CPAs in China: Fascinating Similarities and Differences

By Edwin J. Kliegman

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I hadn’t made an appointment and my visit hadn’t been cleared through the Minister of Finance, but through my guide (and interpreter) I explained that I was a CPA visiting from the United States interested in the profession as practiced in China.

After some pleading, cajoling, and wheedling, Liu Aiu, director of the international department, agreed to a telephone interview.

Evolution of Accounting in China

The Chinese Institute of Certified Public Accountants, established in 1988 as an extension of the government of the People’s Republic of China (PRC), licenses CPAs. Between 1995 and 2002, the State Council required the organization to join with the China Association of Certified Public Auditors, the Asset Evaluation Profession, and the Certified Public Tax Agent Profession, to place the entire accounting profession under the same leadership.

Receiving the CPA certificate requires earning a college degree, passing a uniform examination, completing at least two years experience of independent auditing in China, and becoming a member of the CICPA. CPAs are required to complete 120 hours of CPE every three years.

The Ministry of Finance oversees the activities of the profession. The CICPA enforces the rules and regulations, sets and implements accounting and auditing standards, administers the uniform CPA examination, and enforces ethics and discipline as set forth in its bylaws. The CPA examination covers accounting, auditing, finance, taxation, and law.

In many ways, the CPA profession in China mirrors that of the United States under the Sarbanes-Oxley Act. In the area of enforcement of rules, regulations, standards, and ethics, China appears to exert more control than the United States. In the opinion of the CPAs that I interviewed, an Enron-type disaster would not happen in China, and if it did, those involved would be punished severely and very quickly.

The Chinese Institute of CPAs is responsible for areas that include the following:

• Organizing national unified CPA exams;
• Preparing professional standards and rules for CPAs;
• Safeguarding the legitimate rights and interests of CPAs;
• Monitoring and reviewing the implementation of CPA professional standards and rules; and
• Conducting annual reviews of CPA qualifications and practices.

The mission of the CICPA is serving, supervising, regulating, and coordinating the activities of the CPA profession. It stresses professional ethics, adhering to professional standards, not making false accounts, and creating a professional image of independence and impartiality.

Similar to CPAs in the United States CPAs in China conduct audits, prepare tax returns, do management consulting, and represent clients in disputes with the government in tax matters. Large CPA firms work with clients on IPOs, doing the required auditing and preparation necessary to take a company public. In addition, they do special auditing, such as verification of paid-in capital, net asset verification, internal audits, and working with legal counsel on judicial matters. All businesses require the services of a CPA in order to complete their year-end tax reports as required by the government.

China embarked on development of the CPA profession only about 25 years ago, and the profession has a promising future. The country currently has about 170,000 state-owned enterprises and more than 2.2 million private businesses, and it is growing by leaps and bounds. Not many CPA firms are capable of satisfying the needs of these organizations.

Accountancy is an appealing occupation to many young people in China. More than 500,000 candidates sit for the uniform CPA exam each year, many of them women. CPAs are highly regarded by the public and, as in the United States, are considered trusted professionals.

New clients engage firms based on their reputation, and also through introductions made from personal contacts and recommendations. Advertising and solicitation are prohibited. Employees leaving an accounting firm cannot “steal” clients. Rules on conflicts of interest and independence are strictly observed and enforced. For example, a firm is prohibited from auditing an organization for which it has performed write-up services.

China’s Oldest Firm: Shanghai Certified Public Accountants

There are about 2,600 CPAs in Shanghai. Unlike the United States, which has a shortage of applicants for accounting jobs, China has a plentiful supply of candidates. If a firm needs 20 people for a position, 200 might apply.

In Shanghai, I had the privilege and honor of meeting with Hui-Yong Xu, CPA. He is a founding partner of the firm Shanghai Certified Public Accountants. He has retired from active practice but remains a senior advisor to the firm and maintains an active role in the profession as vice president of the Shanghai Auditing Society, executive director of the Shanghai Institute of CPAs, and an advisor of the Shanghai Accounting Society. A charming gentleman, who understands English perfectly but speaks it only hesitatingly, Xu preferred to conduct the interview primarily in Chinese.

Shanghai Certified Public Accountants (SCPA) was the first accounting firm established in China, as authorized by the PRC Minister of Finance. It remains one of the few accounting firms qualified and approved by the Ministry of Finance and the China Securities Regulatory Administration Committee to audit listed companies. It is also one of the A-class accounting firms authorized to deal with assets appraisal, as approved by the National Administrative Bureau of State Assets.

As one of the country’s largest CPA firms, SCPA has 20 partners and 160 total staff, including 62 CPAs. The firm occupies an entire floor of the WenXin United Press Tower, a striking new building in the heart of Shanghai with well-appointed, modern offices and up-to-the-minute equipment.

Since it was founded in 1981, the firm has adhered to the principle of “Independence, Objectivity and Impartiality.” SCPA is a full-service organization and much the same as firms of similar size in the United States. Clients include foreign-invested companies, joint-stock organizations, publicly listed companies, private enterprises, and state-owned enterprises. It serves the manufacturing, commercial, transportation, real estate, hotel, finance trust investment, and securities sectors. The firm’s scope of service includes annual auditing, capital verifications, profit-forecast auditing, management consulting, asset appraisal, accounting consulting, financial feasibility study of investment, and professional training. Adapting to the developing economic situation, SCPA recently established a firm, Shanghai Assets Appraisal Company Limited, to accept trusts for asset appraisal.

The firm does not provide personal financial planning services. On request it will accept planning engagements for business clients, but is extremely careful not to cross the lines that might affect its independence. SCPA places great emphasis on the quality of operation and service, the upholding of professional morality, and ceaseless expansion of service scope.

Shanghai Certified Public Accountants has a working relationship with Deloitte, and it also services specific cases and situations for other foreign accounting firms and has reciprocal relationships with firms that deal outside of China.

Visiting Yichang

In the port city of Yichang, which has more than 300 accounting firms, I met with the manager and a staff member of HubeiYuhua Certified Public Accountants, Ltd. The firm consists of five partners and about 45 staff operating in four cities, performing audits, taxes, asset appraisals, initial registrations of new businesses, financial statements, and business consulting. I was told that competition for new clients is very fierce.

Here I learned that a good deal of new accounting business in China comes from the government. When the government wants to sell an enterprise to a private organization, a CPA must appraise the assets. The government pays the CPA’s fee for the appraisal, and after the business is privatized, the business pays it back. Registering a business requires government approval. The first step in the process is for a CPA to prepare the necessary forms and documents, including an appraisal of assets. Each year, a business must file both a financial statement and a tax return. There are two types of returns, one for service organizations, another for manufacturing concerns. Individuals must file personal income tax returns as well, but nowhere during my trip did I see storefront tax preparers.

At HubeiYuhua they showed me an audit report in the final stages of completion. A major difference between China (and other countries) and the United States is the depth and volume of the audit report. The full report that I saw consisted of more than 80 pages and covered all aspects of the business. Parts were in English because an American firm was an investor.

Expanding Market, Enormous Potential

During my trip, I learned that the Chinese accounting market is expanding rapidly and holds enormous potential. The national economy has been enjoying strong growth, and as the economy grows, so does the need for accounting services. Despite the strong competition among smaller firms for new business, few firms can satisfy the need for the level of service that large firms provide. The government is liberalizing the accounting market by permitting overseas accounting firms to set up offices and encouraging them to carry out audits in China.

The visit to China was exciting and informative, and my meetings with Chinese CPAs were delightful. It is fascinating to learn that there are so many similarities of practice, problems, and opportunities.