Paul Gillis Ph.D CPA is Professor of Practice and co-director of the IMBA program at the Guanghua School of Management at Peking University. He is a leading expert on accounting and auditing issues in China and has appeared on international platforms such as ABC, Bloomberg TV and China Radio International. Professor Gillis was previously a partner with PricewaterhouseCoopers and was a member of the Standing Advisory Group of the Public Company Accounting Oversight Board. He is also the author of the popular China Accounting Blog.
Young China Watchers (YCW): China Accounting Blog is one of the few up-to-date, English-language publications on accounting and audit issues in China. How did you come to specialize in this important subject often overlooked by many?
Paul Gillis (PG): I joined PricewaterhouseCoopers (PwC) right out of graduate school because its recruiting brochure promised I could see the world. After a couple of years, I raised my hand and asked about overseas assignments. A few months later I was in Singapore and that began a career focused on international business.
I was assigned to China in 1997 when PwC decided that China was going to be the next big thing. We had about 500 people in the country at that time, and it did become the next big thing, since PwC now has more than 20,000 people in China. I took early retirement from PwC because I wanted to have multiple careers. First I played golf a lot, but even though I got my handicap way down I found it a boring career. Then I studied theology, and loved the academics. I decided to get a PhD in accounting because I thought my experience would let me do it faster – I was wrong, it took me just as long as others.
YCW: It goes without saying that China has transformed rapidly over the past few decades and will continue to do so for the foreseeable future. As a long-time resident of China, are there any specific events or time periods that you would identify as turning points for the industry?
PG: China started to adopt Western accounting practices early in the 20th century. After 1949, Soviet practices prevailed, but once the reform and opening up era began in the late 1970s, China began to embrace international accounting standards. Accounting did not really take off in China until the boom in multinational investment that came a few years after Tiananmen Square and former leader Deng Xiaoping’s Southern Tour. The 1990s were dominated by foreign investment as multinationals streamed into China to take advantage of China’s low labor costs and later access to China’s vast markets. The foreign accounting firms prospered during this time because there was a shortage of expertise in dealing with China. The accounting firms were not really experts in doing this either, but some pointed out that in the land of the blind, the one-eyed man is king.
The next big boom in accounting happened following China’s accession to the World Trade Organization in 2001. Chinese companies began to list overseas, mostly in the U.S. and Hong Kong, and China’s economy rapidly grew to the second-largest in the world following the United States. Accounting firms had to adjust to serving local businesses, many of which were state-owned enterprises, and they needed to use local people to serve those clients.
In the West, internal controls often rely on the separation of duties on the premise that it is hard to get two employees to agree to commit a fraud. What we found in China is that the existence of 关系(guanxi) relationships between actors often overrode controls.
YCW: You have a wealth of experience as a certified public accountant (CPA) across many countries. At a high level, is there anything specific that analysts and observers should take into account when trying to understand financial statements and general business practices in China?
PG: One of the biggest challenges has been adapting Western accounting and auditing practices to Chinese business practices, where personal relationships can overshadow contracts and laws. In the West, internal controls often rely on the separation of duties on the premise that it is hard to get two employees to agree to commit a fraud. What we found in China is that the existence of 关系(guanxi) relationships between actors often overrode controls. There was a big problem with bank confirmations. A standard audit practice is for the auditor to ask the bank to confirm the bank account balances of clients. In China, it proved not very difficult for many companies to lean on the bank branch manager to confirm a false balance. Auditors needed to find other ways to audit to overcome these problems, but there were many frauds in the meantime.
YCW: A lot has been said about Beijing’s intention to open up China’s financial sector. How do you see this impacting the audit industry? Have you observed any broad trends recently as a result of the latest round of market reforms?
PG: Accounting is not directly affected by the opening up of the financial sector. Foreign accounting firms in China are structured like the firms elsewhere in the world: Local partners own the local firm. There has always been a lot of talk about allowing foreigners to own interests in local accounting firms—they already can, but the biggest obstacle is passing China’s CPA exam, which is the toughest in the world! It actually makes sense for local partners to own and operate the firms in China. They have local expertise and since most of them are now local Chinese, they better understand the cultural aspects of doing business.
YCW: A lack of transparency has always concerned investors and lenders in China, perhaps unjustifiably so. While the perception is changing, can you identify any obvious steps to be taken at the state and firm levels to speed up this process, or has all the low-hanging fruit been picked?
PG: Disclosures of public companies in China, particularly those listed abroad are pretty extensive. The greatest difficulty often lies in opaque ownership structures where it is hard to figure out who is ultimately in control.
One thing I have observed is that Chinese companies often do not do things in the most straightforward manner. For example, it is not uncommon to put the ownership of companies in the names of friends or relatives. I guess that gives people plausible deniability if problems come up, but it often scares investors and business partners who think they are trying to hide something. I think a lot of this is a legacy of earlier times when being a “capitalist roader” (走资派, zou zi pai) was a bad thing.
One of my goals is to “keep kids off the street”, and the street in that case is Wall Street.
YCW: Many Young China Watchers aspire to a career in China. As the co-director of the Guanghua School of Management at Peking University, what advice do you routinely give your most promising students?
PG: One of my goals is to “keep kids off the street”, and the street in that case is Wall Street. Too many of our promising graduates pursue careers in finance because that is high-paying and something we teach well. But the world needs their skills in other areas to make the world a better place. I want to see students devote their lives to making other people’s lives better. I am seeing more students pursuing careers with startups that are doing that. We offer courses in social entrepreneurship and Chinese culture, and increasingly I see students who are more focused on making a positive impact on our world.
For foreign students, I tell them that they will not succeed in China without strong language and cultural skills. I got by without them, but I am the last of that breed. In addition, they need to bring something to the table—deep skills in some functional business area. It is hard to develop those skills as a foreigner in China, so often it makes sense to start their career back home and then return to China.
— Interview by Jun Liang Yap