This article was originally posted at Axel Standard, a platform for cloud accountants and SaaS applications.
Like in most places, accounting, compliance, and bookkeeping are the bread and butter of many accounting services and firms in China. However, certainly, not all are equal when it comes to the efficiency, accuracy, and risks involved in the services delivered. Some business models even prohibit accounting firms from providing any value-added services beyond the basic accounting and compliance services. This is due to the way China’s accounting industry has developed over the years and the technologies that developed alongside it.
China is unique in a way that it used government-issued tax invoices – fapiaos – as the gold standard for accounting for many years. Fapiaos for a long time were the primary means through which the tax authorities collected tax revenue. They played a leading role in shaping accounting methodology and policies that are still widely in use today.
In practice, many accountants have been slow to develop their skills beyond the bare minimum fapiao accounting methods. Those who have embraced modern accounting technologies have been able to better collaborate with their clients and provide greater value, similar to that in advanced countries. However, those who have successfully adopted technology into their accounting practice are still few in number. Currently, three types of accounting firms make up the large majority of China’s accounting industry; bare-minimum fapiao accounting firms, manual accrual firms, and cloud-based accounting firms.
Each type of accounting firm can be distinguished by its methodology, know-how and skillset, benefits, risks, and the associated costs. We help to distinguish these firms from one another along these lines.
Bare-Minimum Fapiao Accounting Service (RMB 400 – 2000)
Bare-minimum fapiao accounting firms are more like ‘compliance only’ firms. They only record transactions for which a fapiao is issued unless otherwise instructed by their client. This is often the bare minimum to meet tax bureau requirements and avoid non-compliance. When bare-minimum fapiao accounting methods are used it’s not uncommon for transactions to be incorrectly recorded and left on the financial reports for an indefinite period of time. The P&L statement of the business will not reflect the true performance for a given period and subsequent balance sheet items also incorrectly reflect the business’ assets and liabilities.
This method of accounting is the simplest of all the methods. Accountants are able to spend as little time coding transactions as possible and charge very low fees based on the volume of transactions a business has in a given month. However, businesses are left with financial statements that have little to no value for management purposes, tax risks that increase over time, and often a measurably higher tax liability.
Many firms that position themselves as professional accounting firms still often use this methodology. A clear indication that a firm is using fapiao accounting methodology is whether or not the accountant requests supporting material for transaction; such as inventory movement, pro-forma invoices, and accrual lists. Without these supporting materials, it is near impossible for accountants to correctly code large volumes of transactions, indicating they are likely performing their bookkeeping on the basis of bare minimum fapiao accounting.
Manual Accrual (RMB 3,000 – 10,000)
Manual accrual methodology is what most would consider being the minimum acceptable level of accounting practice. Over the course of one month, accountants will collect transactions information, regardless of whether a fapiao has been issued, and manually generate transaction records in an accounting system of their choice. Come month end, they will request all the additional documentation from their clients to produce complete and accurate financial reports according to China’s Generally Accepted Accounting Principles.
Accountants rely heavily on communication with the client to obtain the information necessary to correctly accrue transactions in the accounting system. Businesses receive financial reports that reflect their past performance, up to the closing balance of the previous month. While these reports have some value for management purposes, important information such as Accounts Receivable are not available until month end. Additionally, some incorrectly coded transactions sometimes make it into the financial reports, due to the process being largely manual.
To differentiate whether an accountant is using accrual or fapiao accounting methods to prepare their clients books, you can simply look at the accountant’s involvements in your transactions. If they often ask detailed questions about the nature of transactions, they are doing so in order to accrue the transaction in the correct period and assigning transactions to the correct accounts. Fapiao accounting also creates obvious inaccuracies in financial reports which can be identified by someone with some inside knowledge of the business and its operations. Fapiao accountants will also try to educate their clients that these methods are acceptable in China – to justify their behavior.
Cloud-Based Collaboration (RMB 3,000 – 10,000)
Cloud-based accounting synchronizes business activities with the accounting system, changing the existing workflow of accountants. When a business issues an invoice or creates a purchase order, that transaction record is created in their accounting system and preliminary data provided for the accountant to see. All the cloud accountant needs to do is supervise the process to ensure that transactions are being correctly coded by the cloud system and that compliance requirements are met on time.
Cloud-bases collaboration happens in real time. Clients don’t need to wait until month-end closing to see their financial data. Instead, data – such as accounts receivable – are made available in real-time. Businesses also get constantly up to date dashboards and other custom reports made available to them. This means businesses can resolve issues before losses occur – such as those transactions with impending tax implications.
Often times, accountants spend a lot of time reconciling fapiaos with transactions to avoid increasing the tax liability of their client due to a missing input fapiao or duplicate output fapiaos. Cloud-based collaboration allows the business to track fapiaos with much greater efficiency and accuracy, helping to avoid mistakes.
Cloud-based collaboration addresses many unique accounting and business problems in China, though it is still a relatively new concept. It dramatically changes the workflow of accountants and with it requires learning new sets of skills. It enables external accountants to function close to an internal employee without the need to be on physical location. Also, because cloud-based collaboration involves the business in the accounting process – removing the need for accountants to manually perform double entry bookkeeping – it creates more opportunities for accountants to provide value-added work for their clients.
Conclusion
When it comes to receiving sound advice about your financial situation or viability of business opportunities, accountants are a common first choice. Accountants often provide services such as tax planning, cash flow management, budgeting & forecasting, risk assessment, internal control, and other consulting services all of which help address complex issues the business is facing. A prerequisite, however, is that the past accounting data is accurate and without significant error. This effectively removes fapiao accountants from the equation, as they are “compliance only”. Manual accrual methods allow for these services to be offered and that’s exactly how many of the large accounting firms have built their practices – but this often makes them expensive and out of reach for small to medium-sized businesses. Automation and collaboration between accountants and business has played a big role in making these services available to small to medium-sized businesses in advanced countries, and such is the case in China. Foreign businesses require these services more so in China than at home to operate their business effectively and without significant risk.
While bare-minimum fapiao accounting firms are not expected to disappear in the near future, it’s important to be able to spot the difference between the 3 types of accounting firms in China. For more insights about business in China and the accounting implications, download the Business Management Playbook. Or, contact us here at Axel Standard.