Accounting exec: 'improve Chinese accounting ranks'.

• Author: Chipman, Stephen
• Position: Financial reporting - Henry Paulson

Since Henry Paulson became U.S. Treasury Secretary last year, he has taken an admirably constructive approach to the economic relationship between the U.S. and China. In a speech earlier this year, Paulson eloquently made the case for China to accelerate the reform of its capital and financial markets.

But Paulson overlooked a fundamental issue that, if not addressed, threatens to undermine every recommendation in his presentation. Although he pointed out the importance of "sound accounting standards" and "independent financial information" as significant attributes of successful financial and capital markets, he made mention of these matters only in passing, as opposed to setting them as the cornerstone of his formal recommendations.

Without appropriate accounting and auditing standards, and the ability of corporations to consistently apply them, and without an independent auditing profession to examine their application, further reform of China's financial and capital markets may stall or indeed never get started.

Chinese government officials must be credited with having worked diligently on the development of new accounting standards. According to the Chairman of the International Accounting Standards Board (IASB) Sir David Tweedie, the issuance in January 2007 of China's new "Accounting Standards for Business Enterprises" achieved "substantial convergence" with International Financial Reporting Standards (IFRS).

The point goes beyond the appropriateness of the accounting standards. What use are progressive standards without sufficient qualified and experienced accountants to apply them and trained auditors to examine their application?

From 1949 until the late 1990s, China's accounting profession was effectively disbanded. Chinese accounting firms in the 1990s had professional staffs who were either in their 70s or in their early 20s. The shortage of qualified accountants in China is acute and has been estimated at 300,000, a figure almost certain to be conservative.

Credit must be given to the Chinese Institute of CPAs in striving to develop and implement training and to encourage the recruitment of talented students into the profession. The talent and resource gap, however, is...