Notwithstanding the fact that some of the biggest corporate frauds in history have been perpetrated in the U.S., and that accounting irregularities come up with a proven frequency more in U.S. companies than elsewhere, the US Securities and Exchange Commission, on June 9th 2011, issued a warning to investors about (effectively) Chinese ‘reverse-merger’ companies (we call them back-door listings here).
The response was to not only tar ALL Chinese companies listed on U.S. exchanges with the ‘dodgy’ brush but it also had a pronounced ripple effect on Chinese companies listed domestically. The implication, dovetailing nicely with then and now anti-China prejudice, being that Chinese companies reporting and accounting standards are systematically deficient; but is this true?
In the paper highlighted this week from Dr. Zhefeng Liu et al from the Brock University in Ontario Canada they drill data from the period 2001 to 2011 to try and answer the question.
The methodology is dense so I’ll cut to Dr. Liu’s conclusion: ‘There seems to be the perception that accounting fraud is widespread at Chinese firms. But there is no empirical research putting into perspective the financial reporting quality of the Chinese firms listed in China. [And] ..We provide some evidence that the Chinese firms listed in China may have even better financial reporting quality than the US firms. [My bold and italics]’
Why should we be surprised? Most accept late stage development of things like infrastructure result in a leapfrogging effect i.e. China has a better mobile phone network than the U.S; and trains, and roads, and airports, and subways, and so on. No argument; right? Why then, when it comes to recently adopted accounting standards, does the notion China might have better systems than Western markets promote a reflex-like rejection?
The paper also offers some useful thoughts on why Chinese managers may be better behaved than U.S. peers based on the different incentives the two groups are responding to.
You can access the work in full via this link Stop Bashing.
Happy Sunday.