Standards & Poor's Ratings Services said Thursday that corporations in China's mainland, Hong Kong and Taiwan should improve their financial disclosure quality.
John Bailey, credit analyst of Standard & Poor's, made the remarks at a press conference for publishing a report by Standard & Poor's on corporate financial disclosure in China's mainland, Hong Kong and Taiwan.
He said that "recent technical rule changes by regulators and accounting associations have improved the transparency of financial statements. However, they do not deal with all the creative accounting issues."
Bailey said that "application of accounting principles is usually decided by management, and experience has shown that management at publicly listed companies often attempts to tailor their financial results to reflect more closely the hopes and expectations of the stock market."
The report found that a significant number of accounting statements still require analytical adjustments to better portray credit risk. Certain accounting treatments can benign, whereas others require closer scrutiny by lenders. A common problem is failure to fully reflect the leverage of a company by moving debt off its balance sheet to joint ventures and associated companies, over which it has effective control.
"Boosting profits with one-time gains, such as selling undervalued investments or reversing earlier provisions, is a common practice by companies in Hong Kong and Taiwan to understate the inherent volatility in the business. There is also evidence that some companies try to smooth out the peaks and valleys in their earnings by using reserves to shift income to a better period," said Standard & Poor's credit analyst Raymond Woo.
On the positive side, the report found that tax-driven special-purpose entities do not appear to be in common use, and exposure to unfunded pension liabilities, a significant accounting problem in Europe, is minimal.
Paul A. Coughlin, managing director of Asia Pacific Corporate &Gov't Ratings of Standard & Poor's, said that "we could see strides the Chinese mainland made in improving the accounting system."
Though it will take a long time to build the overall accounting system into a standardized one, it is a structural problem to be solved during the Chinese mainland's shifting of a market-oriented economy from a planned economy, Coughlin said.
The report also looked at the importance of cash flow analysis. Recent large corporate failures have reinforced the value of cash flow analysis. Standard & Poor's believes that a company's near term ability to meet financial obligations is more clearly recognized when looking at the cash flow statement rather than the income statement.
Standard & Poor's is an influential corporation in providing widely recognized financial date, analytical research and investment and credit opinions to the global capital markets.
(Xinhua News Agency June 27, 2003)
