Auditing of state-owned enterprises in China: historic development, current practice and emerging issues

Abstract

State-owned enterprises (SOEs) play a pivotal role in the Chinese economy. Together, they manage over 50% of China's national capital. With China steadily moving towards a market economy, SOEs increasingly are given the latitude to seek external funding, develop joint ventures and more generally, to operate without direct government involvement. This separation of ownership and management, in turn, has increased the need to monitor and control China's SOEs, and audits can play a key role in this oversight function. Despite the potentially important role that SOE audits can play in safeguarding the interests of the state and external investors, there is a relative dearth of research on the current state of, and challenges facing such audits. This paper provides an overview of the historical development of the SOE audit by the Ministry/Department of Finance, and current SOE audit practices performed by the State Audit Administration/Office. The main conclusion of the study is that, with ownership of the SOE being further diversified and the operation of the SOE being completely commercialized (i.e., without any political consideration), the nature of the state audit office as a government agent is incompatible with the role of independent auditor for SOEs. SOEs need a non-government third party to verify its financial statements and audit its business activities to meet the information needs of diversified interest groups in the SOE including the state, individual or institutional investors, creditors and employees etc.