Accountancy in China: Getting Bigger, Merging and Getting More International
Stephen Chipman, CEO of Grant Thornton LLP, visited the University of Illinois College of Business for the first Department of Accountancy Lyceum lecture of the semester. His March 7 talk focused on China’s changing economic, political and social dynamics.
Chipman, who has worked for Grant Thornton for 29 years, in the U.S., Asia, and Europe, opened his talk by describing a historic scene in Beijing, and had the audience guess the date. He described a time when there were no streetlights, though it was night. He could see only one high-rise and there were no lights on in that building, either. There were bicycles everywhere and only five or 10 cars in his field of vision. He was staying in the only international-style hotel in the city, which was heated by coal. He even watched as a man delivered a big box of coal by bike. Inside the hotel only two staff members spoke any English at all.
The audience guessed various dates in the 1970s and 1980s, but the date was, in fact, 1991. Chipman told this tale to demonstrate the mind-boggling rate of change occurring in China over the last few years.
So far the majority of that fast-paced change has taken place on the eastern seaboard and has been driven by both foreign investment and a strong export market, mostly to the United States, said Chipman. However, he added, development is slowly spreading to the central and western parts of the country. In addition, Chinese officials have recognized that a third economic engine must be developed: a domestic market for consumer goods.
Increasing consumer spending will be a challenge, because the domestic savings rate is about 40-50 percent, Chipman said. In addition to historical and cultural reasons for this pattern, there are pragmatic ones. China has nothing much in the way of a safety net like social security, unemployment insurance, public health care, or other social services.
Consequently, people in China are saving “to educate their children, for retirement, for a calamity, for disability or loss of a job,” says Chipman.
“What I think you’ll see in (China’s upcoming five-year plan) is a pretty fundamental shift in this policy,” Chipman said, predicting that we will see “a fairly rapid ramp up of those types of social infrastructure across China to encourage people to unleash some of their savings and in fact starting to promote a much stronger level of domestic consumption that will drive economic growth domestically and take the reliance away from the export engine.”
There is, of course, great interest in China as a market, Chipman acknowledged, but he cautioned his audience to refrain from thinking of China as a monolithic country. Chipman described China as “a 5,000-year-old civilization but a 50-year-old country.” He explained that only since 1949 has China had any national identity, so in that way it is a very young country. As such, it is more a patchwork of provinces and municipalities than it is a cohesive unit.
“You can’t make the mistake of going into it thinking Shanghai is the same as Beijing,” Chipman said. Each region is “extremely different in terms of their culture, their history, their buying habits and their distribution systems and infrastructures. One of the things that is a take away for me is this need to look at China on a local basis and adapt your plans accordingly.”
With regard to the accountancy profession, Chipman had some equally interesting observations and experiences to relate. First, he talked about the dramatic growth and rebuilding of the profession, again just since the 1990s. There had been a robust profession in China prior to 1949, when Mao Zedong took power, he said. After that the profession disappeared, until very recently.
“The government recognized that the accounting profession was critical to generating exciting dynamic capital markets, so they set about rebuilding a robust accounting profession,” Chipman told the audience.
As with other undertakings, once the Chinese government decided on a direction, it moved quickly. By 1999 the government had created a new set of laws to recreate the accounting profession and created independent CPA firms. The government also created a whole new set of Chinese accounting standards, which are predominantly aligned with IFRS, the International Financial Reporting Standard.
“When you go now into those CPA offices, you will see in many cases offices very similar to those in the Western world. China has come a long, long way over the last 11 years,” Chipman said.
And in Shanghai, 300 professionals recruited from Chinese universities staff Grant Thornton’s office on the 45th floor.
“To think that would have existed back in 1999 is quite staggering,” says Chipman.
Chipman did note that in China the accounting profession is government regulated and is entirely within the Ministry of Finance, a major central government department. CICPA, the Chinese Institute of CPAs, is not an independent body like parallel associations in the U.S. and Europe. Instead, CICPA is a quasi department of the Ministry of Finance. CICPA issues accounting standards, auditing standards, quality reports on firms, and determines the business structure of CPA firms. Consequently, the government has significant influence over the future direction of accounting profession in China. Current policies have been focused on growing national firms and more internationally capable firms, Chipman says. Their slogan is, “get bigger, merge and get more international.”
“That’s the message they have in the accounting profession in China,” Chipman said, “which suggests that there are great opportunities for international firms to partner with Chinese CPAs.”
In his closing remarks, Chipman said, “When people ask me for any final words of advice about doing business in China, I boil it down to this. ‘Go to China to learn, not to teach. If you go with that mind set you will have a positive experience and will be successful.’”