The global accounting association ACCA has released a report it commissioned on IFRS convergence in China. Chinese accounting standards converged with International Financial Reporting Standards (IFRS) by 2007. In layman’s terms, the study attempts to determine whether investors rely more on the new IFRS based financial statements than they did on the statements prepared under old Chinese accounting standards (CAS). In other words, does accounting information prepared under IFRS move the market more than accounting information prepared under old CAS?
Prior research results were inconclusive, so the authors added more explanatory variables, looking at industry classification, regional development, state control, foreign ownership, delisting regulations, and state subsidy.
The study finds that there is a significant increase in value relevance after IFRS convergence. That is, investors now pay more attention to financial statements than they used to. There are a number of secondary findings – the financial statements of firms in developed regions, those involved in manufacturing, and those with foreign ownership are relied on more.
None of that is surprising. While I think that convergence of Chinese accounting standards with IFRS did improve the usefulness of Chinese financial statements, I think the main reason why investors pay more attention to them is their increased reliability – not reliability and comparability of the accounting standards, but reliability of the numbers themselves. That may seem to be a funny thing to say given the massive number of accounting scandals of the past few years, but I do believe that Chinese financial reporting has improved significantly over the past decade or so. While the convergence with IFRS was helpful, I think the biggest change was that the Chinese accounting profession is growing up.
The institutional environment for accounting in China has experienced significant change over the past twenty years. Accounting standards were part of that change, but more important was the development of independent accounting firms and experienced accounting professionals. I think what this study shows is that investors are putting greater trust in the institution of accounting, not in accounting standards.
The study attempts to get at that issue by considering some new variables that relate to institutional development. The problem with any academic research is that it is near impossible to identify all the potential variables, especially in a matter so complex as the development of an accounting profession where none had been before. It is good work, though, and ACCA and Professors Lee, Walker and Zeng should be commended for their contribution.