Chapter 9

Corporate Accounting Scandals in China

Catherine Huirong Chen, Yuanyuan Hu and Jason Zezhong Xiao

9.1 INTRODUCTION

The objectives of this chapter are to examine Chinese accounting scandals, identify their causes, discuss their consequences and explore their implications for accounting, law and corporate governance. Although there were scandals before the 1990s, most significant Chinese scandals have occurred since then.

Since the introduction of economic reforms and ‘open door’ policies in 1978, China has been in transition from a centrally planned to a market economy, achieving a 73% degree of marketization in 2003 (Institute for Economic and Resource Management Research, 2005) and achieving the world’s fourth largest GDP in 2005.

China’s modern legal system was built from scratch in the late 1970s and did not embrace the concept of property rights until 2004 (Pistor and Xu, 2005). Its legal protection of shareholders is poor (Allen, Qian and Qian, 2005; Pistor and Xu, 2005). This is evidenced by the virtual absence of investor lawsuits. Administrative enforcements by regulators, such as the China Securities Regulatory Commission (CSRC), are also limited (Pistor and Xu, 2005).

China’s stock market has developed rapidly, with over 1400 listed firms. However, its share price and investor behaviour do not reflect listed firms’ fundamental values (Allen, Qian and Qian, 2005) and there are many accounting frauds and scandals, as shown in this chapter. Further, the banking ...

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