An epidemic in China

Two pieces of news from Forbes first.
China's Zoomlion Tangles With Feisty Newspaper Over Fraud Claims

Arrested Reporter in Zoomlion Case Admits To Taking Bribes And Inaccurate Reporting
Underlying these two pieces of news is the real big challenge for Chinese Economic development---loose accounting standard and dishonest accounting practices. It is a epidemic haunting China's business community.  The tax system is partly to blame together with the loose enforcement, which makes a prisoners' dilemma---no one can afford to be honest.

I happen to know some accountants in China and what they told me is shocking beyond the kind of news you will see. I will quote anonymously what one accountant told me.

"Accounting is a stressful job. I hesitated a lot before taking another accounting job after I retired. It is just you have to make up the books when you do the job, otherwise, no one will hire you. The trouble is the accounts will be kept for ten more years, and I do not want to be haunted by the possibility of getting arrested five years down the road....audition is not the way to go either. You are too naive. Audition is super lucrative, but that does not come from its legal pay. You are certain to find problems in the books you audit, and you need to look the other way. That is where the money comes from. Also, why would anyone ask you to audit when they know you will find the problem and they can hire others to give their book a nod? That stupid certificate, is a stamp of approval, worth so much money. You can lease it out to others and earn a good profit without doing anything. Of course, that is when everything goes well."

He added, "do you understand? You are probably too young to understand".

Actually, it is not such a complicated explanation. You hear that a lot when it comes to the explanation for financial crisis. The incentive for rating agencies.

I think there are a small number of problems that account for most of our troubles. Sometimes we do not know how to solve them. Sometimes, we understand how to solve them very well, but the political system will not allow us to solve them.