Teaching Comparative

Accounting and Democracy

Is accounting related to democracy? The writer of this Economist story from the January 13, 2007 issue, suggests that. Could your students diagram the logical links in the argument? (By the way, the concept "rule of law" gets mentioned here too.)

Chinese accounting - Cultural revolution

"SEPARATING truth from propaganda in China has always been hard, not least when it comes to numbers. Accountants, of all people, were seen as such a threat that during the 1960s they were packed off to re-education camps, dooming the profession for decades afterward. Even in kindlier times, businesses reported information that would interest a centrally planned economy, such as production quotas. The measuring sticks of bourgeois managers—costs, debt, depreciation, and (of course) profit—were ignored.

"But since the 1990s China has begun scrubbing up its accounting system. At the beginning of this year it made its biggest move yet when the Ministry of Finance required the 1,200 companies listed on the Shenzhen and Shanghai stockmarkets to adopt, with important exceptions, norms similar to International Financial Reporting Standards (IFRS). These standards may sound like instruments of accounting torture, but countries all over the world are embracing them. China has given all its other firms the option of complying with them 'voluntarily'—a word with many shades of meaning. If the changes are more than just cynical window-dressing designed to attract foreign investment, they will mark a profound shift in what China wants people to know not only about its companies, but also about its economy and its government...

"There is abundant evidence, from trade statistics to fumes spewing out of factories and power plants across the country, that the Chinese economy is doing well. But how well individual companies are doing is far harder to tell... It is said (with apparent sincerity) that some Chinese firms keep several sets of books—one for the government, one for company records, one for foreigners and one to report what is actually going on...

"...by properly reflecting costs, the heavy burden of state control would become more evident, as would the pricing signals that indicate the real desires of the Chinese people. Sleazy transfers of mispriced assets from the state to the private sector would become vastly more difficult. Theoretically, accounting would serve as a force for democracy...

"[But] international accounting standards are built on foundations that China does not possess, such as experience of truthful record-keeping and deep, clean, markets so that “fair” valuations can be placed on financial instruments, property and softer assets like brands and intellectual property. (These in turn rely on enforceable laws.)..."

posted by Ken Wedding @ 8:30 PM