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Christmas came early for twenty-two successful agriculture and horticulture students with the CAFRE Bursary programme at Greenmount Campus.

A total of £22,000 was distributed in the Awards Presentation on Friday 8 December.

This year’s bursaries were generously provided by: ABP Food Group, AI Services Ltd, Bank of Ireland, Bulrush Horticulture Ltd, Calor Ltd, Cogent, Dale Farm, Danske Bank, Darren Clarke Golf School, Devenish Nutrition, Dunbia, Fane Valley, Genus ABS, Gibson Trust, Irish Farmers’ Journal, John Thompson and Sons Ltd, Moy Park, Tyrone Farming Society, Ulster Farmers’ Union and the Ulster Grassland Society.

As expected, there was very high competition for the bursaries from Higher Education students at Greenmount Campus who commenced their studies in September 2017 on the BSc Agricultural Technology Honours Degree, the Foundation Degree in Agriculture and Technology and the Foundation Degree in Horticulture.

Presentation of Awards

Speaking at the Awards Presentation Ceremony, Mr Martin McKendry, CAFRE Director, thanked the industry representatives for their generosity and willingness to support young people entering higher education within the sector.

The bursary sponsors praised the high quality of the students’ work and congratulated them on their efforts. Ashley Fleming, Cogent’s NI Regional Manager, commented on the amount of work that had gone into the submissions and also the strong performance of the candidates at interview.

Student Appreciation

James Scroggie, a student on the BSc Agricultural Technology programme who progressed from the BTEC Level 3 Extended Diploma and was the recipient of the Bank of Ireland bursary, thanked the sponsors for their support. “The bursary programme is not just about the money, it also provides students with opportunities for work placement and in some cases employment at the end of our studies”.

Agricultural students who received bursaries, with sponsors and CAFRE staff at the recent Greenmount Campus presentation ceremony.

Back Row:  Martin McKendry (CAFRE Director), Brian McCarron (Genus ABS), Dr Kate Semple (CAFRE), Liam McCarthy (ABP Food Group), Seamus McCormick (Danske Bank)

Front Row: Luke McDermott (student), Matthew Muldrew (student), Courtney Colgan (student) and Walter Acheson (student).

Agricultural students who each received bursaries with bursary sponsors and CAFRE staff

Back Row:  Martin McKendry (CAFRE Director), Scott Armstrong (student), David Wilson (student), Orla McKay (student), Rachel Hoey (student), James Roulston (student), Aaron Meeke (student), George Moffett (CAFRE)

Front Row: Neville Graham (Dale Farm), Edward Montgomery (Gibson Trust), Thomas Barnett (Fane Valley) and Dr David Wright (Irish Farmers Journal).

CAFRE staff and Bursary recipients alongside Bursary sponsors at the recent awards event at Greenmount campus

Back Row:  Martin McKendry (CAFRE Director), Sam Watson (Ulster Grassland Society), Alan Houston (Moy Park), Lucy Marshall (student), Edwin Cartwright (Tyrone Farming Society) and Thomas Harkin (Tyrone Farming Society).

Front Row: Kellie Rouse (student), Matthew Compston (student), Philip Stewart (student) and Michaela Quinn (student).

Higher Education students at Greenmount Campus who each received bursaries from bursary sponsors

Back Row:  Martin McKendry (CAFRE Director), James McCluggage (Ulster Farmers Union), Eamonn Matthews (AI Services Ltd), Simon Tolerton (Bank of Ireland), Glen Patterson (Dunbia), Dr Peter Cottney (CAFRE).

Front Row: Jack Wilson (student), Matthew McConville (student), Andrew Heenan (student) and James Scroggie (student).

Greenmount Campus Horticultural students who each received bursaries with CAFRE staff

Paul Campbell (CAFRE), Reece McKay (student), Martin McKendry (CAFRE Director), Eoin Quinn (student) and Paul Mooney (CAFRE).

Unformatted text preview: SECTION EIGHT INTERNATIONAL CASES Certain parties also questioned the judgment of PwC in accepting the Somalia en- gagement. One concern voiced repeatediy was how the firm could ensure the safety of the individuals assigned to the engagement, particularly when those individuals found it necessary to travel to war-torn Mogadishu. In response to that concern, PwC officials noted that their firm had previously carried out similar but less-publicized engagements in both Afghanistan and Sudan. On its website, PwC disclosed that the individuals who had been assigned to the Sudanese engagement had been required to participate in a survivalist program known by the acronym THREAT—The Hostile Region Environment Awareness Training. No doubt, the firm required the staff as- signed to the Somalia engagement to undergo similar training.n Throughout the latter one-half of 2009 and beyond, Somalia continued to be plagued by violence that often resulted in significant ca- sualties for the TFG militia, al Qaeda-trained and financed guerillas, and innocent civil- ians. Charges of government corruption also continued unabated following the retention of PwC by the TFG. in early 2010, the UN and U.S. government began quarreling over the issue of foreign aid for Somalia. According to The New York Times, the UN was upset because U.S. government officials were stymieing the flow of foreign aid into Somalia due to “unfounded allegations“ that much of the aid was being “di- verted to terrorists."12 Two weeks later, those U.S. officials referred to a report prepared by the UN’s own Security Council to support those unfounded allegations. This report indicated that as much as one-half of the foreign aid flow- ing into Somalia was being embezzled by vari- ous parties including corrupt TFG officials and “radical lslamist militants.“'3 Questions 1. What type of professional service engagement is PwC providing to the TFG? What professional standards apply to such engagements? 2. Do you agree that the client confidentiality rule prohibits PwC from disclosing the contractual details of the Somalia engagement? Defend your answer. 3. in addition to client confidentiality, what other ethical issues or challenges does the Somalia engagement present for PwC? 4. identify the specific risks that the Somalia engagement poses for PwC as a firm. Do you believe that PwC has properly considered and mitigated each of these risks? Explain. ll, Those parties who criticized PwC for accepting the lucrative Somalia engagement failed to comment on the prominent firm‘s involvement in important humanitarian activities around the globe. in 2008, the firm committed millions of dollars to a program to help educate Sudanese children living in refugee camps in Chad. Among the many other humanitarian activities supported by PM: is the global initiative of the Save the Children program that provides educational and healthcare services to impoverished children around the globe. 12. J. Gettleman, “UN. Criticizes US. Restrictions on Aid for Somalia,“ The New York Times (online), 18 February 2010. 13. J. Gettleman, “Somalia Food Aid Bypasses Needy, UN. Study Finds,“ The New York Times (online), 9 March 2010. CASE 8.6 Zuan Yan _________________ Let China sleep, for when it wakes, it will shake the world. Napoleon afar! Ell]! years, the Internatiohal Federation of Accountants (lFAC) organizes the ing to stpangressre theof ntants.‘ Accountants from across the globe attend this meet- _ tr vrews on major issues and challenges facin' their ' ’ _ ' . rofesSI . $132.03; :0??? Paoplltfs Republic of China hosted the WorldgCongrgss oiled-3221111: rs 'me int e nation’s history Premier Zhu Ron " ' . 'I ' I . . 811, the second-hi est :zgking official in the‘Chlnese govemmtmt, delivered the welcoming speech diliging mt ginning ceremonies. In his remarks, Premier Zhu. long known for his candid it had crgatléemdanner, spokeaptpenly of the embarrassing series of financial scandals that a mater cre " ility crisis for the worldwide a ' ' ' the previous decade Premier Zhu ‘ ccounnng pmfessmn over . . pornted out that many of those accountin s I . . ca - daslzlliialgrmtovolvled Chinese firms, _a_ fact that Western journalists had largely igngred.n called 0 thpo ltical leaders-m many Western countries in recent yea-rs, Premier Zhu the invegitinge ::§_c;un:iing prolifisslon to reform itself and restore its credibility with . .' en lng pu ic. He reminded the partici t ‘ I that “honesty and trustworthiness” are ‘ pan 5 m the canference ‘ the lifeblood of the accountin rofess' 2 1011. Iggrlncigzllséamaiissured those present that China was committed to “tlgnla3 cultivation among accountants” and, even more hit ortantl ‘ modern and transparent financial reporting system.3 p y‘ to creatmg 3 Then. Mao. and Now For several millennia a series of famil ' ' ‘ ' , _. I y dynasties ruled China; these includ d Iligltgtlréyé the Han, Ming, and Qtng Dynasties. The collapse of the Qing Dyfilaslt‘yoisnt party “03:11:; ctr-featli‘con of the Republic of China that was dominated by a political e uomtntang or National Party. For four ears f 11 ' of World War II a bloody civil war ensued bet y 0 owmg the end , _ . ween forces loyal to Chia ' K ' ghehlleader of the National Party, and the increasingly popular Communist szyhlild g. :0 Zedong and 1118 top subordinate, Zhou Enlai. in 1949, the Communist Party gh (laugh $311521 aciif the (gurgcry. :Jrctng Chiang Kai-shek and his followers into exile on - wan. n to er I, 194 , ' People‘s RePUblic of China. 9 the Communist country was renamed the Mao immediately installed a Marxist re ‘ ' ' _ gum in China under which the centr l - grhnment controlled practlcally all of the nation’s economic resources. To reviltagli: 111:4: economy that had been decimated by Werld War II and the Chinese civil Sawdofligligtleymente? a segues of economic programs, most notably the “Great Leap , ere in en e to convert the nation's largel rI' It I ' a modern industrial economy These ' ' y fig F“ ma economymto I ' ‘ I . programs were dismal failures, leavin Ch' ‘ economy In disarray and the country’s citizens with a miserable standard ofglivirilgil.as ;. firmnEChinese phrase meaning “to search for the truth and hold fast to it ' -. r' . “Cherish integrity of Accounting Prolessio ' Ch“ ' " ‘ httpfl/‘english.peopledaily.com.cn. 21 November 2002. “I mesa Premlerl 3.. M. 393 I94 SECTION stem inrsnusrronar. Cases In 1966 Mao launched the “Great Proletarian Cultural RivplutiOII," merge ‘ ' ' ' the “Cultural Revolution. us sweeprn . _ Inonly referred to by hIstortans as I . a _b 1 hour 601318” ' ' ' tied to rid Chma of the 11 era g socral and economlc reforms was inten I _ C mmunistic ‘ ' ‘ fforts to estabhsh a utopIan, 0 that was allegedly undermmmg Mao s e I l t. n wag a des- ‘ ‘ lass. in reality, the Cultural Revo u to t socIety controlled by the working c _ I . ic Olicées While at divert attention from hls lalled econom p , perate attempt by Mao to ‘ ’ ' Ch’ ' l d From 1966 through ' ' s supreme ea er. I same trme reaffirmmg h15 position as ma I ‘ t11513‘fil6 an estimated 500,000 Chinese citizens were executed and mllllOl‘lS more ex1led ersecuted at the hands of Mao‘s supporters. angofiowing Mao's death in 19713, several political figufres vergestled forhgfigtrrgégfntéiv: ' ' tablished himsel as mas unc country. Eventually, Deng Xlaoprng es ' ' I h. ‘ mm! govern- ‘ d the top p051t101'l m C mas ce leader although he never officially he] I _ I _ d b mac dur- , ' lpohcies tmplemente y t. Den renounced the economic and socra ' ‘ I ‘ figrtlhe Gregat Leap Forward and the Cultural Revoluuon. To raise Chinas standardl living Deng replaced the nation’s Soviet-style “command economy With a 3008 ' arket econom ." ‘ g ‘ tlcUmnder China‘s neiv economic system, the nation 5 central government, whichcgrals ' ' 1d allow private enterprises o - still controlled by the Communist Party, wou A I ' tors of the economy. 11 ‘ - terprlses (SOEs) across many sec I pate wuh State owned en ’ ' bl rint was the encouragement g1ven other critical element of Deng s economIC uep ' “ losed door” ' ' ‘ ’ hina a complete reversal of Maos c I to fore1gn companies to invest in C , I ‘ _ b d m the ' ' ltmational corporatlons ase lic . Den es ecrally encouraged large mu _ . i I Baitefl Stategs aEld other Western countrles to finance 101nt business ventures With ‘nese SOEs. _ ‘ I crib 1980 Deng emphatically endorsed his new econom1c plant'for Chmagvthhliei} ‘ ’ ' ' ' d democratic socle tes aroun , same time shocking Communlst alhes an . ” th decades ' “ ' h is to be glonous. Over the next ree . , when he proclaimed that to be ac . ‘ _ 199? m ered ‘ ' ' ’ ' ' d 1n effect after his death in , gg Dengs economic p011C1€S,Wthh romaine ‘ H d mer rises ' ' ‘ ‘ 'thtn Ch1na.By 2005,5tate—contro e e p an expios1on of econom1c activity W1 I ‘ I d t (GDP). ' ual gross domestic pro uc accounted for only one-thud of the nations ann I Ch. ese ' “ " ‘ nom1c benchmarks, most rn Although still poor relative to common eco ' _ ‘ d they ‘ ' ' ' ' ent in then standard of living un er Cltizens experienced a dramatlc Improvem ' id, second ' ’ “ ' “ ' dJapan 1n 2010asthe wor s nations new muted economy, wh1ch surpasse I I _fi teen- ' ’ the midpomt of the twenty rs teconom .Economrsts predict that before ‘ ‘ Eigyeghina‘s GD}; will surpass that of the Unlted States, making the Chinese economy e la est in the world. . I I th Denrg Xiaoping‘s economic policies have impacted evelryciacet Effglgregedsecgziyé ' ‘ ' ’ ' ' had been large y 1scre 1 e ncludin the nations professions, which _ I I _ timing the three decades that Mao Zedong Imposed his Mdagrmt rdetoflrrggy gr; ' that have bene to e mos country. Among the professmnal groups _ ‘ I W 1 lead- ’ ” ' ' ’ ' .In recent years, Chmas po 1 1ca “revolution ts Chmas accounting profession ‘ ‘ I ival ' ' try to sustain 1ts economic rev , rs have come to recognize that for their coun . . I 2 wide range of parties need reliable and comprehensive financIal data regaégijnig the nation‘s 50135 and other business enterprises. That data can only beilpcriovi oun- China develops a modern financial reporting system and an army of slu e acc tants and auditors. 4 Wikipedia “Cultural Revolution,“ http:ilen.wikipediaorglwikiiCultural_Revolution. CASE 8.6 ZUAN YAN Accounting for Profits To fully appreciate the accounting and financial re economy, it is first necessary to identify the maio within China. Prior to 1980, SOEs Were the overw ness organization within China in terms of annu the economic reforms introduced by Deng Xiao ness organizations have become well establish enterprises (GOES), individually owned enter eign investments (FOEs).5 COEs are typicall members of a small community, porting issues facing the Chinese I types of business organizations helmingiy dominant form of busi- al economic output. As a result of ping, three additional types of busi- ed within China: collectively owned prises (IOEs), and enterprises with for- y local cooperatives organized by the while IOEs are principally small businesses owned and operated by individual entrepreneurs. Because most COEs and 10153 do not ob» tain significant investment capital from third-party investors and lenders, external financial reporting is not a major concern or regulatory requirement of these two types of organizations. FOEs are either joint business ventures involving Chinese companies— SOEs—and foreign multinational corporations, or China-based businesse wholly owned by foreign multinational corporations. As a result, the fina of most FOEs are eventually integrated into the consolidated financial sta a foreign multinational corporation domiciled in the United States, a me of the European Union, or another developed country, employ “Western-style” accounting and financial report Over the past three decades. the efforts to develop a cial reporting system within China have centered on S nornic output of SOEs as a percentage of China's GD over the past three decades, these organizations rem units in China. In recent years, the Chinese governm interests in many $0135 to private investors, ownersh that the Shanghai or Shenzhen Stock Exchanges, Ch China’s political leaders apparently have no intention of completely “privatizing” the large petrochemical, iron and steel, and other at anufacturing enterprises that con- tinue to make up the backbone of the nation‘s economic infrastructure.E Despite the fact that SOEs remain under the control of China's central government, the organizational structure of these entities and their internal operating policies and procedures have changed dramatically under the economic system installed by Deng Xiaopeng. Likewise, the role ol SOEs‘ accounting and financial reporting sys- tems has changed radically. typically 3 that are ncia] data ternents of mber nation meaning that FOEs typically ing systems. modern accounting and finan- OEs. Although the annual eco- P has been steadily decreasing ain the most important business ent has sold minority ownership ip interests that are traded on ei- ina’s two major stock exchanges. Prior to 1978 . . . 5055 were essentially production units (factories). The managers of .S'OEs in the pre-reform era had little or no mo nageriai autonomy. The state provided all financing to the factories and controlled virtually all the investment and operat- ing decisions. . . . The factories simp {y served the purpose of fulfilling the production quota stipulated by the government. Consequently, the managers of these factories had neither the incentive nor the managerial authority to reduce costs and generate profits. in such a command economy, the main role of accounting was to assist the government in planning and controlling decisions? —-——-——._______ 5. X. Bing, “Institutional Factors Influencin Horizons, June 1998, 10?. 6. Mid. 109. ,5; China’s Accounting Reforms and Standards,” Accounting '3. (bid. 395 #— SECTION EIGHT lNTERNATiUNAL CASES In China‘s present economic system, the central government has transferred the responsibility for the day-tovday operations and long-term strategic planning for most SOEs to professional management teams. So, despite being ultimately accountable to the central government, most SOEs “now significantly resemble modern corpora- tions in the West in that they are characterized by a high degree of managerial au- tonomy and a separation of ownership from control.“ The dramatic change in the nature of $055 over the past three decades has created a need for Western-style accounting systems for these organizations. Such account- ing systems produce the data necessary to properly evaluate the operating decisions of professional management teams. Likewise, under China‘s new economic system, there is an explicit recognition on the part of the country‘s political leaders that individual SOEs are competing for a finite quantity of economic resources. Conse- quently, there is a need to regularly assess the extent to which individual 30133 are contributing to the overall economic productivity of the nation. Finally, the central government realizes that for 80133 to raise investment capital from external sources, they must provide those parties relevant financial data. The Ministry of Finance (MOF) is the government agency responsible for over- seeing China‘s economy, including the nation's financial reporting system. In 1993, the MOF adopted an accounting framework for China analogous to the “Conceptual Framework" developed by the US. accounting profession in the late 19805. This framework was entitled “The Accounting Standards for Business Enterprises” (ASBE). Throughout the 1980s, the MOP and other Chinese government agencies had taken steps to revamp the outmoded accounting and financial reporting systems being used by SOEs. However, those measures had been largely ineffectual. The adoption of the ASBE suggested that China’s central government was intent on requiring 50135 to adopt Western-style accounting and financial reporting practices. “The introduc- tion of ASBE was considered the most significant achievement of China‘s accounting reforms since the 19805 in that it signaled the end of traditional accounting in China and brought China’s accounting practices into close conformity with international standards."9 The ASBE required most SOEs and other large Chinese enterprises to adopt the fundamental accounting principles and financial reporting formats used in West- ern democracies. “Among the accounting characteristics specified in the standards [ASBE1 are double-entry accrual records, consistency, conservatism, comparative financial statements . . . and explanatory disclosures."‘° Although the ASBE principally dealt with broad accounting and financial reporting issues, the pronouncement also introduced such specific accounting methods as LIFO! FIFO, the allowance method of accounting for bad debts, the percentage-of-completion approach to revenue rec- ognition, accelerated depreciation methods, and consolidated financial statements. Following the issuance of the ASBE, the MOF retained Deloitte Touche Tohmatsu as a consultant to assist in developing a comprehensive set of accounting standards for the Chinese economy. Over the following decade, the MOF approved several dozen accounting standards proposed by Deloitte. These new standards were generally referred to as Chinese Accounting Standards (GAS). F___________._— 8. Ibi'd., 111. 9. T. Tang, B. Cooper, and P. Leung, “Accounting in China: Developments and Opportunities," in Per- spectives on Accounting and Finance in China, edited by 1.3. Black and S. Gao (London: Routledge, 1995). 10. G. M. Winkle, H. Fenwick, and X. Chen. “Accounting Standards in the People's Republic of China: Responding to Economic Reforms,“ Accounting Horizons, September 1994, 55. CASE 8.6 ZUAN Yaw ‘ As one would expect, there was almost no opposition to, or criticism of th d ' Sion by China‘s authoritarian central government to adopt Western-style accofinie’CIH sfndards. l-lowever, the MOF and other government agencies faced considerablig c allenges in executing that decision. The most intractable of these challe ‘ stemmed from the fact that China‘s accounting profession had been dismafiifec: under Mao Z'edong’s regime. As one journalist noted recently “Grey hair and ex 6' ence [in China’s domestic accounting profession] are scarce because the C 1pm" Revolution wiped out the profession.”” H mm] Within Mao’s soviet-style economy, professional accountants who understood complex accounting and financial reporting issues were no longer needed and in. fact, were consrdered part and parcel of the “liberal bourgeoisie” that had to b ' eliminated. instead of skilled accountants and auditors, China‘s state-controlled e :Etrprise:l required only the services of bookkeepers and “bean counters“ to aCClliflEI: anthg:fiiel;Ctan statistics and related data, which were then funneled to the proper To help organize and promote China‘s accounting profession the MOF created th Chinese Institute of Certified Public Accountants (CICPA) in 1988. This new overhe- ment agency immediately began licensing CPAs; three years later the agenc 8be a administering a CPA examination. In 1993, the “CPA Law” issued’ by China'syceniari gggegnnéznt prowded a more coherent regulatory infrastructure for the new profes- this my; deiiiigmnzgtjnighgggtg‘l t:llsieflfi:iecificIres1ponsipilities oi the ClCPA. Although I . e principa regu atory body for the accountin Eilijtflilegsgligbi‘he powerful MOF retained the authority to override any decisions mad: Presently, China has approximately 150,000 CPAs; however, many of these individ- uals are retired government bureaucrats with minimal or even no formal trainin or experience in accounting. These latter individuals were granted CPA designation: b the CICPA‘ because they had administrative experience of some kind with an SOE oyr other significant government-related organization. Leaders of China's accountin ro- lessuan estimate that the nation has fewer than 100,000 professional accountantgiaho have formal accounting training of any kind. That figure is in contrast with the a - [Eommately 550,000'CPA5 inthe United States, which has approximately onevfourfh t e population of China. Making matters worse, the educational programs corn leted by China s accountants are considerably less rigorous than the educational ropram completed by professional accountants in Western economies In fact in 20%0gf s thfii 20 percent pf China‘s CPAs held a university degree of any kind“; ' ewer th ost gifChinas accounting firms'were quickly organized in the early 1980s when He nee or accounting services Withln the nation’s new economy became evident thoviltjev'er, these new accounting firms were not equivalent to accounting firms in e tilted States and other developed economies. The largest and most prominent of Chinas new. generation of accounting firms were created by various government iageigciesuand, in reality, were simply appendages of those agencies. These “account- ng' ‘rms typically provided accounting services exclusively to the SOEs and oth entities that were overseen by the agencies that had created the firms. er 11. The Asian Banker Journal (online), “In Search of a Reliable Auditor,” 31 August 2006. 12. Y. Tang “Bumpy Road Leading to Intern ' ‘ ' ‘ I n , atlonalization: A ' ‘ China, Accounting Horiznns, March 2000, 99. Rev'ew 0' Accounting Deve'npmem m 39? SECTION EIGHT INTERNATIONAL Cases Because the MOP and the CICPA recognized that the quality of services provided by the government agency—affiliated accounting firms was suspect, the two Offggilr zations launched a “clean-up” program in 1997 to force those firms to seer; 1 relationships with the agencies that had created them. The MOF and CI fia so reviewed the operating policies and procedures of alI'Chinese accounting frills, including those not affiliated with government agenc1es. over’the coursed: 003 two-year clean-up program, approximatelyiO percent of Chinas estimate t_ ,ned accounting firms were forced to disband, wh11e efinotherkdrtlldpercent were sanc io ‘ ed to im lement remedial measures 0 some 1 . ‘ angrigilitl principal objective of this clean-up prpgram was to. make accgili‘nting firms and individual accountants aware of their ethical resp0n51bilit1es. one “ inesel scholar observed that China's new accounting profession was_createl§l in a 91301;) vacuum” devoid of any consideration of ethical principle? or issues. In 19 n, th t: CICPA issued a new authoritative pronouncement entitled Professional Ethics :1 a identified the fundamental ethical responsibilities of Chinese CPAs, particularlyt eir responsibility to perform accounting services with objectivity and integrity. Big Four Lead the Way in Chinese Audits I I h During the early 1980s, the major international accounting firms recognized that t e robust economy emerging in China was creating a new and potentially huge Earf ket for professional accounting services. Over the followmg two decades, eafiCi :5 the major international accounting firms established a network of practic; offic in China. PricewaterhouseCoopers (PwC) invested $200 million to staff I .o cels in China with a workforce of 5,500 accountants, while De101tte spent approXimate y the same amount to establish 10 China-based offices w1th'a staff of 3,000 aCCCILlll'l- tants.” KPMG and Ernst & Young established China practice units of compaer e size to those of PwC and Deloitte. As one Chinese news service noted, the1 5Big or: firms suddenly developed an “insatiable interest“ in the Chinese market. Ehrnsthe Young’s global chief operating officer seemed to confirm that porrit of'view w e? observed, “There is no greater opportunity in the world than in China in terms 0 our . nlfi bugyngggb, the Big Four accounting firms were operating the four largest BCCOUHEIIIg practices in China. The largest domestic firm, Shu Lun Pan Certified Pu 1ci Accountants, based in Shanghai, had annual revenues equal to less than one-third p KPMG‘s China practice, which was the smallest of theBig Four accounting practices in terms of annual revenues. As could be expected, China's major (1011;125th accounting firms felt threatened by the Big Four‘s rapid growth in their country. Instead of chimps- ing to compete with the Big Four, many 0; the large domestic firms developed wor ing ' ’ s with one or more Bi Four rms. . relafitdcerpiilrigent auditing was a prigncipal focus of the Big Four’s practice developmerg activities in China. Prior to Deng Xiaoping‘s economic reforms, there was little Hg; for an independent audit function in China similar to that of Western economies. e 13. fbi'd. I H 14, SinoCost China Financial Watch {onllne}, “Accounting Giants Load Up on China. 28 June 2005. 15. I'bi'd. ‘ I I 16 W. Davies, “China Accounting Sector Makes Gains amid 1P0 Drive, Global News Wire—Astra Africa Intelligence Wire, 5 February 200?. I ‘ _ I n l? T. LeeMaster. “Cleaner Regime for China Auditors," Global News Wire—A310 Africa Intelligence Wire, 18 April 2005. CASE 8.6 ZUAN Yaw SOEs that dominated China’s economy did not prepare periodic financial reports comparable to those prepared by large corporations in the United States and other free market economies. In addition, the principal users of the financial data prepared by SOEs were government bureaucrats that had access to the accounting systems of $0135 and could “audit” that data directly if they questioned its authenticity. As China‘s new economy began emerging, the need for an independent audit func- tion became readily apparent. The large FOEs that were developing in China were typically required to have their financial data audited since those data would be consolidated into another reporting entity‘s financial statements. Likewise, China‘s political leaders quickly recognized that SOEs needed annual audits to encourage foreign investors to purchase minority ownership interests in them. Those officials also realized that annual audits of 50135 would establish an important measure of accountability for their professional management teams. China’s domestic independent audit function deveIOped slowly and haphazardly during the 1980s. Unlike in the United States and other Western economies, China‘s accounting firms did not initially provide audit services. In the early 19805, organi- zations offering audit-type services began appearing in China’s major metropolitan areas. Similar to China‘s first-generation accounting firms, most of the nation’s early audit firms were affiliated with, or sponsored by, a government agency. These audit firms-which were overseen by the State Audit Administration (SAA)—provided prin- cipally operational, compliance, and “social” audit services. Full-scope financial statement audits were rare and when they were performed, they were not oriented around the rigorous professional standards used in Western economies. Eventually, many of China’s larger domestic accounting firms began providing services similar to those provided by audit firms, resulting in significant competition between the two types of firms. By the early 19905, the Chinese audit market was a mishmash of various types of audit-type services and service providers. Adding to the confusion was an array of often conflicting auditing rules and regulations issued by the CICPA, MOF, 5AA, and other government agencies that claimed some degree of regulatory oversight for the audit services market. This chaos was a contributing factor to several large-scale accounting and auditing scandals within China during the 19905. Among the most notorious of these scandals was the Great Wall Fundraising fraud invoiving the Great Wall Electrical Engineering Science and Technology Company. This company‘s executives used finan- cial statements “certified” by a local accounting firm to raise a large amount of funds from private investors across China, much of which they embezzled. A subsequent investigation revealed that the accounting firm had spent oniy one day auditing the company‘s financial statements. China’s central government dealt quickly and harshly with the parties involved in the fraud. The chief architect of the fraud, the company president, was executed, while the company‘s accounting firm was disbanded. The Great Wall Fundraising scandal and mounting criticism of China's chaotic audit services market by various parties, including the major international accounting firms, were key factors that persuaded the central government to issue the 1993 CPA Law. That statute consolidated the nation‘s accounting and auditing professions and placed them under the regulatory supervision of the CICPA, which remained ulti- mately accountable to the MOP. The CPA Law also mandated that the CICPA develop independent auditing standards that would be subject to the approval of the MOF. In late 1994, the CICPA formed a task force to begin drafting Chinese Independent Auditing Standards (CIAS). Over the next several years, the CICPA issued auditing standards dealing with such topics as materiality, internal control risks, application of analytical procedures, computer-based auditing procedures, fraud detection, 399 SECTION EIGHT INTERNATIONAL CASES - ~ “18 o and “special considerations in the audit of Stale-OWHEddCOIHpZBIIES.r V1333): ' dards the quality of indepen ent au I s p o promulgation of these stan , fChin , . fi 1 had the new ' ' as domestic rms rea mestic firms remained questionable. Many o bl. many ' ‘ ' datory rules. Even more trou mg, ndards as uidelmes rather than man. _ :tjdit clients rfiutinely pressured their auditors to help them conceal material errors and fraudulent misrepresentations in their accounting records. “Some client; expected their auditors to help them conceal their frauds. Many companies not reappoint their auditors if the latter were unwilling to help them cover up their wrongdoings.“ 1‘3 As the Chinese audit discipline continued to evolve in the lat? 199:0; Sgrdtsiriiftgtat: ' ‘ reasingly importan par 1 . new century, the Big Four firms became me I I I i I l- ' ' ' the Big Fours growrng prom . Accordm to one Asran business publicauon, ' I “ _ Eleanrggtln China's agudit services market was due to those firms repgitation lor profes ' ' ' ' ' ' dence from clients.” . 1 m, technical ability, and then indepen I _ I ‘ ‘ ' ‘- 51033321306 the Big Four firms audited a large malority oi Chinas mBJOIi-bJIEHEfctl-Irlliiaelgg ' T d 150 large companies 15 e o zations. A Hong Kong brokerage firm surveye I d_ The bro- ' d not employ Big Four au 1tors. k xchan es and found that only SIX d1 “ . . _ a _ ' ' lifrtag: firm reglerred to those companies as the suspicmus 51x, 21 implying that mgr; financial statements were suspect. A manager of a Hong Kong hedge fund expresse similar point of view: “I don‘t think I'm comfortable with local [audit] firms. It‘s the pro- fessionalism of the people. It seems like they like to twist the rules. That bothers me. 3:22 The most prized of all audit clients in China are m: Fguigingfictuhfi Esra: I211: ' ‘ These ban 5 me u e the cornerstones of the nation 3 economy. I d I 1 nd ‘ ' ' tructlon Bank, and the In ustria a h , the Bank of China, the China Cons I , Ehfnriieicial Bank of China. Over the past several years, China : cential i?:&:;ntlrl11::; ' ' ' ' ' ll minority owners 1p in ere has used initial public offerings (IP05) to se ‘ l t med IPOs government offic1a 5 re a l wholl owned SOEs. For each of those 1 , _ ' “ Logirgefi‘gur accgunting firm to audit the given bank 5 financial statements. This vote of confidence" in the Big Four accounting firms by China’s political leaders suggeisiid that those firms would likely play a significant role In the future development 0 e Chinese economy. In a m... 'I' ii an. In 2005, the MOF announced that it was working with the International Accounting Standards Board (IASB) to converge CAS with International Financial Reporting Standards (IFRS).The deadline for completing this con- vergence process was extended on multiple occasions, but the process was ultimately ex- pected to be completed no later than 2012. #5. _" l or --=- a Most Chinese business organizations were required to adopt the revised CASII'he'lASB reported that it would help Chmese offic1als develop lFRS—consistent CAS to meet the spe- cial needs of China‘s economic system-in- cluding an accounting standard addressing the controversial issue of disclosing materIal related-party transactions. 18 J Z Xiao Y Zhang and Z. Xie, “The Making of Independent Auditing Standards in China," Account- ing Horizons, March 2000, 77. 19. ibid. 20. The Asian Banker Journal, “In Search of a Reliable Auditor." 21. laid. 22. lbid. CASE 8.6 ZrMN YAN This is a sound prtacrple in general and par- ticularly appropriate for companies in coun- tries where the government owns a piece of everything, and presses companies to take steps that may be bad for them (such as buy- ing from troubled suppliers to protect jobs). But because overlapping ownership is so common in China Gite government still owns shares in almost euery large company), de- tailing each [related-party] transaction would ouenaiietm the financial report.23 At the same time that the MOF announced the plan to converge CAS with IFRS, the gov- ernment agency also announced that as of January 1, 2007‘, CIAS would be converged with International Standards on Auditing (lSAs). These latter standards are issued by the Interna- tional Auditing and Assurance Standards Board (lAASB), an entity sponsored by the IFAC. The decision by the MOF to converge Chinese accounting and auditing standards with inter- national standards enhanced the already strong competitive position that the Big Four firms had established within the Chinese accounting and auditing services market. Because each of those firms had global accounting practices, they had extensive expertise in helping compa- nies implement IFRS as well as significant ex« perience in applying ISAs. As a result, the firms were ideally suited to help Chinese companies make the transition to the new accounting and auditing standards. Despite the Big Four‘s bright prospects in China, the firms still face significant challenges in that market. These challenges include acquir- ing sufficient skilled accountants and auditors to staff their rapidly growing Chinese practices and coping with the nation's regulatory infrastructure that continues to be a cluttered maze of often- conflicting regulations issued by several layers of the Communist bureaucracy. Two more seri- ous and difficult-to—resolve problems facing Big Four firms are an increasing litigation risk within China and the need to deal with an authoritarian central government that influences every facet of the Chinese society and economy. Since the 19705, arguably the most important challenge faced by the Big Four accounting ____________ 23. The Economist (online), "Cultural Revolution: N firms in the United States has been the large number of civil laWsuits filed against them. In recent years, the Big Four firms have begun experiencing litigation problems in China. Numerous accounting frauds, embezzlement schemes, and related scams have been perpe- trated by opportunists hoping to take advan- tage of China’s new economic system. Many private investors, institutional investors, gov- ernment agencies, and other parties adversely affected by these subterfuges have begun adopting a Western-style strategy to recover their losses andior mend their wounded pride, namely, filing lawsuits against parties even remotely associated with the fraudulent ac- tivities. At least in part because of their “deep pockets" and high public profiles, Big Four firms have increasingly found themselves tar- gets of such lawsuits. In 2003, KPMG became the first of the Big Four accounting firms to be named as a de- fendant in a major securities lawsuit filed by Chinese investors. The accounting firm issued a series of unqualified opinions on the financial statements of Jinzhou Port Company Limited, a company sanctioned by the MOF for intentionally overstating its revenues over the five-year period 1996—2000. The other Big Four firms have been ensnared in similar finan- cial scandals involving Chinese companies: Deloitte (Guangdong Kelon Electrical Holdings Company), PwC (Shanghai Waigaoqiao Free Trade Zone Development Company Limited), and Ernst & Young (Global Trend Intelligent Technologies). The Big Four firms insist that the complaints filed against them in these and other cases are unwarranted and that the engagements in question were completed with due profes- sional care. Nevertheless, critics suggest that the quality of independent audits in China is generally weaker than in Western countries, an allegation seemingly confirmed by a Deloitte partner. “Auditing is easier in an environment where all your clients have 25 accountants, internal controls, and independent boards. The audit process is the same in this part of the world; we follow the same methodology ew Accounting Rules Have Replaced the Little Red Book as China‘s Guide to Self-improvement; Can the State Handle the Truth?” 1] January 2007. 401 12 SECTION EIGHT INTERNATIONAL Cases and document it in the same way. But, the material you’re dealing with is different.”2‘1 A KPMG partner voiced a similar opinion when he noted that within China “the public expects too much of auditors. Audit work is one thing. The most important thing is the integrity of the owners and managers."25 An even more serious challenge than the in- creasing risk of civil litigation facing the Big Four accounting firms in China is how they will deal with their ultimate “client” in that market, namely, the authoritarian central gov- ernment. No doubt, executives of the Big Four firms recognize that conflicts with officials of the Chinese government could damage their future opportunities in the lucrative Chinese market. These executives also realize that their credibility in other markets around the globe could be damaged if their firms are per- ceived as kowtowing to Chinese governmen- tal officials. Ernst 8: Young was the first of the Big Four firms to have a highly publicized confrontation with China’s Communist central government. In 2006, a Chinese government agency hired Ernst 81 Young to prepare a report on the “nonperforming loans" held by China‘s Big Four banks. Over the previous several years, the magnitude of China's nonperforming loans had become a major in» ternational issue. “The size of China‘s bad loans is a figure of immense importance, as it serves as a measure of the banking sector's financial health."26 At the time, many economists main tained that governmental officials routinely em- bellished the health of the Chinese economy by refusing to disclose that a significant proportion of the Big Four banks‘ loan portfolios were uncol- lectible. Allegedly, those officials refused to rec- ognize the magnitude of this problem because doing so would have damaged China's credit rating in international markets, discouraged much-needed foreign investment, and undercut the impressive economic trends that the central government regularly touted in the global press. In May 2006, Ernst & Young reported that Chi- na's Big Four banks had total nonperforming loans of more than $900 billion. That figure was several times higher than the $133 billion figure being reported by the Chinese government. Chinese officials reacted quickly and fiercely to the E&Y report, referring to it as “ridiculous and barely understandable?” Those officials went on to point out that if the nonperforming loans figure reported by E&Y was accurate, then the “clean” opinion E&Y had issued on a Big Four bank’s financial statements was almost cer» tainly wrong. Within a few days of the harsh criticism by Chinese officials, Ernst & Young retracted its re— port. In the retraction, Ernst 8: Young stated that “Upon further research, Ernst & Young Global finds that this number cannot be supported, and believes it to be factually erroneous."28 The retraction went on to note that Ernst & Young believed that the nonperforming loans figure of $133 billion reported by the Chinese government was accurate. Skeptics immediately accused E&Y of capitulating to the Chinese gov- ernment. Many ecouomic analysts chimed in as well, insisting that the Chinese government‘s fig» ure was only a fraction of the actual bad loans held by the Big Four banks. The E&Y incident raised two concerns within the global investment and business community. First, the incident only added to widespread speculation that China‘s impres- sive economic data had been intentionally in- flated by the nation’s Communist government. “It has become an article of faith over the past quarter of a century of China's economic opening up that numbers issued by the Bei- jing government are at best rose-tinted, and at worst politically motivated fabrications"?9 Second, the incident suggested that China’s 24. The Asian BankerJoumal, “In Search of a Reliable Auditor.“ 25. fbfd. 25. Agence France Presse (online), “Ernst 8: Young Withdraws ‘Erroneous’ Report on Bad Loans in China," 15 May 2006. 2?. J. Manthorpe, “Accountants Backtrack on China Bad-Debt Report," The Vancouver Sun, 23 May 2006, E5. 28. Ibt'd. 29. Ibid. CASE 8.6 ZUAN 16w central government would not hesitate to use its authoritarian powers to stifle dissent or honest differences of opinion, even an objec- tive opinion expressed by a respected interna- tional accounting firm. Ernst & Young’s unpleasant encounter with Chinese governmental officials angered many Western journalists. In commenting on that encounter, one such journalist suggested that Questions those officials had not internalized the slogan adopted by Deng Xiaoping when he attempted to resurrect the Chinese economy after nearly 30 years of the failed policies of Mao Zedong. “‘Truth from facts‘ was the slogan adopted by the Chinese government after Mao's death to strip away the lies that left China a wallowing giant. Thirty years on, this remains an elusive goal."30 1. Research relevant databases to identify important recent deveIOpments within China‘s accounting profession, including the nation’s independent audit function. Summarize these developments in a bullet format. 2. Since ethical and moral values vary from culture to culture and nation to nation, does this mean that a global profession, such as the accounting profession, cannot have a uniform ethical code? Explain. 3. How, it at all, do financial reporting objectives differ between a free market economy and a “socialistic market economy"? Explain. Are there specific accounting concepts or principles that are more or less relevant in a free market economy than in a socialistic market economy? If so, identify those concepts or principles and briefly explain your rationale. 4. Consider two organizations that require annual independent audits. Organization A is a Chinese SOE with a minority ownership interest of 20 percent, while Organization B is a U.S. company of similar size Operating in the same industry. The common stock of both entities is traded on a domestic stock exchange, and each is audited by a Big Four firm. List specific differences that you might expect in the independent audits of these two organizations. Ceterr's pen‘bus, would you expect more “audit failures” for SOE audit clients than for similar US. audit clients? Defend your answer. 5. What recommendations would you make to Big Four firms to help them (1) avoid confrontations with governmental officials in an authoritarian society and (2) deal effectively with such confrontations that do arise? 30. The Economist, “Ruth from Facts," 13 January 2007, 14. 403 ...
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