A steep learning curve

China, by its own estimates, requires hundreds of thousands of accountants – fast. Such is the pace of its growth that China’s economy could outstrip that of all developed countries by 2050, according to a report by PricewaterhouseCoopers. The clock is also ticking towards 1 January 2007, when China comes into line with international accounting standards.

Yet the Chinese Institute of Certified Public Accountants (CICPA) has just 140,000 members, only half of whom are practising. They must be on par with the world’s best practice, both to give confidence to inward investors and to enable China to launch itself on to the world stage. Foreign firms have big plans for expansion in the mainland, but the Deputy Finance Minister, Wang Jun, speaking during a forum in May, also called on local firms to become more competitive.

Sam Wong, Ernst & Young’s (E&Y) managing partner in China Central Region and a past president of ACCA, felt Wang’s comments came as no surprise.

It was commonly known that Big Four firms provide the best training ground and have been grooming local accountants since they first arrived in China two decades ago, Wong pointed out. When the giant multi-nationals started expanding into China they brought their own accountants with their world-class skills, but they also needed to hire local accountants who could speak the language and understand cultural differences. The answer was to take new graduates and train them to international standards, even, as in E&Y’s case, posting them overseas for a time through the firm’s global exchange programme. As a result, E&Y has nearly 5,000 local accountants in its China firms, and 10 locally groomed Chinese partners. It gained a further 10 local Chinese partners through a joint venture with a local firm.

Wong says the Deputy Finance Minister’s comments were interpreted as a desire to move forward faster, especially as China’s large state-owned enterprises are starting to list overseas. But is it realistic? Wong says that, according to figures from CICPA, China has only 5,639 accountancy firms, with 70,000 practising members for a population of 1.3bn. The US, in comparison, has 300,000 accountants for a population one-fifth that size.

Only 100 of China’s accounting firms have annual revenue in excess of 20m yuan. And there is the problem of geographical spread, given the sheer size of the country. Clearly, said Wong, no single local firm could help China’s state-owned enterprises list overseas, let alone try to service them without help from foreign firms.

If local firms really want to be on par with international accounting giants, they need to shape up in terms of size and quality control, Wong said. Firms need to join forces to compete for assignments and provide equally good service.

The accounting profession in China is relatively young and “We have to be patient”, Wong adds. “I am glad to see the Ministry of Finance, as well as CICPA, have identified this shortfall as a priority, and there is an urgent need to train up local accountants. There is a recognition that local accounting firms are loosely organised, and not groomed enough to be big and strong and comparable to the major foreign firms.”

Dickson Leung, senior partner with LehmanBrown, an international firm with a strong China presence, says decisions on whether to use local or foreign accountants should be market-driven. The Government should not have so much intervention in the industry, but rather “It is the customer who should decide which professional would best suit their needs”.

Leung calls for a cohesive approach in tackling the new frontiers. “By opening up the profession and making it easier for foreign accountants to practise alongside Chinese accountants, and harmonising the regulations for Chinese and foreign corporations, greater transparency will ensue. This will not only benefit the profession but also China as a whole. Closing the profession will diminish its credibility,” he says.

Support

For local accounting professionals to be able to deal with issues they are likely to face in auditing firms that have never been audited before, they are going to require strong support from the Ministry of Finance and CICPA, Leung adds. “Rather than worrying about the extent to which foreign firms are able to practise, they would be better focusing on how they can support the profession as a whole in dealing with the issues.”

Ian Ball, chief executive of the International Federation of Accountants (IFAC), says China’s decision to converge with international accounting and auditing standards demonstrates the value it places on high quality accounting services. However, the growth and economic development of China means local supply cannot keep up with demand. “Part of the solution is to use foreign firms, but also to build up the local industry,” he said.

Ball adds that China is not alone in expressing a desire for strong local firms. IFAC thinks developing jurisdictions can make a strong case for a quality profession in their own country, to balance rather than compete with international firms.

“The real issue for China is how quickly they can develop the local profession, and to what extent services can best be provided by the large international firms,” Ball says. “There are constraints on both sides: a limit to how many accountants they can produce within a limited time, while foreign firms are also constrained by language, entry restrictions and the availability of staff.”

Meanwhile, IFAC is doing its part to ease China’s (and other developing countries’) dilemma by introducing a compliance programme, where professional institutes around the globe can benchmark their performance against IFAC standards. The results are rolled out on IFAC’s website to allow external bodies to make their own assessment. “It’s a fully transparent programme,” Ball says. “While it doesn’t assess the work of an individual audit firm, it does give a snapshot of a country’s proficiency in terms of international standards. This can lead to greater confidence in the quality of work being done there.”

ACCA is also helping to raise the bar in China, having recently struck a deal with the CICPA to train university accounting teachers in the mainland. Thirty-six outstanding teachers from 22 certified public accountant major universities will participate in the training, which will focus on financial reporting, international accounting standards and strategic financial management.

Zhou Fei, ACCA’s head of public affairs for the Chinese mainland, said ACCA felt this was an important initiative because of the long-term benefits for the profession. “It is important to train the trainers because, as an old Chinese saying goes, ‘First-class teachers produce first-class students’.”

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.