ROSC - Accounting&Auditing - China

62538
Public Disclosure Authorized
REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC)

– ACCOUNTING AND AUDITING
People’s Republic of China

October 2009
Financial Management – Central Operational Services Unit

East Asia and Pacific Region
World Bank
ABBREVIATIONS AND ACRONYMS
A&A Accounting and Auditing

ASBE Accounting Standards for Business Enterprises
ASSE Accounting System for Small Enterprises
CAS Chinese Accounting Standards
CASB China Auditing Standards Board
CASC China Accounting Standards Committee
CBRC China Banking Regulatory Commission
CICPA The Chinese Institute of Certified Public Accountants
CICSC China Internal Control Standards Committee
CIRC China Insurance Regulatory Commission
CNAO China National Audit Office
CNY Chinese Yuan
CPA Certified Public Accountant
CPD Continuing professional development
CSA China Standards on Auditing
CSRC China Securities Regulatory Commission
EU European Union
FSB Financial Stability Board
HKICPA Hong Kong Institute of Certified Public Accountants
IAASB International Auditing and Assurance Standards Board
IAS International Accounting Standards
IASB International Accounting Standards Board
IASC International Accounting Standards Committee
IES International Education Standards
IESBA International Ethics Standards Board for Accountants
IFAC International Federation of Accountants
IFRIC International Financial Reporting Interpretation Committee
IFRS International Financial Reporting Standards
IMF International Monetary Fund
ISA International Standards on Auditing
MOF Ministry of Finance
NAI National Accounting Institute
PRC People’s Republic of China
ROSC Reports on the Observance of Standards and Codes
SASAC State-owned Assets Supervision and Administration Commission
STA State Administration of Taxation
XBRL Extensive Business Reporting Language
Vice President: James Adams

Country Director: Hsiao-Yun Elaine Sun
Sector Director: Alfred H. Nickesen
Financial Management Manager: Iraj Talai
Program Manager: M. Zubaidur Rahman
Task Team Leaders: David I and Yi Dong
Table of Contents
Preface
Executive Summary
I. Background …………………………………………………………………………………..1
II. Institutional Framework ……………………………………………………………………..2
III. Accounting Standards as Designed and Practiced ………………………………………….18
IV. Auditing Standards as Designed and Practiced …………………………………………….20
V. Perceptions on the Quality of Financial Reporting …………………………………………22
VI. Policy Recommendations …………………………………………………………………..22
Appendix. Roadmap for Continuing and Full Convergence of Chinese Accounting Standards for
Business Enterprises with International Financial Reporting Standards (Exposure Draft)

PREFACE

There is a broad agreement among the international financial community that the observance of
international standards and codes are pivotal in strengthening national and international financial
architecture. This was again emphasized in the G-20 Summits held April and September 2009 in
London and in Pittsburg, respectively, in context of the global financial turmoil. The Reports on the
Observance of Standards and Codes Accounting & Auditing (ROSC A&A) is one of 12 modules jointly
developed by the World Bank and IMF soon after the Asian financial crisis in 1997. These modules
were developed in order to assess a country’s strengths and weaknesses of actual practices regarding the
various components of financial architecture.
The ROSC A&A review focuses on the institutional framework regulating the accounting and auditing
practices, and the comparability of national accounting and auditing practices with international
standards and best practice, using International Financial Reporting Standards and International
Standards on Auditing as benchmarks. The review evaluates the effectiveness of enforcement
mechanisms for ensuring compliance with applicable standards and codes. The final draft report is
submitted to the country authorities for comment, approval, and permission to publish. Once agreed, the
report is published on the World Bank’s website. An overview of the ROSC A&A Program, including
rationale and detailed methodology are available at http://www.worldbank.org/ifa/rosc_aa.html
The World Bank team wishes to express its appreciation and thanks to the Chinese Government, and in
particular to the Vice Minister of Finance, Mr. Wang Jun. Under the coordination of Mr. Liu Yuting,
Director-General of Accounting Regulatory Department, Ministry of Finance, the ROSC A&A exercise
was carried out in China from November 2008 to September 2009 through a participatory process
involving in-country stakeholders, including the Government (MOF, SASAC, CNAO); regulators
(CBRC, CSRC, CIRC); accounting professionals (CICPA); banks; insurance companies; state-owned
enterprises; accounting firms; corporate accountants; and academics. The World Bank team gratefully
acknowledges the valuable and extensive contributions of the counterpart team at the Ministry of
Finance and other in-country stakeholders.
The China ROSC A&A benefited from valuable inputs and guidance from Iraj Talai (Manager,
Financial Management, East Asia and Pacific Region). The ROSC A&A report was prepared by a
World Bank team comprising David I (Senior Financial Management Specialist and Task Leader), Yi
Dong (Senior Financial Management Specialist and Co-Task Leader), M. Zubaidur Rahman (Program
Manager, OPCFM, and Study Adviser), and Humayun Murshed (consultant).
EXECUTIVE SUMMARY
China has made impressive progress putting in place institutional framework for accounting, auditing,
and corporate financial reporting. Since the beginning of introducing market economic system, the
Chinese Government gave significant attention to modernizing accounting standards in line with
international good practice. China has been implementing a well-designed strategy for convergence of
Chinese Accounting Standards with International Financial Reporting Standards. Similar steps have
been taken with regard to the implementation of International Standards on Auditing. Under the
leadership of the Ministry of Finance, the Chinese strategy for improving the quality of accounting and
auditing standards and practices has evolved as a good practice model that may be followed by other
countries. With the high level of Government commitment to continue the path it has taken for full
convergence with international standards and good practice, the ROSC team believes that, with the
implementation of the recently developed roadmap, China expects to achieve its continuing and full
convergence with the international standards in 2012.
The objectives and focus of the ROSC A&A, as designed and implemented around the world, are to
report on the comparability of national accounting and auditing standards with international standards,
and assess the strengths and weaknesses of the institutional frameworks that underpin actual practices
of accounting and auditing in each county under review. Given the many good outcomes and
interesting lessons, the China ROSC A&A also provides a summary description of the processes, which
led to China’s achievements in this area.
Recognizing the fact that proper implementation of high-quality accounting standards depends on the
corporate accountants, practicing auditors, and relevant regulators, the Chinese authorities have focused
on strengthening capacity in these three areas. Building on past achievements, more efforts need to be
given to further enhance the capacity of the regulators in order to ensure compliance with applicable
standards more efficiently and effectively. The accountancy profession has grown, in line with
international good practice, under the supervision of the Ministry of Finance. In order to keep pace
with China’s developmental needs, there is a need for further strengthening of the accountancy
profession throughout the country. Further improving and maintaining the quality of accounting and
auditing practices outside major cities of China poses an important challenge for the Chinese
authorities.
The report outlines interrelated, principle-based policy recommendations. These recommendations are
to build on the existing system in China and contribute to the international body of knowledge on the
process of bolstering the corporate financial reporting infrastructure.

I. BACKGROUND
1. This assessment of accounting and auditing (A&A) practices in China is part of a joint
initiative of the World Bank and the International Monetary Fund (IMF) to prepare Reports on
the Observance of Standards and Codes (ROSC) covering 12 internationally recognized
standards and codes relevant to economic stability and private and financial sector
development. The main objective of ROSC A&A is to review and report on the rules and
standards governing the practice of accounting, auditing, and reporting by companies and
professionals; on the way these rules and standards are put in practice and complied with; and
on the mechanisms, systems, and structures to monitor and enforce compliance with public
interest in mind. The focus of this report is on the strengths and weaknesses of the accounting
and auditing environment that influence the quality of corporate financial reporting and
involves a review of both mandatory requirements and actual practice. It uses International
Financial Reporting Standards (IFRS) 1 and International Standards on Auditing (ISA) 2 as
benchmarks and draws on international experience and good practice in the field of accounting
and audit regulation. However, given the impressive achievements of China in this area, this
report also describes in summary steps and processes that made such achievements possible
with the hope that the lessons from China can serve others.
2. The ROSC A&A assessment adopted a participatory approach with a strong

involvement of policymakers and other country stakeholders. The stakeholders included
regulators of corporate entities, banks and similar financial institutions, professional
accountants, bankers and investment analysts, preparers of financial statements, auditors, and
academics. The assessment used a diagnostic tool, which facilitates capturing a comprehensive
review of the institutional framework underpinning accounting and auditing practices in China.
The information gathered through this diagnostic tool was supplemented by a due diligence
exercise in capturing primary experiences of stakeholders and other facts on corporate financial
reporting practices in China.
3. The People’s Republic of China (PRC) has been one of the world’s fastest growing
economies for more than three decades. Having an average growth rate of about 9.7 percent
per annum since the late 1970s has helped to lift several hundred-million people out of absolute
poverty, with the result that China alone accounted for over 75 percent of poverty reduction in
the developing world over the last 20 years. 3 Rapid economic growth and favorable
government policies have promoted employment in urban areas; while rural income in real
terms grew by 9.5 percent. The global financial crisis is likely to limit growth in China in 2009
and 2010; nevertheless; it is likely to outgrow most other countries.
1
In this report, IFRS refers to the International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB), the International Accounting Standards (IAS) issued by IASB’s predecessor
International Accounting Standards Committee (IASC), and the applicable interpretations issued by the
International Financial Reporting Interpretations Committee (IFRIC).
2
ISA are issued by the International Auditing and Assurance Standards Board (IAASB) of the International
Federation of Accountants (IFAC).
3
World Bank, Country Partnership Strategy for the People’s Republic of China for the Period 2006 – 2010.
China – ROSC Accounting and Auditing 1
4. China continues to modernize its market regulations. Part of this modernization
includes the restructuring and transformation of state-owned enterprises to listed companies.
However, the state is still retaining the largest and controlling shareholding of many of these
listed companies. Founded in 1990, the Shanghai Stock Exchange and Shenzhen Stock
Exchange are regulated by the China Securities Regulatory Commission (CSRC). Instruments
traded on both Stock Exchanges include A-shares and B-shares, 4 bonds, closed-end mutual
funds, and repos. Apart from B-shares, all instruments are traded in local currency. While
significant progress has been achieved and reforms are generally heading in the right direction,
increasing the share of institutional investors remains a major challenge. In order to overcome
this challenge, there is a need to continue the current initiatives for enhancing the quality of
corporate financial reporting, and to further strengthen the effectiveness of monitoring and
enforcement mechanisms, which will have impact on enhancing investor confidence in
corporate financial information.
5. China’s financial sector has undergone significant market-oriented reforms since

1978. The Central Bank Law 1994 and the Commercial Bank Law 1995 further deepened
China’s financial reform. These laws allow the state–owned banks to concentrate on
commercially oriented lending and emphasize the need for financial institutions to incorporate
commercial criteria into their lending practices, including the adoption of standard accounting
and prudential norms. Since 1978, a number of non-state-owned banks entered the financial
system (e.g., urban and rural credit cooperatives, trust and investment companies, and finance
companies). Nevertheless, the level of capital mobility still appears to be low and China’s
financial markets remain fragmented across regions. Surveys and studies show that private
Chinese firms are constrained in their access to credit due to poor lending practices and
underdeveloped bond and equity markets. 5
II. INSTITUTIONAL FRAMEWORK
6. China has made significant strides in putting in place the institutional framework for
improving corporate accounting, auditing, and financial reporting practices. The framework,
salient features of which are discussed below, as a whole seems comprehensive and robust.
Since all elements of this framework are well anchored and players have developed good
habits, it will adequately respond to needs of the national financial system with effect on the
international financial architecture. Additionally, in order to face future challenges,
continuation of mechanisms and good practice now in place would allow a timely update as
circumstances change in future. This dynamic aspect of the framework is an interesting and
important feature not observed in all countries and is particularly noteworthy. Furthermore, the
framework and its implementation by different actors would benefit from a sharpening of the
focus on efficiency and effectiveness.
4
A-shares are traded by companies incorporated in PRC; traded in Shanghai and Shenzhen. B-shares are traded
by companies incorporated in PRC and traded in Shanghai in U.S. dollars and Shenzhen in Hong Kong dollars.
5
Aziz, J., Real and Financial Sector Linkages in China and India (IMF Working Paper, 2008).
Statutory Framework
7. Over the last 30 years, China’s legislative and regulatory regime applicable to
accounting and auditing of corporate entities, banks, and similar financial institutions
has improved significantly. Such improvements are primarily geared toward the needs of
transition to the market economy. Substantive amendments have been made in the Company
Law, Securities Law, Tax Law, and laws relating to operation of banks and other financial
institutions. Furthermore, an Accounting Law and Law of the People’s Republic of China on
Certified Public Accountants were developed with the objective of putting in place a sound
institutional framework for regulating accounting, auditing, and corporate financial reporting.
8. According to the statutory framework of China, the Ministry of Finance (MOF) is

primarily responsible for regulating the accounting and auditing practices. Various
regulatory bodies also carry out their regulatory responsibilities in line with related laws.
Other regulators work in collaboration with the MOF, and their regulatory activities regarding
accounting and auditing are designed for specific purposes. The responsibilities of the MOF
include developing principles, issuing regulations, setting standards, ensuring compliance with
financial reporting requirements, providing directions and setting requirements for the
accounting and audit profession, and carrying out regular inspection and special investigations
on the audit services provided by the statutory auditors. Carrying out these responsibilities
calls for continued MOF capacity improvement, with MOF personnel trained in complex and
up-to-date accounting and auditing requirements in line with international good practice. The
MOF has put in place arrangements for continuing professional development of its specialists
who work on accounting standard setting and related matters. 6
9. The regulatory system of China’s accountancy profession is led by the

Government’s administration, accompanied by the professional organization’s activities.
Currently, the MOF is entitled to monitor the performances of accounting firms; and impose
administrative sanctions on errant firms, individual certified public accountants (CPAs), and
their audit clients. The MOF and CSRC are responsible for registration and supervision of the
accounting firms that are qualified to provide audit services to the listed companies.
Additionally, the Chinese Institute of Certified Public Accountants (CICPA) conducts its
quality review on these accounting firms every three years. The MOF Accounting Department
and provincial-level finance bureaus’ accounting divisions are responsible for registering and
supervising all other accounting firms. The CICPA is the professional organization that is
responsible for registration and management of its members according to CPA law and the
CICPA constitution.
10. The Accounting Law provides the fundamental legal framework for ensuring a
uniform accounting, and corporate financial reporting in corporate entities. Under the
Accounting Law, all corporate entities are required to prepare and present financial statements
6
During the last 10 years, several staff of the Accounting Department of MOF has spent extended time on
learning about programs supported by the IASB, U.S. Financial Accounting Standards Board, Australian
Accounting Standards Committee, and similar organizations of other western countries to gain exposure to
internationally recognized accounting standards and international good practice on accounting and financial
reporting regulations.
in compliance with the unified accounting system of the state. The unified accounting system
includes a series of rules and regulations, including the Accounting Standards for Business
Enterprises (ASBE). 7 The Accounting Law defines applicable principles and requirements
together with the scope of corporate accounting and financial reporting. It also provides for the
preparation of financial statements, their disclosure and audit, and inspection. Uniformity in
corporate accounting and financial reporting practices ensures comparability in the financial
information, a crucial element of rational decision making in a market economy.
11. The Accounting Law includes provisions to help ensure a true and fair view of
enterprises’ financial performance is disclosed in their financial reports. Chapter IV of
the Accounting Law requires each corporate entity to establish an internal accounting
supervision system. This is to ensure that enterprises follow a systematic approach in
maintaining books of accounts and preparing financial statements. The top management is not
allowed to unduly influence the accounting personnel to manipulate measurement and
disclosure of financial information.
12. The Code of Corporate Governance for Listed Companies in China sets specific
requirements regarding corporate accounting. The Code was issued by the CSRC in
January 2001. Article 25 of the Code requires enterprises to establish sound accounting and
financial management system in accordance with applicable standards and codes and without
any interference from the controlling shareholders.
13. The Securities Law requires listed companies to submit their interim financial
statements to the CSRC. The Securities Law requires the listed companies to prepare both
interim (quarterly and half-yearly) and annual financial statements and submit them to the
CSRC. The quarterly report must be submitted within one month after the end of each quarter
of the financial year, while the half-yearly report is to be submitted within two months after the
end of the first half of the financial year. The annual financial statements must be submitted
within four months from the end of the financial year. It is mandatory that annual financial
statements be audited, but interim financial statements do not have to be audited, except in the
following circumstances:
x A company plans to distribute profit, capitalize, or make up loss from general reserves
in the second half of the financial year.
x A company plans to issue new shares or convertible bonds for refinancing in second
half of the financial year.
x A company meets any other special requirement set by the CSRC.
14. The Securities Law requires listed companies’ financial statements to incorporate
some non-financial information, which is intended to facilitate the informed decision
making process. Article 65 of the Securities Law requires that, apart from providing operating
results, listed companies’ financial statements should focus on information relating to (a) the
general business condition of the company, (b) the company’s involvement in any major
litigations, (c) changes in the number of shares issued, and (d) any important matters submitted
in the annual general meeting for shareholders’ consideration. In addition, Article 66 of the
Securities Law asks for a brief introduction of the directors and senior managers of the
7
The ASBE are also known as Chinese Accounting Standards (CAS).
company, information on the shares and corporate bonds issued, and the top 10 company
shareholders and the amount of their held shares. Taking financial and non-financial
information together tends to help the readers of financial statements obtain a broader insight
into a company’s state of affairs.
15. The Company Law outlines management’s obligation for the probity of financial
statements. The company management is responsible for ensuring timely preparation of
annual financial statements reflecting true and fair view of the corporate entity’s financial
condition and operating results. According to the Article 166 of the Company Law,
management is also responsible for submitting the corporate entity’s audited financial
statements to the general shareholders’ meeting within four months from the end of the
financial year. Noncompliance with regard to responsibilities for preparing financial
statements and making them available to the shareholders could lead to sanctions, including a
fine. 8 The Company Law does not mention that shareholders need to approve the financial
statements. However, the right of shareholders to approve the corporate entity’s financial
statements is important as it allows the corporate owners to check on management’s
performance and its stewardship of the entity’s resources.
16. Except for listed companies, there is no statutory requirement for public interest
entities 9 to allow public access to their financial statements. The audited financial
statements of the listed companies, listed banks, and similar financial institutions must be
published in a printed annual report, on the Internet, and in newspapers designated by
respective regulators. Noncompliance with this requirement could lead to sanctions. Non-
listed entities are only required to submit annual financial statements to their respective
supervisory bodies without any requirements to make them public. Public availability of the
financial statements of public interest entities is very important for a healthy corporate sector
adding benefits in terms of transparency, market discipline, and availability of information for
making informed and rational investment decisions.
17. Law of the PRC on Certified Public Accountants (CPA Law) regulates the audit
profession. The CPA Law defines the notions of audit and accounting firm, specifies the
requirements to become an auditor, outlines the rights and obligations of auditors, and specifies
the legal status and main responsibilities of MOF, provincial-level finance bureaus, and the
CICPA. The CICPA exercises the management and service functions by virtue of the powers
vested by the CPA Law, the Charter of the Chinese Institute of Certified Public Accountants,
and other relevant laws and regulations. The major statutory functions of the CICPA include
implementing policies regarding admission to membership, formulating professional standards
and rules for CPAs, organizing the uniform CPA examination, administering programs for
8
Various provisions of the Accounting Law, Company Law, and Securities Law outline several sanctions for
noncompliance with applicable requirements. In this regard the fine for noncompliance may range from 3,000
Yuan to 100,000 Yuan. The other kinds of sanctions include industrial discipline, criminal detention, civil
liability, public condemnation, and confiscating illegal proceeds derived from accounting policy manipulations.
9
Within this report, public interest entities are those in which the general public has an interest by virtue of the
nature of their business size, their number of employees, or their range of stakeholders. Examples include banks
and similar financial institutions; insurance companies; investment funds; pension funds; publicly traded
companies, and large enterprises, including large state-owned enterprises.
members’ professional development, ensuring adherence to professional ethics and standards,
and taking disciplinary actions against erring members.
18. In order to strengthen the quality of listed company audit, the MOF and CSRC
require the auditors and accounting firms to meet some specific conditions:
x The firm should have been in operation for more than 3 years.
x Over 50 percent of owners or partners have served this firm for more than 3 years.
x Employed at least 80 CPAs, of which at least 35 should have more than 5 years
experience.
x The net assets are not less than CNY5.0 million for a limited liability firm and
CNY3.0 million for a partnership.
x The previous year revenue should be at least CNY16.0 million.
x Accumulated risk fund is more than CNY6.0 million.
x No penalty or violation record imposed during the last 3 years.
x No fraudulent information appears in its application package.
19. The MOF and CSRC require the engagement partner of a listed company auditor
to be changed at least once in every five years. Although the shareholders have the ultimate
authority to hire or fire statutory auditors, in practice the decision to appoint or terminate
auditors is mostly exercised by the board of directors. Consideration should be given to this
issue by the relevant authorities taking into account the context of China. The statutory
regulators, which include MOF, CSRC, China Insurance Regulatory Commission (CIRC), and
China Banking Regulatory Commission (CBRC), require notification, together with
justification, of any decision made to terminate an existing auditor. Nevertheless, the
requirements of these regulators cannot be considered as substitute for a proper governance
mechanism that can ensure the independence of external auditors for the benefit of
stakeholders. Indeed, the law should clearly outline the grounds for termination of statutory
auditors to augment the credibility of information contained in corporate financial statements.
20. In line with international good practice, the Company Law and Securities Law
provide for establishment of oversight within the company to explicitly monitor the
independent audit process on behalf of shareholders. Good corporate governance practice
requires that audit committees oversee the appointment of auditors and their discharge of
professional responsibilities, as well as establishing adequate financial control within the
entity. The Company Law and the Securities Law require corporate entities to establish board
of supervisors and audit committees in order to oversee whether the members of the board of
directors’ and statutory auditors discharge their mandated responsibilities.
21. The MOF and CSRC require auditors to attend shareholders’ general meeting. In
particular, this gives the opportunity for the minority shareholders to seek and obtain
clarification from the auditor on issues of concern to them. However, there is need for
effective monitoring as to whether, in practice, auditors are fulfilling this professional
obligation. From various discussions, the ROSC team found that in some cases,
representatives of both management and auditors are not aware of auditors’ obligation to attend
the shareholders’ meeting.

22. The CPA Law outlines auditors’ obligations. Chapter III of the CPA Law allows the
statutory auditors to undertake audit and advisory services. The auditors have the right to
express their independent opinion upon examining the financial statements. In this regard, they
can ask for information and seek clarifications from corporate management in undertaking
audit work. In line with International Federation of Accountants (IFAC) requirements
concerning conflict of interest, the auditors are not allowed to provide various non-audit
services to the audit clients.
23. Article 23 and 24 of the CPA Law allow the accounting firms to be established as
either a partnership or a limited liability company. However, provision for establishing
accounting firms as limited liability companies may constrain auditors’ accountability to the
clients since these accounting firms’ liabilities are limited to the company’s share capital.
Generally, accounting firms are incorporated as a limited liability company with low share
capital, which offers little protection to the claimants. The 6 largest accounting firms (in terms
of revenue) in China, including members of international network accounting firms, are
established as limited liability companies. In China, audit services are to be provided in the
name of a firm. Individuals are not allowed to undertake audit services and issue audit reports
in the name of individual auditors. The accounting firms must register with MOF or provincial
finance bureau to work as statutory auditors.
24. Auditors are subject to civil and criminal liability. Auditors are liable for
compensation of losses to their clients due to negligence in undertaking audit works and other
related services. According to the CPA Law, accounting firms shall establish funds for
professional liability or purchase a professional liability insurance policy, pursuant to the
regulations promulgated by the Finance Department of the State Council. For noncompliance
with mandated obligations in the context of an audit assignment, the auditors can face both
administrative and other sanctions that could range from a fine of not less than one time and
not more than five times the value of the income from that particular assignment, revocation of
audit license, public condemnation, and imprisonment.
25. The China Banking Regulatory Commission regulates the financial reporting of
banks and similar financial institutions in China. The disclosure requirements set by the
CBRC are additional to those stipulated by the Accounting Law. It requires banking
institutions to prepare their financial statements within four months after the financial year-end.
It also prescribes disclosure requirements, primarily for prudential reporting, that each bank
must follow. A MOF/CSRC-approved auditor must perform the audit of listed banks’ financial
statements whereas, for non-listed banks, any statutory auditor can perform the audit work.
Before the audited financial statements are published, a tripartite meeting is held between the
auditors, the bank, and the CBRC. Banks are obliged to submit monthly, quarterly, and
audited annual financial statements to the CBRC. The CBRC has set up its own standard
review procedures in order to determine whether the financial reporting of banks is adequate.
The CBRC carries out both on-site and off-site supervision.
26. Auditors are required to make independent evaluation of the internal control
system and risk management of banks. The CBRC requires statutory auditors, appointed by
the banks, to evaluate the internal control system and risk management issues of banks. The

evaluation report is appended to the annual report of the bank. The statutory auditors are
obliged to report to the CBRC on any significant noncompliance with applicable standards and
codes and any impact on the going concern of bank.
27. The China Insurance Regulatory Commission regulates the financial reporting
requirements of insurance companies. The annual financial statements of insurance
companies must be audited, and insurance companies are required to submit audited financial
statements to the CIRC together with other reports as prescribed monthly, quarterly, and
annually for prudential purposes. The audit of listed insurance companies must be performed
by MOF and CSRC-approved auditors; however, there is no such requirement for the non-
listed insurance companies. The CIRC requires that the insurance companies’ financial
statements must be verified by external auditors with regard to material issues such as
reinsurance activities, capital provisioning, liquidity, commissions, revenues, costs, profits, and
profit distribution. Also, it is mandatory for the insurance companies to submit the audited
solvency report to the CIRC annually.
28. The stock exchange listing rules require all listed companies to present interim
financial statements. The listing rules require all listed companies to publish quarterly
financial results, according to a prescribed format. These quarterly financial statements do not
require auditing, but the annual financial statements are to be audited by the statutory auditors.
29. Article 91 of the Chinese Constitution empowers the China National Audit Office
(CNAO) to undertake audits of state-owned enterprises. The CNAO is responsible for
auditing assets, liability, income, and loss of state-owned enterprises; auditing the performance
of state-owned enterprises on compliance with responsibilities regarding their financial
condition and various financial activities; and providing guidance and supervision to the
internal auditing. The government officials responsible for providing guidance on conducting
state-owned enterprise audits largely lack exposure to relevant IFAC-issued accounting and
auditing pronouncements. In addition to CNAO audit, the listed state-owned enterprises are
subject to annual external audit by accounting firms.
The Profession
30. The audit profession is managed by the Chinese Institute of Certified Public
Accountants and supervised by the Ministry of Finance. The MOF supervisory oversight of
the CICPA is exercised through issuing regulations and recommending senior officials to the
CICPA Council. 10 Oversight for ensuring public interest is important for assuring that the
quality assurance, investigation, and disciplinary systems are adequate to promote high-quality
audits.
31. The CICPA has more than 150,000 members and is a full member of the
International Federation of Accountants. The CICPA was established in 1988. It gained
10
According to the Article 4 of the CPA Law, CICPA is a civil society association. According to Article 5 of the
CPA Law, the financial department under the State Council and the financial departments of the people’s
governments of provinces, autonomous regions, and municipalities directly under the Central Government shall
supervise and guide the activities of certified public accountants, public accounting firms, and CICPA, including
its branch offices.
full IFAC membership in 1997 with a commitment of compliance with the IFAC Statements of
Membership Obligations. Among the CICPA membership, 88,000 are practicing auditors, and
more than 70,000 are working as non-practicing professionals. 11 The CICPA performs all the
functions of a modern professional accountancy body, including granting membership,
formulating professional standards for its members, organizing CPA examination, organizing
practice review of members, undertaking disciplinary actions against members for violating
professional rules, organizing continuing professional development (CPD) programs, and
representing the China CPAs in various forums.
32. Minimum competency requirements for membership of the audit profession are
determined by MOF. The conditions for becoming an auditor include having passed the CPA
examination set by the CICPA, followed by completion of 2 years of work experience; and
having no criminal record and administrative punishment within the last 5 years and 2 years,
respectively, from the date of registration. The provincial institutes of CPAs in different
provinces, autonomous regions, or municipalities are responsible for the CPA registration with
general guidance from the CICPA. The MOF inspects the locally administered registration
process in order to ensure compliance with applicable rules. The CICPA also formulated a
Code of Professional Ethics for its members, which converged with the IFAC’s Code of Ethics
for Professional Accountants.
33. According to the legal requirements in China, only accounting firms can provide
statutory audit services. In order to be registered as an accounting firm, there must be at least
two CPA-licensed partners. From this perspective, in order to develop the audit profession, the
MOF has played an important role to facilitate merger of sole practitioners throughout the
country. At present, there are more than 7,500 accounting firms involved in providing
statutory audit services in China. Members of the international networks of accounting firms
are among the 60 firms eligible to undertake audits of listed companies in China. Most of
these firms provide audit services to the banks and insurance companies in the country. Mostly
major accounting firms (both local and internationally affiliated firms) in China audit the listed
companies. The small and medium-sized accounting firms perform bookkeeping services,
capital verification, and audits for smaller companies.
34. China has strategized the development of 10 big accounting firms capable of
providing a full range of accounting and audit-related services on a global scale. As part
of the overall strategy for improving the audit profession, the Chinese Government will
develop 200 better managed medium-size accounting firms in China within the next 5years.
These 200 accounting firms will focus on providing high quality value-added services to listed-
companies and large/medium-size enterprises and public entities. In addition, 10 large and
competitive accounting firms will be supported to become international with the capability of
serving the needs of the Chinese enterprises going global, and providing the full range of
services to globally operating Chinese enterprises. The objective focuses on optimizing
accounting firm’s scale and structure, implementing the talent strategy,12 and enhancing the
professional competence of CPAs.
11
Most of these non-practicing professionals work as corporate accountants.
12
Paragraph 41 of this report describes the Leading Accountant Talent Project.
Professional Education and Training
35. In discussion with the ROSC team, many stakeholders expressed concern that new
accountancy professionals lack adequate exposure to the practical application of accounting
standards, appropriate level of communication skills, and aptitude in forming judgment in
applying accounting policies concerning complex recognition and measurement issues. These
stakeholders believe that university graduates do not have adequate levels of practical
knowledge and are not prepared to deal with the challenges of discharging their professional
responsibilities. In most cases, the employers have to spend substantial amount of time and
resources to train newly hired accountants to begin their assigned jobs.
36. The quality of academic education in accounting widely varies among universities.
Only a handful of universities in major cities in China have developed internationally
comparable curriculum and teaching arrangements. The universities in remote provinces suffer
from the scarcity of well-trained teaching staff. Moreover, Chinese universities have not made
an effort to harmonize accounting curricula and establish common minimum requirements for
type and content of courses on accounting and auditing. The accounting curricula do not
adequately focus on practical application aspects of accounting and auditing standards.
Textbooks from the United States are widely used in accounting programs. Textbooks from
United Kingdom, Australia, and Canada are also used. Specifically, in the case of using United
States textbooks, the students are confronted with the challenges of understanding the
accounting environment in the United States. Under such circumstances, the students need
help from well-trained and highly knowledgeable teachers. This kind of teachers is not
available in many universities. Most of the local accounting textbooks lack adequate focus on
international dimensions of accounting and auditing. Some universities’ curricula integrate
Chinese accounting and auditing standards by launching a major focus on the CPA
examination. However, the capacity of academic institutions to teach the practical implications
of these standards remains a concern.
37. The professional accounting curriculum covers important content requirements of

International Education Standards (IES). In 2009 the CPA curriculum has been restructured
into a Professional Stage and an Advanced Stage with the incorporation of a new subject –
Corporate Strategies and Risk Management – into the Professional Stage. The Professional
Stage covers the following subjects:
x Accounting,
x Auditing,
x Financial and Cost Management,
x Economic Law,
x Taxation Law, and
x Corporate Strategies and Risk Management.
The Advanced Stage examination requires candidates to apply knowledge to practical

situations. It addresses professional and legal knowledge, professional values, ethics and
attitudes, intellectual ability, and inter-personal communication and managerial skills.

38. The MOF-administered examination for accountants largely satisfies the
requirements of IES 6, Assessment of Professional Capabilities and Competence.
Accountants, aspiring either to work as corporate accountants or provide accounting services to
the public must pass the MOF-administered examination. This examination is different from
the examination, set by the CICPA. The CICPA examination is designed for aspiring auditors;
however, those who pass this examination can also work as corporate accountants. The MOF-
administered examination has two components – Accounting Qualification Examination and
Accounting Professional and Technical Qualification Examination. In order to be qualified to
provide any kind of professional accounting services (not audit services) in China, a person
needs to pass the Accounting Qualification Examination. This examination focuses on
financial regulation and professional ethics, basic accounting, and computerized accounting.
The Accounting Professional and Technical Qualification Examination is a higher-level
comprehensive evaluation system. It comprises three-level examinations (junior, middle and
senior). The MOF-administered examination system largely appears to test underpinning
theoretical knowledge and its practical application, including the judgments to be exercised by
accountants in real life circumstances as per IFAC requirements. 13 Given the fast-growing
private sector in China, there is a clear need of accounting technicians in addition to skilled
preparers and auditors. The ROSC team views that the MOF-administered examination is
useful to encourage growth of the broader profession to ensure that the number of skilled
technicians and professional accountants is established to meet market demands.
39. Practicing CPAs are required to participate in a CPD program for a total of 80
hours within 2 years, with a minimum of 30 hours each year. The MOF-qualified
accountants are required to have 24 hours of CPD each year. The CICPA, local CPA
associations, professional training institutions, and large accounting firms offer various types
of CPD programs. The CICPA has been making efforts to improve the quality of the CPD
programs, and such efforts need to continue. The CPD programs should focus more on
practical implementation aspects of applicable accounting and auditing standards so as to
develop and maintain sufficient knowledge and professional skills with regard to modern
accounting and auditing practices in the accountancy profession.
40. The National Accounting Institute (NAI) is making arduous efforts to provide high-
quality CPD program in China. The Chinese Government established NAIs in Beijing,
Shanghai, and Xiamen. The major participants of the NAI program include senior financial
managers of state-owned enterprises and medium-size enterprises and CPAs. The NAI-
delivered program is better organized compared to many other providers. However, the
content and delivery of the program need to be more focused on emerging international
developments in accounting and auditing standards. The case studies developed by NAI
illustrating the China-specific contexts are certainly a move in the right direction. The CICPA
conducts teaching quality checks for the training programs offered by the NIA. Local CPA
associations carry out inspection on the quality of training provided by the accounting firms.
41. The Government-sponsored Leading Accounting Talent Project aims to develop

professionally qualified accountants capable of facing challenges of internationalization
13
IFAC IES 6, Assessment of Professional Capabilities and Competence, states that the examination should
“require a significant portion of the candidate’s responses to be recorded form” and “cover a sufficient amount of
the whole range of professional knowledge, professional skills, and professional values and attitudes.”
of accounting and reporting practices. In 2007, the MOF launched this 10-year plan for
creating 1,000 leading accounting talents in China. The candidates are selected from both
public and private sector entities and with strong track records in business and management.
The training focuses on applicable accounting and auditing standards, professional challenges
and values, and international dimension of accounting and auditing practices. The project
participants will have a professional attachment with reputable institutions and professional
bodies overseas.
Setting Accounting and Auditing Standards
42. The Chinese Accounting Standards (CAS) and the Chinese Standards on Auditing
(CSA) are issued by the Ministry of Finance. Under legal mandate, the MOF issues
accounting and auditing standards and related regulations.
43. China has established an Accounting Standards Committee composed of

representatives from key stakeholders, providing a good platform for development and
implementation of the accounting standards. The MOF established the China Accounting
Standards Committee (CASC) in 1998. The CASC mainly provides advice on the overall
planning, structure, and development of accounting standards; selection of accounting policies;
and implementation of accounting standards. In 2003, the CASC was reorganized. The
reorganized CASC comprises 26 members appointed by the MOF, drawn from relevant
government agencies, academia, professional accounting organizations, and business
community. The reorganized CASC has three professional committees: Professional
Committee on Accounting Theory, Professional Committee on Accounting Standards for
Business Enterprises, and Professional Committee on Accounting for Government and Non-
profit Organizations. 14
44. In conformity with international good practice, accounting standards setting follows
a due process. The process of setting standards involves the following steps:
x Initiating a new project. The Accounting Department of MOF initiates a new

project for developing a particular accounting standard based on China’s economic
development need and seeks comments from the members of the CASC and other
related parties. Upon receipt of the comments, the Accounting Department
develops a proposal for setting the new standard.
x Drafting the exposure draft. The Accounting Department constitutes a team to

prepare an exposure draft based on the proposal for setting the new standard. The
exposure draft is submitted to the CASC for their comments.
x Soliciting public comments. Once the exposure draft is approved, the Accounting
Department seeks comments from interested parties by publishing the exposure
draft on the CASC website and through other major media.
14
The current Secretary General of CASC is a Vice Minister for Finance. The secretariat of the CASC is located
in the Accounting Regulatory Department of MOF. The Director General of this department also serves as the
Director of the CASC secretariat.
x Preparation of final draft. The drafting team revises the draft standard based on the
comments received and prepares the final draft for the CASC. After reviewing the
draft, the CASC submits the standard to the MOF for approval and issuance.
During the period between 2005 and 2007, the MOF organized a series of training programs
and workshops in order to deepen the understanding of the CAS. The target audiences for
these programs were listed companies, statutory regulators, and members of academia. In
addition, the CASC has established a Working Group of Experts on implementation of CAS,
drawing membership from CSRC, CBRC, CIRC, the State-owned Assets Supervision and
Administration Commission (SASAC), and State Administration of Taxation (STA). This
Working Group provides its opinion on material issues encountered during the implementation
of CAS.
45. The strategy for convergence of the Chinese Accounting Standards for Business
Enterprises with IFRS was put in place in 2005. The MOF developed IFRS-comparable
Chinese ASBE system consisting of a Basic Standard, 38 Specific Standards, and
Implementation Guidance. The Chinese ASBE system was enacted on February 15, 2006. 15
The CASC members and technical experts of the International Accounting Standards Board
(IASB), following an analysis of the various aspects of comparability between CAS and IFRS,
came to an agreement on the Chinese convergence strategy. On November 8, 2005, the CASC
and the IASB signed a joint statement on the convergence of CAS and IFRS. 16
46. A new full convergence strategy has been developed. In response to the call from the
G20 and Financial Stability Board (FSB) on establishing global uniform accounting standards,
the MOF has prepared a roadmap for full convergence of CAS with IFRS. As the IASB has
planned to complete some major revisions of existing standards by 2011, the timing of full
convergence of CAS with IFRS has been planned to align with that date. The MOF has a plan
to start revision of CAS at the beginning of 2010 and expects to complete the revisions by end-
2011. Implementation of the revised CAS in all large and medium-sized enterprises will start
at the beginning of 2012. The composition of the revised accounting standards will include –
basic standard, specific accounting standards, and implementation guidance. The basic
standard will remain unchanged, and relevant parts of the specific accounting standards will be
updated. The new convergence strategy is presented in details in the Appendix to this report.
47. The Ministry of Finance has issued a separate standard for small-size enterprises,
outlining simplified financial reporting requirements. In April 2004, the MOF issued the
15
ASBE and CAS are used interchangeably.
16
The joint statement showed the following consensus: (a) China stated that convergence is one of the
fundamental goals of the country’s standard-setting program, with the intention that an enterprise’s financial
statements prepared under CAS should be same as its financial statements prepared under IFRS. It was further
stated that the convergence process should be decided by China. (b) China’s accounting standards system for
business enterprises is being developed with a view to achieving convergence with IFRS. The two parties
acknowledged that differences between CAS and IFRS exist at the present time in a limited number of areas,
including reversal of impairment losses, disclosure of related party relationships, and transactions. (c) The IASB
identified a number of accounting issues for which China, because of its unique circumstances and environment,
could be particularly helpful to the IASB in finding high-quality solutions for IFRS. These include disclosure of
related party transactions, fair value measurements, and business combinations of entities under common control.
Accounting System for Small Enterprises (ASSE), which has been effective since January 1,
2005. Small enterprises may choose to follow ASSE or CAS. However, if a small enterprise
is a subsidiary company and if its parent company follows CAS, then the particular small
enterprise is also required to comply with CAS. For many small enterprises, compliance with
financial reporting requirements is a challenge. Moreover, external demand for the financial
information from these enterprises is often limited to tax authorities. The simplification
introduced by the ASSE is more responsive to the smaller size, simpler transactions and
narrower range of stakeholders of the small enterprises. This is a praiseworthy step taken by
the MOF, which is worth considering by the developing and emerging market economies.
48. The Ministry of Finance has issued 48 auditing standards, developed by the China
Auditing Standards Board (CASB) of CICPA. The CASB, established as an advisory group
in 1995 and reorganized as a board in 2005 within CICPA, includes experts from relevant
government departments, accounting firms, research institutes, and universities. Following a
due process similar to the accounting standards setting (as described in paragraph 44) and in
conformance with international good practice, the CASB develops draft standards on auditing
for MOF approval. The Chinese Standards on Auditing are largely comparable to IAASB-
issued ISA. However, there are two additional CSAs – verification of capital contribution and
communication between predecessor and successor CPAs – for which there are no equivalent
ISAs. Verification of capital contribution in equity joint ventures forms an important practice
area of Chinese CPAs; in the past, several cases involving fictitious verification reports by
accounting firms have raised serious concerns over the work of auditors. 17 The Government
has now made the verification of capital contribution a statutory audit requirement through the
promulgation of various laws and regulations and has made it clear that an untruthful
certificate by an auditor is a criminal offence. 18 Communication between predecessor and
successor CPAs was adopted for ensuring independence of auditors in situations where
Chinese companies frequently change statutory accounting firms. The ISA does not include
any such equivalent standard, but related requirements can be found in the IFAC Professional
Code of Ethics for Professional Accountants issued by the International Ethics Standards
Board for Accountants (IESBA).
49. The MOF and CICPA issue implementation guidance on CAS and CSA. Despite the
good practice, these guidance notes need to be expanded further in order to be fully equivalent
to the implementation guidance on IFRS and ISA, which inform and illustrate with
comprehensive examples and contextual situations to help fully understand the application of
each standard. Detailed implementation guidance reduces the knowledge gap among preparers
and auditors of financial statements. Consequently, it raises a possibility of applying the
standards consistently and minimizing the compliance gaps between applicable requirements
and actual practices.
50. The financial sector regulators issue prudential regulations that may have some
impact on preparation of general purpose financial statements. In terms of practical
application, the CBRC and CIRC issue prudential requirements. The differences between
17
Tang, Y.W., Chow, L.M., and Cooper, B.J., Accounting and Finance in China: A Review of Current Practice
(Hong Kong: Sweet and Maxwell, 2000).
18
Lin, K.Z., and Chan, K.H., “Auditing Standards in China – A Comparative Analysis with Relevant International
Standards and Guidelines”, The International Journal of Accounting, Vol. 35, No. 4, pp. 559 -77, 2000.
prudential reporting requirements and general purpose financial reporting requirements arise in
the banking and insurance sectors, for instance in loan-loss provisioning of banks and
calculation of technical reserves in the insurance companies. In some cases, such differences
may lead to inconsistencies in application of accounting regulations across banks and insurance
companies.
51. Chinese Accounting Standards are recognized as applicable financial reporting

standards in various jurisdictions outside China. On December 12, 2008, the European
Union (EU) issued relevant decrees deciding that, during the transitional period between 2009
and 2011, the Chinese enterprises that are listed in stock exchanges of EU member countries
may prepare financial statements in accordance with the Chinese Accounting Standards. The
Hong Kong Institute of Certified Public Accountants (HKICPA) signed a joint statement with
the CASC on December 6, 2007, recognizing equivalence of CASC and the applicable
accounting standards in Hong Kong. It is worth mentioning that full IFRS is the applicable
accounting standards in Hong Kong.
52. The MOF has been translating annual bound volumes of International Accounting
Standards and International Financial Reporting Standards since 1980s. These translated
standards are used as reference for the development of CAS. The International Accounting
Standards Committee (IASC) Foundation recognizes the Chinese edition of IFRS as an official
translated publication of IASB. The Chinese-language IFRS is very helpful for the students,
teachers, and professionals to have access to the internationally accepted accounting standards.
53. Arrangements have been put in place for convergence of CSA with ISA. In 2005, the
China Auditing Standards Board signed a memorandum of understanding with the IAASB for
achieving convergence with ISA. In this respect, China has already made significant progress.
Also, on December 6, 2007, the CASB and HKICPA signed a joint declaration on the
convergence of CSAs and Hong Kong Auditing Standards. The CASB is currently working to
produce exposure drafts on updated CSA for public comments. The CICPA has planned to
update the CSA with ISA for achieving full convergence by October 2010.
Ensuring Compliance with Accounting and Auditing Standards
54. The MOF took various preparatory steps to support ASBE implementation. In July
2006, MOF launched a nationwide training campaign on the new standards, engaging listed
companies, accounting firms that are licensed to provide audit services to the listed companies,
accounting academics in higher educational institutions, and relevant regulatory authorities.
The training programs focused on practical implementation issues and interpretations of ASBE.
More than 10,000 trainees took part in these training programs. At the same time, MOF
experts conducted on-site studies in listed companies to identify possible problems of
implementation and to determine necessary actions for overcoming those problems.
55. The MOF, in collaboration with the relevant regulatory agencies, closely monitored
implementation of the ASBE. The MOF and CASC, assisted by experts from CSRC, CBRC,
CIRC, SASAC, and other groups established the Expert Working Group on ASBE
Implementation to give advice on emerging issues concerning implementation of the standards.
At the same time, through the accounting regulatory bodies of the financial sector in provinces,

autonomous regions, and municipalities, MOF put in place a real-time feedback mechanism in
order to detect and resolve the ASBE-implementation problems. The MOF also established a
coordination group comprising members from standard setting bodies, securities market
regulators, accounting regulatory and inspection bodies, CICPA, and other departments to
determine noncompliance with ASBE requirements in corporate financial statements. This
helps in monitoring and enforcing the new accounting standards in China.
56. In order to support implementation of the new CAS, MOF has developed a
standardized internal control system for enterprises. In July 2006, MOF together with
CSRC, CNAO, CBRC, and CIRC launched the China Internal Control Standards Committee
(CICSC) to jointly promote the standard system of internal control in China. In June 2008,
MOF with another four ministries and commissions jointly issued the Basic Standard for
Enterprise Internal Control and concurrently issued internal control evaluation guidelines, 22
guidelines on internal control application, and draft supporting guidelines.
57. The MOF Supervision and Inspection Bureau conducts review of company financial
statements and practice review of the accounting firms and CPAs. In this regard, a working
arrangement has been developed with the accredited agencies of MOF in provinces and
provincial financial bodies. On the basis of the results of audit practice reviews, 60 accounting
firms have been licensed to provide audit services to listed companies. Each of the accounting
firms is subjected to practice review once in a three-year period. The practice review
conducted by the MOF Supervision and Inspection Bureau covers internal risk control,
compensation system, audit practice quality, and other related aspects. When infractions are
found, the MOF and provincial financial bodies determine the appropriate sanctions ranging
from warning, fines, penalties, temporary suspension of audit practice, and up to withdrawal of
practice license.
58. The CSRC has instituted forward-looking arrangements to enforce financial

reporting requirements by listed companies. The CSRC reviews corporate financial
statements of listed companies for the purpose of monitoring and enforcement of applicable
standards. In addition, CSRC undertakes the review of audit practice. Out of 60 licensed
accounting firms that are eligible to audit listed companies, more than 50 percent of these firms
were reviewed by the CSRC at the end of 2008. According to the CSRC plan, these licensed
accounting firms will be reviewed at least once in every three years. In conducting the
accounting firm review, when necessary, the CSRC contracts with technical experts from other
accounting firms. The CSRC focuses on internal quality assurance systems and auditors’
compliance with applicable standards. The CSRC has established a ‘professional integrity and
ethical track record system’ in its review process. It records basic information of the
accounting firm, inspection results, and any penalties imposed. There are instances when
CSRC has initiated administrative sanctions against statutory auditors for their wrong doings.
Based on the review results, the MOF and CSRC re-assess the qualification of accounting
firms on providing statutory audit services to listed companies. The review results are shared
with the CICPA along with recommendation for action based on the nature of infraction.
59. There is a need for improving oversight of the quality of financial reporting and
auditing of non-listed public interest entities. Although these entities are regulated by their
relevant government authorities, scrutiny over the quality of their financial statements and/or

their accounting firms is not as robust as those of listed enterprises. The absence or weakness
in monitoring and enforcement of financial reporting requirements for public interest entities
poses a significant threat in ensuring good governance and developing a sound financial system
in a country. Many of the non-listed entities in both financial and non-financial sectors in
China, including state-owned enterprises and credit cooperatives, have significant public
interest. However, their accounting and auditing activities are not subject to strong monitoring
and enforcement, as in the case of listed companies. As a result, economic decisions regarding
those entities might end up not being based on credible financial information. In the financial
sector, it is unclear what sanctions could be imposed if non-listed banks and the credit
cooperatives do not fully comply with applicable accounting and financial reporting
requirements. Given the public sensitivity of these entities, the concerned authorities might
wish to review this area and consider putting in place appropriate arrangements while taking
into account the Chinese realities and circumstances.
60. The CBRC needs to have a mechanism to regularly review the general purpose
financial statements of banks and other financial institutions to ensure compliance with
the financial reporting requirements. The CBRC enforcement actions are mostly limited to
specific problematic cases, either raised by the statutory auditors or any other regulators like
CSRC, or as a by-product of monitoring and enforcing prudential regulations. The CBRC
primarily relies on examination of prudential reports and their own investigations. Since the
prudential norms set by the CBRC generally address risk issues and prudential capital
adequacy, both off-site and on-site supervisors give priority to checking the compliance with
these requirements during their examinations.
61. The CNAO has the power to impose administrative punishments for violating the
financial management and reporting rules by state-owned enterprises. In order to
discharge this responsibility more effectively, the CNAO needs to have adequate number of
technically qualified people who can review the financial statements and identify accounting
and auditing noncompliance with respect to international good practice.
62. The stock exchanges’ monitoring and enforcing mechanism regarding financial
reporting and disclosure requirements needs further improvement. The stock exchanges
work in collaboration with the CSRC and its local resident offices. Sanctions for significant
noncompliance by the listed companies are carried out by the CSRC. The Shanghai and
Shenzhen Stock Exchanges, as part of monitoring compliance with the listing rules, review
financial statements filed by the listed companies. The listed companies use the XBRL system
for filing financial statements. In the recent past, the stock exchange reviewers have identified
manipulations with regard to accounting estimates in various companies. However, due to
shortage of highly skilled human resources, the stock exchanges find it difficult to efficiently
conduct financial statement reviews. Most common sanction for noncompliance is in form of a
warning letter. If significant noncompliance is found, the issuer is asked to make corrections
and re-issue the financial statements.
63. The CICPA conducts auditors practice review. Based on review results, the CICPA has
taken some punitive measures against auditors for their noncompliance with applicable
standards and requirements. The CICPA has two committees – disciplinary committee and
complaints committee – to deal with any infractions detected through the review. The

committees consist of representatives from the industry, accounting and auditing experts,
lawyers, and other members of the community. Based on the recommendation of the
committees, CICPA initiates actions against the wrongdoers. The professional disciplinary
measures are divided into 3 categories: public condemnation, circulating a notice of criticism
within the profession, and reprimand, which are all recorded in the professional regulatory
information system of the CICPA. An effective review mechanism can ensure that accounting
firms have adequate quality control arrangements in place and can enhance stakeholder and
investor confidence in China’s accounting and auditing practices. In this regard, the ROSC
team views that the CICPA is well placed to play an important role with regards to the external
quality assurance system, both through strengthening its own practice reviews and supporting
the audit practice review of listed companies by the CSRC. Therefore, CICPA should work for
continuously strengthening the procedure for reviewing the audit practice and focusing more
on the quality assurance of accounting firms.
64. The CIRC needs to further improve the mechanism for ensuring full compliance
with financial reporting requirements. The CIRC inspectors review the annual returns and
financial statements of insurers for compliance with both prudential and financial reporting
requirements. However, the focus tends to be more on compliance with prudential
requirements. The CIRC primarily relies on auditor reports for ensuring compliance with the
applicable accounting standards rather than independently reviewing the financial statements.
Given improvement in the quality of the financial statements of insurance companies and the
increase in the number of insurers, CIRC concentrates their reviews on a selected number of
insurance companies so that this process is more effective and efficient.
III. ACCOUNTING STANDARDS AS DESIGNED AND AS PRACTICED
65. The CAS and IFRS are basically comparable. The memorandum signed between
CASC and IASB in 2005 identified two major differences between the two sets of standards.
These are (a) reversal of impairment losses and (b) disclosure of related party relationships and
transactions. In January 2008, CASC and IASB established a continuing convergence
mechanism. Meetings between the two parties in April and October 2009 helped to identify
and eliminate some differences between CAS and IFRS. In August 2009, the IASB decided to
exempt from the disclosure requirements for transactions between a government-controlled
reporting entity and that government or other entities controlled by that government. This
exemption would ensure CAS convergence with IFRS in respect of related party relationships
and transactions.
66. As is relatively common in many countries, tax rules tend to influence the
preparation of general purpose financial statements. This often deters the fair presentation
of financial information. In order to satisfy the requirements of taxation authorities with regard
to the recognition of taxable revenues and deductible expenses, the preparers of general
purpose financial statements often tend to deviate from applicable financial reporting standards,
preferring to follow the taxation regulations. As a result, treatment of certain items in the
general purpose financial statements may be different from that which should apply under the
CAS. The ROSC team, through facilitated discussion with various stakeholders, observed that
the preparers of financial statements have the ability to manipulate accounting policies in

revenue recognition and inventory valuation to reduce their tax liabilities.
67. Companies and their auditors face a number of practical constraints in

implementing CAS. Most of these problems arise from the lack of adequate expertise among
the corporate accountants who find it difficult to prepare financial statements in accordance
with the CAS requirements. It has been observed that some corporate accountants and auditors
face considerable difficulties in applying the concepts of fair value and impairment losses in
implementing applicable standards. Moreover, some accountants and auditors lack industry-
specific knowledge with regard to application of relevant CAS.
68. Given China’s economic size, there appears a shortage of high-quality and credible
expertise on the valuation of property, plant, and equipment. This sometimes limits the
reliability of valuations used on privatization, business combinations, and other non-cash
transactions. Consequently such a situation tends to significantly limit compliance with
applicable standards in measurement and disclosure of financial information.
69. In the general purpose financial statements of banks, loan loss provisioning is
mainly based on prudential requirements. This is common in many other jurisdictions.
Banks generally calculate impairment in the unsecured portion of loans and receivables on the
basis of a provisioning matrix approved by the CBRC. This calls for a range of fixed
provisioning rates for the number of days a loan has been classified as nonperforming, which is
one of the factors considered in calculating the loan loss provisions. This methodology may
not provide CAS-compliant results. The CAS requires impairment or loan losses to be
calculated as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows (excluding future credit losses that have not been incurred), and
discounted at the financial asset’s original effective interest rate. However, some Chinese
banks present a comparative picture (without reconciliation) showing the impact of applicable
CAS and CBRC requirements on reported earnings with regard to loan loss provisioning. The
CBRC is aware of these differences and will look to resolve this matter in the future.
70. The methodology to discount technical provisions for pending claims departs from
internationally accepted principles. Insurance companies are required to take into
consideration CIRC-issued Rule No. 14, Preparation and Submission of Insurance Company
Solvency Report: Insurance Groups and its Practice Guide. Insurance companies need to
comply with CIRC-issued regulations regarding the measurement of technical reserves, which
are formulaic and differ from the measurement principle that would apply under CAS. Under
this approach, insurance companies are required to discount provisions for pending claims only
when they are expected to be paid in 4 years or more. Determining whether a claim will be
settled in three years (and does not have to be discounted) or five years (and should be
discounted) may be very arbitrary (e.g., in case of claims related to low frequency risks and
claims subject to settlements or court rulings). More importantly, an insurance actuary
generally evaluates the expected timing for all claim settlements and determines whether
discounting is required or not. Reference to an arbitrary cut-off timeframe does not conform to
internationally accepted practices.
71. The ASBE was mandatorily applied for the first time in the preparation of financial
statements of the 1,570 listed companies as of January 1, 2007. The MOF, with

collaboration of the relevant regulatory agencies, provided guidance and supervision
mechanisms for supporting implementation of ASBE in the listed companies. In order to
provide a picture of the application of ASBE in listed companies, the Accounting Regulatory
Department of the MOF has prepared and published a research report entitled Analysis of the
Implementation of New Accounting Standards in Listed Chinese Companies in 2007. Again in
2008, a similar study report was published by the MOF Accounting Regulatory Department.
These reports depict a picture of continuing and smooth implementation of ASBE.
72. Many companies’ financial statements have shown a high degree of compliance
with applicable accounting standards and reporting requirements. However, ROSC team
identified noncompliance in some financial statements. The ROSC team reviewed 38 listed
companies’ financial statements with a focus on issues relating to presentation and disclosures.
These 38 sets of financial statements cover the financial statements audited by various
categories—top, middle, and bottom—of MOF- and CSRC-approved accounting firms. Some
examples of noncompliance in the reviewed financial statements are as follows:
x Insufficient disclosure of information in the notes to the financial statements with

regard to content and process of specific transactions. For instance, there are
inadequate disclosures regarding risks associated to financial instruments,
determination of fair value, etc.
x Misclassification of leases (treating finance lease as operating lease). This
misclassification improves the liability side of the balance sheet and creates more
favorable borrowing capacity.
x Inadequate disclosures in the area of debt restructuring with shareholders and
subsidiaries.
x Inadequate disclosure as to the basis for determining business combination.
x Inadequate or no disclosure as to whether actuarial or any other forms of valuation had
been made to quantify outstanding liabilities for post-employment benefits.
x Inadequate segment reporting as to geographical areas, product lines, and elements of
the balance sheet.
x Classification of restricted equities as available-for-sale financial assets, which should
have been accounted for as long-term equity investments in accordance with the
applicable Chinese Accounting Standards.
IV. AUDITING STANDARDS AS DESIGNED AND PRACTICED
73. In general, level of compliance with applicable auditing standards varies greatly
across accounting firms. To assess actual auditing practices, the ROSC team interviewed
practicing auditors and leaders of the audit profession. Discussions were held with the partners
representing large and medium-size accounting firms. It appeared that auditors of large
accounting firms generally tend to follow auditing standards more efficiently than the small
and medium-size practices. Nevertheless, there were instances where some of these larger
firms apparently could not ensure a proper quality audit. However, smaller accounting firms

find it difficult to bear the cost of implementing auditing standards in an adequate fashion.
Application of CSA requires an auditor to make an assessment of risk and internal controls,
leading to an audit strategy and plan that encompasses systems, transactions, and balance
testing, which enable the auditor to gain adequate audit evidence for expressing opinion on the
financial statements. The large and medium-size accounting firms often have better trained
staff and access to updated audit practice manuals. However, smaller accounting firms
struggle to keep up to date with latest standards and may have no or limited access to high-
quality audit methodology, which has been designed to comply with applicable standards. The
ROSC team observed that some cases of noncompliance with CAS detected through the ROSC
review of audited financial statements were not revealed in the corresponding auditors’ reports.
Various stakeholders suggested that improved audit supervision by the audit partners, instead
of relying significantly on the trainee students, would improve the application of auditing
standards. 19
74. The quality of corporate financial reporting will benefit from further improvements
in actual auditing practices. Some major financial scandals in different parts of the world in
the early 1990s exposed publicly the ethical-and quality-related problems that existed among
the accounting firms for some time, resulting in investors’ loss of confidence in the audited
financial statements. 20 Institutional reforms and other measures have been undertaken to
enhance the quality of financial reporting, but there is still room for improvement. 21 The
following examples of weaknesses of the audit practices tend to affect the quality of auditing in
China:
x Audit risk and audit materiality are not determined in accordance with the
standard and not adequately considered when conducting the audit.
x Documentation practices are not adequate to provide audit evidence to support
the audit opinion, mostly in the audit of small and medium-size enterprises.
x Meaningful analytical procedures are not always undertaken along with tests of
control and substantive procedures.
x The small and medium-size accounting firms, due to lack of capacity, face
difficulties in quality control requirements. Second partner peer reviews are in
many cases not done in these firms.
x Auditors sometimes find it difficult to obtain audit evidence and so rely on
management representations, particularly for fair values, impairment of assets,
related party transactions, segment information, and contingent liabilities.
19
From discussions by the ROSC team with corporate accountants, it was revealed that due to high turnover of
staff in accounting firms, in many cases the junior audit staffs lack adequate training before conducting audit
work.
20
Xia, J. Z, Y. Zhang, and Z. Xie, “The Making of Independent Audit Standards in China,” Accounting Horizons,
Vol. 14, No. 1, pp. 69-89, 2000.
21
One such measure was the “Rectification Campaign.” China initiated this campaign between 1997 and 1999 in
order to standardize and raise the quality of accounting and auditing practices. The campaign had on-site
inspection of accounting firms; and almost 12,700 individual CPAs were either forced to withdraw from the
profession or were disciplined. Few practicing firms had their licenses cancelled for noncompliance with
applicable standards and norms.
x Although the CSA on auditor’s report is fully comparable with ISA 700, The
Independent Auditor’s Report on General Purpose Financial Statements,
Chinese audit reports tend to provide less detail on audit qualifications and
explanation paragraph.
V. PERCEPTIONS ON THE QUALITY OF FINANCIAL REPORTING
75. In general terms, users of financial statements in China appear to be relatively satisfied
with the quality of the financial reporting by listed companies. Interviews with representatives
of banks, credit rating agencies, and other stakeholders revealed a consensus that financial
information provided by the listed entities, including listed banks and insurance companies
meet their needs and expectations. This is broadly attributed to the improved quality in
application of CAS in the publicly traded corporate sector. However, many expressed concern
about the financial reporting of other enterprises.
76. Some stakeholders, interviewed by the ROSC team, perceive that the companies,
audited by the large accounting firms have high-quality financial information. The
perception is that, a high degree of reliance is placed on the financial statements that are
audited by large accounting firms. Some other stakeholders viewed that an audit does not add
value but is only a requirement for the company to win a contract or to obtain a bank loan.
77. The corporate financial reporting quality is not similar in all parts of China. In
less-developed areas of the country, the preparers and auditors of financial statements are
relatively weak to properly handle complex accounting and auditing issues. Also, the structure
of accountancy profession in remote areas is not adequately developed. For all these reasons,
the quality of corporate financial statements varies in different parts of the country.
VI. POLICY RECOMMENDATIONS
78. The main purpose of this section in the ROSC is to offer suggestions to the Government
of the Peoples’ Republic of China for further strengthening its private sector’s accounting and
auditing practices and in enhancing financial transparency in the corporate sector. The
principle-based policy recommendations arising from the assessment of existing practices will
be discussed during a workshop with the Government and in-country stakeholders.
79. Insofar as the recommendations would support some of the key development
objectives set by the Government, a wide range of country stakeholders would benefit
from them. These stakeholders include the following:
x The financial community, especially pension funds, investment funds, and banks since
increased accuracy and reliability of the financial information could enhance their
ability to make informed investments and loans and could lead to broadening pension
funds’ possibilities of investing.
x Small and medium-size enterprises and large non-registered enterprises, which could
gain easier and cheaper access to capital. Making available more complete and
accurate financial statements to investors and lenders will allow them to place greater

reliance on those statements, which in turn will contribute to diminishing the perceived
or real risk related to these investors and lenders. Ultimately, the improved perception
should lead to reducing investing and lending premium, reducing financing costs, and
improving development prospects on small and medium-size enterprises.
x Employees of the private sector, who have an important stake in their company’s
success and are entitled to receive accurate information on which to judge the impacts
and soundness of management decisions. Also, as future retirees they would be the
ultimate beneficiaries of improved private pension fund investments.
x The public sector – since taxes on corporate profits are based on accounting records,
reinforcing accounting and auditing practices in the corporate sector would support the
Government’s efforts to limit tax evasion and increase its revenues.
x The accounting profession – since increased visibility and public confidence arising
from the delivery of high-quality professional services would elevate the image of the
profession in the minds of the broader business community and its ability to attract
high-quality graduates.
80. The ROSC A&A recommendations are interrelated and mutually supportive and
require a holistic approach for implementation. The ROSC team believes that the champion
role played by MOF has been critical for the past success and advises that this role continues
with the support from the multi-disciplinary steering committee. The members of the steering
committee should advise policymakers on how to implement the ROSC A&A follow-up
country action plan for further improvement of the corporate financial reporting regime.
A. Statutory Framework
81. With regard to statutory framework, the following actions for underpinning the
corporate accounting, auditing, and financial reporting practices are recommended
through issuance of legal pronouncements:
x Require legal entity and/or consolidated financial statements to be audited only when
there is a public interest for such an audit irrespective of entity’s legal form. In general
terms, public interest should include listed companies, banks, insurance companies,
investment funds, pension funds, and other large entities, including state-owned
enterprises of certain size (which may be measured by the amount of revenue it
generates or assets it owns, and/or by its number of employees).
x Require public interest entities (not only listed companies as it now stands) to make
audited financial statements, including notes to the financial statements, readily
available to the public.
x Make arrangements so that the financial statements of banks, insurance companies, and
similar financial institutions, under the regulatory purview of CBRC and CIRC, will be
audited by the MOF/CSRC-approved auditors.

x Set eligibility criteria as to who can provide training to the aspiring professional
accountants.
B. Institutional Capacity Building
82. With regard to strengthening key institutions in the field of corporate accounting
and reporting, the following recommendations should be considered:
x The MOF should continue its efforts for maintaining highly skilled workforce to ensure
high-quality corporate financial reporting in China.
x The CSRC should engage additional professionally qualified and experienced

accountants and train the existing staff for further enhancing the effectiveness of the
reviews of financial statements and audit practices. 22
x The CBRC and CIRC should develop a core group, imparting them additional training
to identify accounting and auditing infractions in the financial statements of banks and
insurance companies.
x The CBRC should align the banking norms on loan loss provisioning with applicable
standards and Basel Committee’s recommendations. In this regard, it should undertake
a comprehensive study and cover the impacts for banks in terms of (a) amount of
provisions, (b) information system supporting the monitoring and accounting of loans,
(c) capacity-building efforts required for banks to be able to apply a methodology
consistent with accounting standards and Basel Committee’s principles.
x The CICPA should involve more qualified personnel, both internal and external, for
carrying out the audit practice review.
x Accounting firms, in particular small and medium-size practices, should have access to
updated publications on IFRS and ISA with the support of CICPA. The IFAC Guide to
Using International Standards on Auditing in the Audits of Small and Medium-Size
Entities should be adopted and introduced to local practitioners.
C. Monitoring and Enforcement
83. With regard to improvement of monitoring and enforcement of applicable

accounting and auditing standards, the following recommendations should be considered:
x Auditors should supplement capacities of CBRC and CIRC by acting as whistle-

blowers by bringing the infractions of applicable standards to the attention of these
statutory regulators. Since the financial sector’s vulnerabilities can have quick
multiplier effects, appropriate advanced warnings by auditors would help to make the
financial sector supervision more efficient and effective. Added to this benefit, there
22
According to IFAC, a professionally qualified accountant is an individual who is a member of an IFAC member
body.
could be a synergy between the requirements of prudential regulations and those for the
general purpose financial reporting.
x An awareness program should be implemented to improve the degree of compliance

with the financial reporting requirements. The related regulatory bodies should
continue their efforts for motivating the top management of corporate entities to
comply with the accounting and financial reporting standards. Through workshops, top
management should be briefed on their responsibilities regarding compliance with
standards, and related enforcement policies. New dimensions of regulatory regimes
affecting accounting and auditing, and the role of transparent financial reporting in
financial and private sector development could also be presented. Moreover, an
outreach program could be introduced for financial executives and accounting staff of
business enterprises, in different parts of the country, to disseminate knowledge on
current developments in accounting and financial reporting standards and practices.
D. Professional Education and Training
84. For enhancing academic and professional education and training, the following
recommendations should be considered:
x University-level accounting curricula should be reviewed to ensure a consistent

approach is followed in China’s universities. Particular focus should be given to
include practical application of accounting and auditing standards and improve
communication skills and professional judgment, together with case studies to best
prepares accountants (rather than bookkeepers) for careers in the corporate sector.
x The staff of the regulatory agencies should have further exposure to practical
dimensions of accounting and auditing requirements as per international good practices.
Furthermore, they should undertake industry-specific training to update their skills.
x Accountants in state-owned enterprises should be encouraged and persuaded to enroll

in retooling programs; and companies should also take similar approach to support
employee training and study toward professional accountancy qualification.
x The MOF should develop further guidance on how to arrange delivery of high-quality
training programs on practical implementation aspects of accounting and auditing
standards and code of ethics for professional accountants. In this regard, MOF should
work in collaboration with NAI and CICPA.
x The CICPA should update its practical training requirement of aspiring professional
accountants. Also, the CICPA should institute a sound mechanism to ensure the quality
of the practical training.
x The MOF and CICPA should reinforce the importance of continuing professional
development in order to ensure that members are fulfilling their requirement to upgrade
professional knowledge. There is a clear need for improvement in the content,
structure, and delivery of the CPD program.
x Participants in the financial reporting process should be encouraged to gain education
and training for discharging their professional responsibilities effectively. This covers
corporate accountants, regulators, auditors, and taxation officers. The challenge for
training and educating the existing and newly qualified accountants and auditors is to
impart the core skills and concepts related to private sector accounting and auditing,
including principle-based accounting standards, modern auditing standards and
techniques, managerial accountability toward shareholders and other stakeholders, and
advanced corporate governance.
E. Implementation Priority
85. The implementation of policy recommendations should be prioritized in the

following order:
(a) Issue legal pronouncements:
x Make the CAS mandatory only for the public interest and rest of the entities
to comply with simplified accounting and corporate financial reporting
requirements,
x Require not only the listed companies, but all financial market institutions,
to get their financial statements audited by the MOF/CSRC-approved
auditors, and
x Require all public interest entities to make their audited financial statements
publicly available.
(b) Strengthen current audit practice review arrangements by MOF, CICPA, and CSRC
through recruiting more technically qualified people who have the experience of
implementing accounting and audit standards.
(c) Revise the accounting curriculum of the institutions of higher learning, focusing on
the practical application of CAS and CSA and recruiting adequate number of
academics to teach the practical application of standards.

APPENDIX
Roadmap for Continuing and Full Convergence of the

Chinese Accounting Standards for Business Enterprises with the
International Financial Reporting Standards
(Exposure Draft)
Ministry of Finance, People’s Republic of China, September 2, 2009
International convergence is an inevitable choice for nations to grow their economy and
economic globalization. Since 2005, China has developed the ASBEs that are substantially
converged with the IFRSs and made a smooth transition from the old system to the new standards
thanks to an effective and stable implementation of the new standards, thus taking the lead
among Asian countries and emerging market economies,. After the international financial crisis
broke out, the G20 summits and the Financial Stability Board (FSB) initiated to establish a single
set of high-quality global accounting standards, raising the issue to an unprecedented high level.
The International Accounting Standards Board (IASB) has taken a series of important actions to
accelerate the international convergence of accounting standards of various jurisdictions. In this
context, it’s imperative to respond actively to the changed international landscape.
I. A roadmap for continuing and full convergence of the ASBEs with the IFRSs developed
and released in response to G20/FSB recommendations
In response to the international financial crisis, the G20 summit in Washington on November 15,
2008 produced a profound analysis and summary of root causes of the crisis, putting forward
action plans including improving the IASB governance and establishing a single set of high-
quality global accounting standards. The G20 summit in London in April 2009 required proactive
collaboration from member countries. From June 26 to 27, 2009, FSB, restructured from FSF,
held its inaugural meeting in Basel, Switzerland, deciding to establish a steering committee and
three standing committees responsible for vulnerability assessment, supervisory and regulatory
cooperation and standards implementation. The Ministry of Finance of China (MOF), the
People's Bank of China (PBOC), and the China Banking Regulatory Commission (CBRC) are
members of the FSB. One task of its Standards Implementation Committee is to promote
international convergence of national accounting standards.
Based on the recommendations of the G20/FSB, the IASB spared no effort to study the problems
unveiled by this financial crisis and look for how to improve accounting standards to help
regulators solve these problems. The IASB:
(1) In December 2008, established the Financial Crisis Advisory Group (FCAG), which
issued a report in July 2009 with detailed proposals to improve financial reporting in
response to the crisis;
(2) On May 28, 2009, issued an exposure draft Fair Value Measurement, which will be
finalized in the first half of 2010.
(3) On July 14, 2009, issued an exposure draft Classification and Measurement of Financial
Instruments as the result of the first phase of the comprehensive project of reducing the
complexity of accounting standards for financial instruments; and plan to issue an
exposure draft of the second phase in October addressing issues concerning pro-
cyclicality and loans provisioning to simplify accounting for impairments of financial

assets, and another exposure draft for the third phase to be issued in December to
simplify hedge accounting.
(4) Proposed to cooperate with the FSB to establish a formal dialogue for financial reporting
of financial institutions to enhance the dialogue mechanism with all stakeholders.
FSB will monitor progress in implementing key international regulatory standards, including the
IFRSs, by member countries. The matter of accounting standards has grown into a priority task
with public accountability and government background, not only for the accounting profession.
In response to the G20/FSB recommendations, we will track and participate in major projects of
the IASB in light of China’s actual situation, release the roadmap for continuing and full
convergence of the ASBE with the IFRSs, and make contributions to a single set of high-quality
global accounting standards.
II. The ASBE is substantially converged with the IFRSs, laying a solid foundation for the
continuing and full convergence
In the whole year of 2005, the MOF focused on finalizing the IFRS-converged ASBE (including a
Basic Standard and 38 Specific Standards). During this period, IASB sent several missions to work with
the Accounting Regulatory Department of the MOF. On November 8, 2005 the IASB and the China
Accounting Standards Committee (CASC) signed a joint statement. The statement indicated that
China issued exposure drafts of the Basic Standard and Specific Standards in the past year and
the system of ASBE was being developed with a view to achieving convergence of those standards
with the IFRSs. Both sides acknowledged that the two sets of standards had differences on a
limited number of matters, including the reversal of impairment losses and disclosures of related
party relationships and transactions. The two sides agreed to continue to push forward the related
work to eliminate these differences. In addition, IASB identified a number of accounting issues in
China because of its unique circumstances and environment, including the disclosure of related party
transactions, fair value measurements and business combinations between entities under common
control, where China could be very helpful to the IASB in developing high-quality IFRSs solutions.
The MOF officially promulgated the ASBE system on February 15, 2006. Sir David Tweedie,
Chairman of the IASB, attended the releasing conference and highly commended the new system. The
ASBE has been effective to all listed companies from January 1, 2007. The MOF worked with the
China Securities Regulatory Commission (CSRC) and other agencies to enhance guidance over and
dynamic monitoring of listed companies in their implementation of the accounting standards. As a
result of joint efforts from all related parties, the ASBE has been well tested and proven in practice. The
Accounting Regulatory Department of the MOF took a “day-to-day tracking and one-by-one
analyzing” approach for an in-depth analysis of the financial reporting information disclosed by
each listed company, producing an analysis report on the effective implementation of the
accounting standards by Chinese listed companies in 2007, the English version of which was
timely sent to the IASB, the World Bank and the European Commission. In the first half of 2009,
the Accounting Regulatory Department of the MOF adopted the same approach to further track
the implementation of ASBE by listed companies in 2008, producing a similar report with the
conclusion that listed companies in China maintained their effective and smooth implementation
of ASBE in the year covered.
In May 2008, IASB experts conducted a field study of the ASBE implementation in Chinese listed
companies, holding meetings with listed companies, accounting firms and investment banks and funds
respectively and further confirmed the conclusion of the smooth and effective implementation of the
system. The World Bank experts also appreciated the effective implementation of the ASBE after
their study tour, saying that the China Accounting Reform and Development project was one of
the Bank’s most successful technical assistance projects. According to the assessment by the

Internal Market & Services DG, EU, the ASBE performed well in China. On December 12, 2008 the
EU issued a regulation on the equivalence of third country accounting standards, among other things
allowing Chinese enterprises listed or to be listed on the EU regulated markets to file financial
statements prepared under the ASBE for the transitional period from 2009 to the end of 2011. The
CASC and the Hong Kong Institute of Certified Public Accountants (HKICPA) announced the
equivalence of accounting standards of the mainland of China and Hong Kong (Hong Kong Financial
Reporting Standards are equivalent to the IFRSs) by signing a joint declaration on equivalence on
December 6, 2007, the culmination of their one-year comparative study of the two sets of standards.
This can facilitate easier access to Hong Kong stock market and lower costs for mainland enterprises,
serving the common development of capital markets on both sides.
The aforementioned facts point to the convergence of the ASBE with the IFRSs, and its effective
implementation by listed companies in China, widely recognized both home and abroad. On this
basis, China, aware of the latest international changes and answering to the calls of the G20
summits and the FSB, shall focus on the continuing and full convergence of its accounting
standards to make its contribution to the building of a single set of high-quality global standards.
III. Schedule and main items of the roadmap for continuing and full convergence of the
ASBE with the IFRSs
It is a major systematic project to build a single set of high-quality global accounting standards.
China fully recognizes and appreciates the unremitting efforts made by the IASB over the years
and the many results thus achieved, especially the countermeasures it took in response to the
crisis as recommended by the G20 and the FSB, and will continue to support the IASB in its
endeavor. Meanwhile, we believe that as emerging market economies have their own legal,
economic and cultural specificities, establishing high-quality global accounting standards should
be based not only on economic conditions in developed countries but also on the full account of
the circumstances in emerging market economies.
A. We will actively participate in the IASB agenda items on which major revisions are
planned to help with better-informed development of a single set of high-quality
global accounting standards about the circumstances in emerging market economies.
The CASC and the IASB have jointly set up a working mechanism for the continuing
convergence, under which they hold at least two technical meetings a year for in-depth
analysis of the implementation of the accounting standards and the future development of
the IFRSs. The mechanism proves highly pragmatic and effective. As part of its
continuing and full convergence program, China will be an active participant in IASB’s
revisions of the financial instruments, fair value measurement and financial statement
presentation standards in response to the international financial crisis. The MOF has also
proactively initiated to set up the Asian-Oceanian Standard Setters Group (AOSSG) with
the same hope that the IASB will give as much as possible consideration to the economic
realities in China and other emerging market economies.
China supports the IASB to simplify the IAS 39 Financial Instruments: Recognition and
Measurement. According to the exposure draft of the first phase, Classification and
Measurement of Financial Instruments, which was issued on July 14, financial
instruments are proposed to be classified into two categories, i.e., measured at amortized
cost and at fair value. While recognizing the value of the “two category” solution, China,
as an emerging economy, is concerned about the expanded scope of fair value
measurement. China believes that for financial assets/liabilities with basic loan features
and managed on a contractual yield basis, amortized cost measurement will provide more
useful information.

China agrees to introduce other comprehensive income into financial statements with the
reservation that substantial changes to the internal structure and presentation items of the
current financial statements may not be appropriate. Since the current structure and items
of presentation are well used in practice. there appears no need of major structural
changes to them. Besides, there may be legal barriers to significant revisions of the
presentation of statements.
B. We will make an effort to eliminate the few differences existing between the ASBE
and the IFRSs. After more than four years of discussion, IASB officially approved the
revision to IAS24 Related Party Disclosures on August 4, 2009. The revised IAS24
considers China's situation and removes the difference between the ASBE and the IFRSs
on this matter. As the accounting for assets revaluation in corporate restructuring is unique
to China, the MOF has turned to the IASB for a solution for several times. On August 26,
2009, the IASB in its annual improvements project decided to make amendments to the
IFRS 1 First-time Adoption of International Financial Reporting Standards, with the
commitment to make corresponding revision. On that, the IASB should be credited with
its pragmatic and effective efforts to accommodate the specificities of emerging
economies like China.
China's business combination standard spells out the accounting for business
combinations between entities both under common control and not under common control.
While IFRSs provide for the accounting for combinations not involving entities under
common control, namely the acquisition method, accounting for business combinations
involving entities under common control remains a vacancy. It is indicated in the Joint
Statement 2005 between the CASC and the IASB that the provisions and practice of the
ASBE in this respect will provide the IFRSs with a useful reference. We expect IASB to
add this project into its agenda as soon as possible.
According to the IFRSs, enterprises are permitted to reverse impairments of non-current
assets, such as fixed assets, intangible assets, etc., recognized previously and include
them in profit or loss. However, according to the China's assets impairment standard,
such asset impairment losses are not allowed to be reversed once recognized. IASB
expressed its understanding of China's rule and asked us to follow the progress of the
convergence project of FASB and IASB on assets impairment to jointly study and resolve
this problem.
C. Schedule for the continuing and full convergence of the ASBE with the IFRSs. The
IASB plans to complete major projects like financial instruments, revenue recognition
and financial statements presentation by 2011. Therefore 2011 is also the target year for
the continuing and full convergence program of the ASBE, making 2010-2011 a critical
period for the convergence. The MOF plans to kick off the overhaul to its ASBE system
in 2010 and finish by 2011. All large and medium-sized enterprises will be required to
use the revised standards as of 2012. The revised ASBE system will still consist of three
parts, i.e., the Basic Standard, Specific Standards and Implementation Guidance. While
the Basic Standard remains unchanged, the Specific Standards will be revised and
complemented. The existing Implementation Guidance will be incorporated in related
Specific Standards and the current Explanatory Guidance for the ASBE will be renamed
the Implementation Guidance with enhanced contents and illustrative examples for
enterprises to better understand and implement the accounting standards system after the
convergence process. Beginning from 2011, the ASBE and the IFRSs will embrace a
relatively stable period during which emerging transactions or events in practice will be
addressed through the continuing and full convergence mechanism.

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62538

Public Disclosure Authorized

REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC)

People’s Republic of China

Financial Management – Central Operational Services Unit

A&A Accounting and Auditing

Vice President: James Adams

II. Institutional Framework ……………………………………………………………………..2

III. Accounting Standards as Designed and Practiced ………………………………………….18

IV. Auditing Standards as Designed and Practiced …………………………………………….20

V. Perceptions on the Quality of Financial Reporting …………………………………………22

VI. Policy Recommendations …………………………………………………………………..22

2. The ROSC A&A assessment adopted a participatory approach with a strong

5. China’s financial sector has undergone significant market-oriented reforms since

II. INSTITUTIONAL FRAMEWORK

8. According to the statutory framework of China, the Ministry of Finance (MOF) is

9. The regulatory system of China’s accountancy profession is led by the

China – ROSC Accounting and Auditing 6

China – ROSC Accounting and Auditing 7

37. The professional accounting curriculum covers important content requirements of

The Advanced Stage examination requires candidates to apply knowledge to practical

China – ROSC Accounting and Auditing 10

41. The Government-sponsored Leading Accounting Talent Project aims to develop

Setting Accounting and Auditing Standards

43. China has established an Accounting Standards Committee composed of

x Initiating a new project. The Accounting Department of MOF initiates a new

x Drafting the exposure draft. The Accounting Department constitutes a team to

51. Chinese Accounting Standards are recognized as applicable financial reporting

Ensuring Compliance with Accounting and Auditing Standards

China – ROSC Accounting and Auditing 15

58. The CSRC has instituted forward-looking arrangements to enforce financial

China – ROSC Accounting and Auditing 16

China – ROSC Accounting and Auditing 17

III. ACCOUNTING STANDARDS AS DESIGNED AND AS PRACTICED

China – ROSC Accounting and Auditing 18

67. Companies and their auditors face a number of practical constraints in

China – ROSC Accounting and Auditing 19

x Insufficient disclosure of information in the notes to the financial statements with

IV. AUDITING STANDARDS AS DESIGNED AND PRACTICED

China – ROSC Accounting and Auditing 20

V. PERCEPTIONS ON THE QUALITY OF FINANCIAL REPORTING

VI. POLICY RECOMMENDATIONS

China – ROSC Accounting and Auditing 22

China – ROSC Accounting and Auditing 23

B. Institutional Capacity Building

x The CSRC should engage additional professionally qualified and experienced

C. Monitoring and Enforcement

83. With regard to improvement of monitoring and enforcement of applicable

x Auditors should supplement capacities of CBRC and CIRC by acting as whistle-

x An awareness program should be implemented to improve the degree of compliance

D. Professional Education and Training

x University-level accounting curricula should be reviewed to ensure a consistent

x Accountants in state-owned enterprises should be encouraged and persuaded to enroll

85. The implementation of policy recommendations should be prioritized in the

China – ROSC Accounting and Auditing 26

Roadmap for Continuing and Full Convergence of the

China – ROSC Accounting and Auditing 27

China – ROSC Accounting and Auditing 28

China – ROSC Accounting and Auditing 29

China – ROSC Accounting and Auditing 30

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