'Optimism' Vs 'Big Bath' Accounting - A Regulatory Dilemma in Chinese Financial Reporting Practices

Abstract

Although China's accounting system has experienced an evolution during the last three decades, its financial reporting practices are still not satisfactory. Optimism, by means of overstating companies' profits and assets value, has always been criticized in China. Therefore, the principle of Conservatism may provide a means of minimizing such improper behavior. With such concern, the paper systematically reviews the financial reporting problems in China. However, through analysis, it is found that although Optimism exists, the extremely contrary case - Big Bath accounting also exists. Hence, this paper argues that Conservatism may not be applicable in contemporary China's financial reporting environment.