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Opinion: Accounting sector needs administrative intervention
( 2002-02-20 10:06 ) (1 )

Administrative forces remain crucial for the growth of China's accounting industry as the country is still undergoing economic transitions.

After analyzing the industry's development since 1992, we have found that all the major industrial reforms have been initiated by the State Council through administrative orders.

The government-led reform needs more time, compared with that initiated by market forces, for its effect to be brought about on the industry. During this process, follow-up administrative interventions are needed to ensure the reforms will be effective.

The interventions have been vital for the growth of the industry.

Another administrative tinge of the accounting industry is that most accounting firms have been affiliated with State departments.

As an intermediary, the accounting industry is quite profitable and socially important since it is applicable in all fields concerning economic information. Many governmental departments have established accounting firms.

By the end of 1997, only 100 out of the 6,663 accounting firms in China were independent.

The affiliation has much negative bearing on the industry.

Those firms are the derivatives of institutional reforms of the government. The establishment and enforcement of professional standards have not been emphasized much. It may in a way provoke the desire of the government departments to interfere in professional matters.

Administrative interference provides room for the existence of unqualified accountants and distorts the fluid flow of financial information.

Worse, the affiliation mechanism guarantees profits for the accounting firms but does not hold them responsible for losses incurred from bad operations. This makes them ignorant of market risks and the importance of quality, which results in the low quality of the whole industry.

To solve the problem, only administrative forces can be used. It is clear that administration remains the driving force for the growth of the industry, whether it is the severing of relations between the accounting firms and the governmental departments or the increase in the number of accounting firms.

The government obviously takes the accounting system as part of its economic infrastructure construction programme. It is the country's long-term investment during the transitional period.

China needs accountants to improve the internal management of the State-owned enterprises (SOEs).

In the SOEs' construction of modern corporate governance, they are hassled by the problem of "insider control." Due to deficiencies in China's agent mechanism, the agents of State property take advantage of economic reforms to exercise de facto control over the firms they are asked to manage.

In this process, those agents need the accountants to forge false financial information.

So the State needs to intervene to ensure the integrity of the industry, which is vital for the healthy growth of the sector.

But the dilemma is whether the administrative interventions produce the setbacks that were common in the planned economy period.

In the past, intervention mainly focused on the drafting of relevant industrial regulations and supervision of their enforcement. There have been few examples of direct interference in daily management.

The accounting industry is highly professional. It is quite different from administrative management, which makes it hard for administrative forces to go beyond the limit.

What we desire is not interference in, but the supervision of, the industry by administrative departments. If we can handle this relation properly, administrative forces will contribute to pushing forward the development of the industry.

Accountants are a product of China's opening up policy. They provide intermediary services for joint ventures and foreign companies.

Meanwhile, they serve as auditors of State fiscal revenues to make up for the government's shortage in auditors. They provide service for the State fiscal department, State-owned commercial banks and the capital market.

China's accountants have distinctive features compared with their Western counterparts. The most conspicuous is the overwhelming influence of administrative forces on them.

This seems contradictory: On the one hand, powerful administrative forces are needed to direct and push forward the growth of the industry; on the other, an open eliminating mechanism that will improve the quality of the industry through market forces is indispensable. This may be an inevitable dilemma the accounting industry faces during its transitional period.

The author is director of the editing department of the Beijing-based magazine Chinese Certified Public Accountant.