Enforcement of China's Accounting Standards: Reflections on Systemic Problems

Abstract

The key objective of this paper is to highlight the interconnectedness between China's political and economic system and its weak enforcement of accounting and auditing standards. The institutional analysis shows that the prevailing political and economic priorities constituting China's “socialist market economy” create a framework, that basically relies on state-led enforcement with weak supplementary private safeguard mechanisms. The resulting policy-mix is characterized by a mismatch of incentives and available devices to effectively enhance enforcement. While the state bureaucracy has little incentive to effectively fight financial misreporting because of both blurred policy–economy boundaries and the coexistence of multiple and even non-economic goals, shareholders and creditors do not have sufficient and effective private safeguard mechanisms at hand. Findings lead to the conclusion that China's recent harmonization move of accounting and auditing standards urgently needs to be backed up by stronger efforts to create effective enforcement mechanisms. Sound reforms would have to center on a rigorous upgrading and restructuring of the responsible bodies supervising auditing quality and financial disclosure. Parallel to these measures, the increasing integration into the global economy may provide incentives and competitive pressure to comply with globally accepted standards.