Xu-Dong Ji

Evaluation of research on Chinese accounting issues

Outlines the history of accounting in China and reviews the literature published in English on the full range of Chinese accounting issues. Summarizes the contents of three books, refers to sections in other books and analyses journal articles by period, journal, research topic and research method. Argues that this accounting research has historical, academic and practical value,believes it will continue to improve and calls for greater use of more rigid research methodologies in this area.

Governmental influences in the development of Chinese accounting during the modern era

This paper reviews the historical development of accounting in China during the modern era since 1911, dividing the period into three phases: the pre-revolution period (1911–49); the pre-reform period (1949–79); and the current period (1979–to date). Attention is focused on the development of accounting during the current period. This paper critically evaluates an important phenomenon in Chinese accounting history – governmental dominance. It reveals that there have been two forces at work during the modern era, governmental control and outside influence. In China, the state has dominated the evolutionary process of accounting despite strong external influences, e.g. from Japan in the early part of the twentieth century, from the Soviets in the 1950s, and from the West more recently. The article examines accounting developments in their social, political and cultural environment, and concludes that with the Western influence increasingly strong, particularly given the world-wide trend towards the adoption of International Financial Reporting Standards, the Chinese government can maintain its controlling power over accounting affairs for the foreseeable future.

The impact of corporate governance and ownership structure reforms on earnings quality in China

Purpose - – The purpose of this paper is to investigate the effect of corporate governance and ownership structures on earnings quality in China both prior and subsequent to two important corporate reforms: the code of corporate governance (CCG) in 2002 and the split share structure reform (SSR) in 2005. Design/methodology/approach - – This study utilises informativeness of earnings (earnings response coefficient), conditional accounting conservatism and managerial discretionary accruals to assess earnings quality using 12,267 firm-year observations over 11 years from 2000 to 2010. Further, two dummy variables for measuring the changes of CCG and SSR are employed to estimate the effects of CCG and SSR reforms on earnings quality via OLS regression. Findings - – This study finds that the promulgation of the CCG in 2002 has had a positive impact, but the SSR reform in 2005 has had little effect on listed firms’ earnings quality in China. These results hold good after controlling for a number of ownership, governance and other variables and estimating models with multiple measures of earnings’ quality. Research limitations/implications - – Future research could focus on how western style corporate governance mechanisms have been constrained by the old management systems and governmental dominated ownership structures in Chinese listed firms. The conclusion is that simply coping Western corporate governance model is not suitable for every country. Practical implications - – The results will assist Chinese regulators in improving reporting quality, ownership structure and governance mechanisms in China. The results will help international investors better understand quality of financial information in China. Originality/value - – This is the first to our knowledge that addresses the effects of major governance and ownership reforms together on accounting earnings quality and, thus, makes a significant contribution on understanding the effect of regulatory reforms on improving earnings quality. In doing so, it also indirectly assesses the effectiveness of western-style corporate governance mechanisms introduced in China.

The value relevance and reliability of intangible assets : Evidence from Australia before and after adopting IFRS

Purpose - – The purpose of this paper is to examine the value relevance of intangible assets, including goodwill and other types of intangibles in the pre- and post-adoption periods of International Financial Reporting Standards (IFRS). Most importantly, this paper investigates whether the value relevance of reported intangible assets is associated with their value reliability. Furthermore, this paper reports whether the adoption of IFRS improves the value relevance of intangible assets and alters the relationship between value relevance and reliability. Design/methodology/approach - – Both price and return models based on Ohlosn theory (1995) are employed to test the value relevance and value reliability of intangibles. Australian-listed firms with capitalised intangibles from 2001 to 2009 are selected in this study. The sample includes 6,650 firm-year observations. Findings - – The main result shows that capitalised intangible assets are value relevant in Australia, in both the pre- and post-adoption of IFRS periods. Value relevance is higher in firms with more reliable information on intangible assets. This study finds that the value relevance of intangibles has declined in the post-adoption period of IFRS. However, the positive relationship between the value relevance and the reliability of intangibles has remained unchanged in the post-adoption period. Originality/value - – The paper contributes a new measurement of value reliability of accounting information about intangibles. This paper is one of few studies on the relationship between value relevance and reliability of intangible assets. The results show that value relevance is positively associated with value reliability. This suggests that, when accounting standard setters assess whether the existing IFRS of intangibles should be improved in the future, they need to think not only in terms of whether the standard can provide more relevant information of intangibles to investors but also whether the standard can make the information of intangibles more reliable.

The evolution of bookkeeping methods in China: A Darwinist analysis of developments during the twentieth-century

This article reviews the historical development of bookkeeping methods in China during the twentieth century by applying the “Universal Darwinism” theory developed by Dawkins (1983) and Hodgson (2002). According to Dawkins and Hodgson, the biological principles of variation, selection and inheritance can be applied to cultural and other forms of evolution. This article applies these principles to critically evaluate the evolution of double-entry bookkeeping methods in China during the twentieth century. It concludes that bookkeeping methods are selected by their surrounding environment which is determined by the political, economic and cultural factors of that particular period. The methods selected are those that adapt best or are most suited to a change in the environment. Different methods compete for the dominant position. If a single method cannot be exclusively selected, then multiple methods may be permitted to co-exist. This conclusion can also explain why, in general, pluralism is a very prevalent phenomenon in accounting.

Internal control weakness and accounting conservatism in China

Purpose - The purpose of this study is to investigate the impact of internal control weaknesses on accounting conservatism in Chinese listed firms. It also investigates the relationship between the demand for external audit and accounting conservatism, and whether additional assurance of internal control reports (ICRs) can mitigate the negative impact of ICWs on accounting conservatism. Design/methodology/approach - An empirical research approach is taken through the use of ordinary least squares (OLS) models and hand-collected internal control weakness data from ICRs released by Chinese listed firms. Findings - The results of this paper show that the existence of ICWs has a negative effect on accounting conservatism in China. Further, the results demonstrate that both accounting-related and non-accounting-related ICWs affect accounting conservatism. The authors also find that there is a complementary relationship between accounting conservatism and the demand for additional assurance of ICRs, and additional assurance of ICRs can mitigate the negative impact of ICWs on accounting conservatism. Practical Implications - This study provides timely evidence to Chinese regulators of the possible economic consequences of the official implementation of internal control standard in China from 2012. The findings of this paper can also benefit regulators around the world and, in particular, the regulators in emerging markets that are considering implement regulations similar to the US SOX. Originality/value - The paper demonstrates that a wider scope of ICWs, including non-accounting-related ICWs, also has a significant impact on accounting conservatism. Therefore, this research provides a more general evidence on the relationship between internal control quality and accounting conservatism.

Earnings management by top Chinese listed firms in response to the global financial crisis

Purpose - The main aim of this study was to examine the earnings management behaviours, including both accrual-based and cash flow-based earnings management, of Chinese firms during the Global Financial Crisis (GFC). Design/methodology/approach - A data set of 1,392 firm-year observations derived from a large sample of Chinas top listed firms (based on total assets) was constructed and investigated via univariate and ordinary least squares regression analyses. Findings - Two distinct conclusions can be drawn from the results of the study. First, the top Chinese listed firms did engage in earnings management, as indicated by comparisons of the means of the absolute values of both accrual-based and cash flow-based earnings management indicators in the periods before and after 2008 when the GFC started. Second, investigation of earnings management directions revealed that in response to the GFC, the firms from construction-related industries and the airline industry manipulated earnings upwards through either accrual-based and/or cash flow-based earnings management activities. On the other hand, firms in the household durables industry engaged in earnings-reducing activities. These findings reflect the effect of the stimulus package launched by the Chinese Government in an effort to combat the GFC. In addition, the results indicate that firm characteristics such as size, leverage, profitability and growth affected the earnings management behaviours of the firms analysed in the study. Originality/value - The empirically derived findings of this study contribute to the literature pertaining to the effects of the GFC on earnings management practices in China, which has remained relatively scant to date.

Accounting conservatism, corporate governance and political connections

Purpose - The purpose of this paper is to examine the relationship between accounting conservatism, corporate governance and political connection in listed firms in Malaysia where political influence plays a significant role in the capital market and in many business dealings. Design/methodology/approach - By utilizing 824 firm-year observations comprising large listed companies over a period of four years from 2004, this study uses ordinary least squares regression models to investigate the relationship between accounting conservatism, corporate governance and political connections in Malaysia. Multiple measures of conservatism developed by Basu (1997) and Khan and Watts (2009) are employed. Findings - The results show evidence of accounting conservatism (bad news being recognized earlier than good news) in Malaysia. Further, the results reveal that better corporate governance structure in terms of board independence is positively associated with accounting conservatism while management ownership is negatively associated with it. However, political connection has a negative moderating effect on the positive relationship between accounting conservatism and board independence. The results also suggest political connections have a positive association with firm’s future performance. Originality/value - This study is the first in investigating the effect of political connections on accounting conservatism in Malaysian context and how political connections negatively affect the monitoring role of the corporate boards. By directly measuring political connection and controlling for various corporate governance mechanisms and firm-specific attributes, this study contributes to enhance the authors’ understanding of the political influence in financial reporting quality and firm performance in an emerging market setting.

How do the Chinese management accountants cope with changes from a planned economy to a market economy

Purpose - Since the Chinese government implemented its reform and open-up policies in 1978 many western management accounting concepts and techniques have been introduced into China. The purpose of this paper is to investigate how Chinese management accountants have coped with the changes in the new economic environment and absorbed new ideas into their own practices. This paper also discusses the differences between the current Chinese management accounting system and the management accounting systems used in the western countries, and the obstacles in implementing western management accounting systems in China. Design/methodology/approach - Both field study and survey approaches were used in this project. Six selected Chinese enterprises were visited. A questionnaire was distributed to all accountants in these companies. Findings - This paper has found that the main obstacle for implementation of western methods is not political sensitivity, but the extent of technical constraints. The management information system (MIS) is under development in most Chinese enterprises, while the essential data for using western techniques, such as activity-based costing, cannot be collected easily in the current situation. Nevertheless, changes in management accounting can be seen in some areas, such as the quality of products being promoted; the use of the responsibility accounting; and profitability as the key criterion for selecting investment projects. Originality/value - This paper provides a comprehensive study about Chinese management accounting systems. The findings in the study will help western investors to be better prepared if they have set up a business in China or are going to enter the Chinese market.