China 'isn't even close' to where it needs to be in terms of corporate governance standards, according to the chief executive of global accounting giant Andersen.
However, mainland government officials had sent clear signals that they understood the challenges and recognised the need for change, Joseph Berardino said during a visit to Hong Kong.
'They need better-trained accountants; they need better-trained directors; they need to have clearer standards. The infrastructure isn't in place,' he said.
China has won praise recently from investment commentators and fund managers for its commitment to improve regulatory and governance standards. However, abuses remain rampant. About 98.7 per cent of Chinese companies falsified their earnings in annual reports for last year, according to a Ministry of Finance survey reported by the China Reform Daily last week.
Mr Berardino was speaking before heading to Shanghai, where Andersen has funded a new institute to train accountants. The United States-based company has been active in the mainland market for 15 years.
Andersen had begun by advising and providing services for multinationals making investments in China, but its work was now evenly split between foreign firms and domestic state-owned enterprises, Mr Berardino said.
With World Trade Organisation entry around the corner, state-owned firms were increasingly looking to see how they could use technology to transform themselves into world-class businesses.
'With that is coming early recognition that risk management has to be an act of will by management . . . you need to assess the competition and where the risks are, and we are helping companies with [that].'
Andersen's risk management business had grown by 40 per cent in China in the past year and the firm expected further substantial growth this year, Mr Berardino said.
Andersen had faced no official restrictions on its operations and was constrained only by its ability to find enough capable staff.
'Our value proposition is very high quality. We could be even bigger if we were willing to dilute our quality, and we are not willing to do that,' he said.
Despite acknowledging China's relative backwardness, Mr Berardino said it was inappropriate for the country simply to copy the Western corporate governance model and held out the prospect that it could improve on overseas practices.
'The question becomes how does [China] take advantage of what's been learned in the West. It's easy to fall into the trap of just adopting the Western model.'
With the world moving to a '24/7', or round-the-clock, seven-days-a-week, trading environment, it was important to develop a common set of accounting and auditing standards to enable cross-border comparisons of companies, he said. This would require negotiations across different countries and cultures.
Andersen is supporting efforts by the International Forum on Accountancy Development to create a common worldwide financial reporting framework. Mr Berardino said he was optimistic the initiative was making progress.
Andersen, formerly Arthur Andersen, last year split from its consulting arm, which has renamed itself Accenture, following a bitter two-year arbitration battle. The split coincided with pressure from the US Securities and Exchange Commission (SEC), which has been concerned over possible conflicts of interest involving accounting firms that provide auditing and more-lucrative consulting services to the same companies.
Mr Berardino, who took over as Andersen's chief executive in January, helped negotiate a compromise settlement with the SEC that enables auditing firms to continue offering consulting services in exchange for improved disclosure of fees.
Mr Berardino said the firm had split due to pressure from within rather than outside.
'We evolved into two firms that had two different business models and it's just that simple,' he said. 'When you have two business models and go to a market differently, you wake up one day and [think]: remind me why we are together again?'