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8Ed.sol8.05 - CASE 8.5 ZUAN YAN Synopsis In the late 1970s...

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CASE 8.5 ZUAN YAN Synopsis In the late 1970s, Deng Xiaoping became the new political leader of the People’s Republic of China, replacing Mao Zedong who died in 1976. Almost immediately, Deng installed a “socialistic market economy” in China that was antithetical in many respects to the Marxist economic model that Mao had imposed on China. Over the past three decades, the new economic system has dramatically improved the standard of living in China and converted the nation into an economic powerhouse. During Mao’s Marxist regime, China’s accounting profession had been deemed part and parcel of the “liberal bourgeoisie” and was disbanded. Once the new economy began functioning, China’s political leaders recognized that the nation needed a reliable financial reporting system and an army of skilled accountants and auditors. China’s new accounting profession has evolved haphazardly over the past three decades. In 1988, the powerful Ministry of Finance established the Chinese Institute of Certified Public Accountants (CICPA) to help organize and promote the profession. Most observers agree that China’s accounting profession is still inadequate in many respects. For example, on a per capita basis, China has only a fraction of the CPAs that it needs to service the rapidly growing Chinese economy. Likewise, the educational infrastructure for accountants in China needs to be improved dramatically. Over the past two decades, the Big Four accounting firms have established large practice units within China. In fact, by 2005, those firms had the four largest accounting practices in China. A major focus of the Big Four’s Chinese practice units is the provision of independent audits. The two principal types of businesses within China that require independent audits are FOEs (foreign-owned enterprises) and SOEs (state-owned enterprises). In recent years, minority ownership interests in many of China’s large SOEs that make up the backbone of the nation’s economy have been sold by the Chinese government to individual investors. These minority ownership interests are traded on China’s two large stock exchanges. As a result, these SOEs require annual audits, as do a large number of the FOEs, many of which are wholly-owned by foreign multinational corporations. The Big Four continue to view China as one of the most lucrative markets for accounting and auditing services worldwide. However, those firms face major challenges in that market. Among these challenges are an increasing litigation risk and the difficulty of coping with the often heavy-handed tactics of China’s authoritarian central government.
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65 Case 8.5 Zuan Yan Zuan Yang—Key Facts 1. In the late 1970s, Deng Xiaoping installed a “socialistic market economy” in China to replace the Soviet-style “command economy” that his predecessor, Mao Zedong, had established shortly after the People’s Republic of China was founded in 1949.
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