financial reporting objectives differ between a free market economy and a “socialistic market economy”? Explain. Are there specific accounting concepts or principles that are more or less relevant in a free market economy than in a socialistic market economy? If so, identify those concepts or principles and briefly explain your rationale.

4. Consider two organizations that require annual independent audits.
Organization A is a Chinese SOE with a minority ownership interest of 20 percent, while Organization B is a U.S. company of similar size operating in the same industry. The common stock of both entities is traded on a domestic stock exchange and each is audited by a Big Four firm. List specific differences that you might expect in the independent audits of these two organizations. Ceteris paribus, would you expect more “audit failures” for SOE audit clients than for similar U.S. audit clients? Defend your answer.

5. What recommendations would you make to Big Four firms to help them (1)
avoid confrontations with governmental officials in an authoritarian society and (2) deal effectively with such confrontations that do arise?