The Holding Foreign Companies Accountable Act passed the U.S. House Dec. 2. The latest attempt to scrutinize financial ties with foreign companies listed on U.S. exchanges has put the spotlight on investor concerns over China companies' financial credibility.
Lacking transparency, inflation of sales and fabrication of transactions are among the noncompliance behaviors revealed by the U.S. auditing regulator - and are the same issues troubling domestic markets.
China enterprises are not only encountering regulatory issues abroad. Domestically, 566 Chinese A-share-listed companies last year were exposed for noncompliance by China's exchange regulators - that is 15% of the A-share market, according to data analysis company Choice. Cumulative litigation reached 1.2 billion yuan - nearly double that of 2018.
To explore how professional endeavors, at odds with a regulatory push, seek evolutionary changes for regulating millions of small- and medium-sized enterprises in China, Business Times interviewed local professionals.
Foreign Progress Meets Chinese Tradition
Restlessly traveling between the financial metropolis Shanghai and rapidly developing cities, including his hometown Chengdu, Michael Chiao, over the past six years, has been scouting and working with China SMEs that believe professional accounting management can be an effective way to enhance their companies' business.
Chiao jointly founded bilingual cloud accounting software Megi with an Australia software designer in 2014. To adapt it to China's SMEs, the software was embedded with Fapiao accounting - China's unique invoicing system for tax control and inspection.
"We were excited, at the time, to introduce such high-level software to Chinese companies," Chiao said. We believed this enterprise resource planning system could help them to integrate accounting and business practices within one system - which was rare in the SMEs market."
However, more foreign enterprises were early adopters of the Megi software.
From foreign clients like Tunisia e-merchant to Australia and New Zealand singer Boyd Owen, users appreciated a system that not only supported systematic accounting management but also reflected underlying business or management problems through visualization of comprehensive financial data.
However, many China companies hesitated - saying the software was "unnecessary" compared with their former Fapiao accounting - a bookkeeping practice that doesn't require accounting management but is widely applied by China's accountants.
"China's rapidly growing economy did boost many China SMEs to profit and many people's lives have changed," said Chiao. "But the fundamental behaviors of how these businesses were conducted have not been significantly changed from a decade ago."
He had to "pivot" to rediscover what the market demanded. Chiao said that there were some things in the culture "too powerful to shake."
Involution Versus Evolution
"Neijuan" is the Chinese term for involution - a word recently in vogue among netizens that describes a process that is regressive. While evolution can be seen as progress to a goal, many Chinese feel that their work isn't benefiting them. Neijuan, recently accepted in the Chinese language, is now popular among the educated elite and workers alike to describe a low-paid, nonstop work loop.
In a recent article in local online magazine Sixth Tone, anthologist Xiang Biao, a University of Oxford professor, discussed this specific urban culture pressure in China.
"Homogeneity is extremely important," professor Xiang said. "One of the most important prerequisites of the involution we've been discussing today is nondifferentiation: everyone is focused on and living for the same goals."
In accounting, short-term goals such as revenue growth and deduction of tax expenses often appear to be more commonly important. So, China SMEs are prone to focus on these - rather than long-term goals such as improving corporate governance, internal control structures, process optimization or employee performance.
"One of my clients was a toy factory owner. Despite being the biggest local toy maker, he didn't know how many hours a trained laborer in his factory took to make a product, " Linda Zhang, an institutional coach for certified management accountants, said.
A few years ago, Zhang enthusiastically embarked on a side career as an independent accounting management consultant for China SMEs in manufacturing and foreign trade - applying what she teaches into practice. Her ultimate goal is to enhance the corporate value of China SMEs.
Rather than a singular case, small-scale enterprises in traditional manufacturing relying on unscientific methods - such as piece counting - often fail to meet the basic accounting requirements, for example, accuracy. In family workshops, numerous SMEs in China have relations as accountants using simple debit-and-credit bookkeeping methods, according to Zhang's observations.
"Such business owners are aware that their accounting system is a total mess," Zhang said. "Some told me they wish for improvement but as long as they see every year the revenue growing, there is no urgent need to make a revolutionary change."
Realizing "improvement of corporate value" is an alien goal for clients, Zhang said she was changing her consulting approach while maintaining her ultimate goal.
Accounting - The Next Generation
As artificial intelligence increasingly plays a role in escalating China's development and advancing its modernization, young college students in China, however, fear their future will be replaced by robots - particularly in repetitive jobs such as bookkeeping.
Observing the anxiety and self-doubt among her students, Li Haiping, accounting department dean at the Beijing Institute of Petrochemical Technology, is cooperating with the Shanghai-based Young & Zone accounting and business advisory company. Together they hope to bring the most cutting-edge business case studies in China to spark student curiosity.
"What the current accounting textbooks at college are about - China's manufacturing and industrial industries - appear to be outdated," Li said. The nearly 70 clients Young & Zone has are in internet innovation business, e-commerce, online education and travel sectors. Li described these case studies as "the most changeable, yet most interesting learning materials."
Dilemmas fuel organic business growth. Encouraged by meeting such demands in the education field, Melissa Yang, the managing director of Young & Zone and a partner of Megi software, is working with Chiao to bring firsthand accounting consulting practices as on-the-job training materials to accountants.
Yang sees increasing numbers of young entrepreneurs looking for more scientific approaches and best practices to sustain business, instead of conservative ways - which depend on family members or "guanxi," China's culture of relying on personal networks.
"It's our duty to support those who aspire to adapt a more refined management style into business development under this challenging environment," Yang said.
With the belief that small- and medium-sized businesses play the most crucial and dynamic roles within an economic entity, Yang has noticed more SMEs coming to her for professional consulting. These companies encountered critical problems such as high revenues but low profit or adaptation to new e-commerce regulations.
Some modernization originates within the government. The Golden Tax System phase four is expected to be issued this month. Initiated by the China State Administration of Taxation a decade ago, the system aims to centralize tax information - providing nationwide, standardized tax administration and data processing.
Seen as a big-data revolution the new system is expected to impose tougher restrictions on tax violations.
