Cultural Differences When Managing Chinese Financial Reporting

September 2005 China Briefing

In this important and unusual issue we highlight the cultural differences between International and Chinese standards of financial reporting, and the misunderstandings that can occur when different cultures and reporting standards clash. We provide examples of what on one hand may appear unacceptable manipulation of accounts, but on another may in fact be normal practice - from both the international and Chinese viewpoints. The lead article, "Cultural Differences When Understanding Chinese Financial Reporting & Common Accounting Practices in The PRC", written by Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates, and subtitled "a new look at assessing financial reporting in your China business" is a detailed look at the conflicts in culture, regulatory regimes, reporting standards, in addition to educational and historic differences in reporting structures between China and the developed world. It deals with the reasons why company money may end up in personal bank accounts, VAT liability issues and how the Chinese get around these, as well as China tax bureau inefficiencies, and the different treatments and levels of scrutiny that exist between domestic Chinese businesses and foreign invested businesses. It is a unique look at understanding why what may appear to be completely unacceptable practices occur, and how to identify the differences between staff trying to protect the business from tax penalties, and out and out fraud. Regional updates are also included, with Sabrina Zhang, Regional Partner, Dezan Shira & Associates Beijing commenting on "New Tax Treatment Concerning Individual Income Tax for Employee Stock Options", Lulu Zhang, Regional Partner, Dezan Shira & Associates Shanghai, with comments on the new qualifications for "Identifying Bad Debt In Your Accounts" and Alberto Vettoretti, Regional Partner, Dezan Shira & Associates South China with an article "Correctly Assessing the Ratios of Total Investment Capital and Registered Capital in your China Business"