8. ACCOUNTING AND AUDITING OF SOEs’ FINANCIAL PERFORMANCE Accounting and auditing reforms are prerequisites to provide SOE owners, boards of directors and managers with reliable information to monitor enterprise performance. Without accurate, transparent and commercially meaningful financial information on enterprise performance, all other aspects of Chinese SOE reform could be for naught. China’s rules for financial accounting (issued in 1993) and International Accounting Standards (IAS) differ in several respects: on the policy basis of the accounting framework; the intended audience; and the definition and application of terms. Most other national accounting standards identify ‘investors and creditors’ as the primary users of accounting information. China’s accounting standards generally do not. China’s standards give priority to administrative control, which conflicts with the goal of separating government and enterprises. Newly drafted Chinese accounting standards are more precise and comprehensive than the general principles embodied in the 1993 rules. If they are fully implemented, accounts prepared under Chinese and international standards will become more similar. THE BUSINESS(ES) OF THE CHINESE STATE 871 ß Blackwell Publishers Ltd 2001
But even with the issuance of improved accounting standards, there are other barriers to implementing meaningful accounting practices. Many of China’s SOEs lack the capacity to prepare such accounts. At the same time, tertiary businesses’ assets, costs and implicit liabilities, especially social obligations, are unclear. Inconsistencies also exist within a single enterprise group. Moreover, costs are often determined arbitrarily. In many SOEs, different independent profit centre workshops or production units still rely on an ‘internal banking system.’ Each unit writes cheques and makes demands on the central finance department with little coordination. Most units and the ‘internal bank’ lack sufficient information to plan or to deal with working capital shortages. Exacerbating the problem is that many SOEs are heavily indebted to other SOEs. Perhaps most importantly, in general SOE financial accounts are not subject to audits carried out by bona fide independent auditors, nor are such audits made publicly available. The amount of resources at stake through improved checks and balances on SOE financial accounts, including public disclosure of professional independent audits, is large. In late 1999 an investigation conducted by the Ministry of Finance revealed that nearly 90 per cent of 100 selected SOEs had intentionally altered their financial statements and inflated their profits by a total of 2.7 billion yuan. 26 The Ministry reported that in many cases, the auditors assigned to review the balance sheet and profit and loss statements of the SOEs were often unqualified to conduct audits, and even frequently conspired with the SOEs to alter and fabricate such statements. The Ministry indicated that both the SOEs in question and the auditors who assisted them would be prosecuted for their fraudulent actions.
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