Management Prof Co-Authors Article in China's Financial Times
Shaomin Li, the Haislip-Rorrer Faculty Research Fellow and professor of management and international business at Old Dominion University, recently co-authored an article in China's Financial Times.
While visiting at the Skolkovo Institute for Emerging Market Studies (SIEMS) in Beijing, Li wrote a piece on the problem of data manipulation in many foreign-listed Chinese companies
In a guest post headlined "China's Mutant Turtles," Li and Seung Ho Park, president of SIEMS, wrote that the problem of shady accounting shows up eventually in the raw numbers, no matter how rosy the picture looks initially.
"It is nicely summed up in a modern Chinese parable: a locally-listed food company makes up a news release saying a flood washed away its turtles - a Chinese delicacy - and later issues another saying the turtles swam back when the flood receded," Li and Park wrote.
China's economy has grown by an average of more than 10 percent a year for the past 20 years, but market returns have been only half that size. The authors say that's because the problem is "in the paper" - the financial information contained in paper documents is easily forged.
Li and Park wrote that their research shows the poor quality of accounting in China is an extension of the poor governance environment, an issue that has its origins in China's cultural, political, economic and legal systems.
"After decades of communist rule the state is still trying to establish its legal authority and is unable to enforce the law impartially. The result is that people resort to personal connections and private information to protect their business dealings," the authors wrote.
That's a holdover from the way Mao Zedong-ruled China, and the radical ideology that being rich was shameful, Li said. "To achieve his revolutionary goals, he encouraged people to use any means, including breaking the law."
The scholars wrote that the succession of Chinese rule, where Deng Xiaoping made a complete reversal and celebrated wealth, added to the problems that exist today.
"The combination of Mao's lawless legacy and Deng's call for enrichment has mutated into a unique culture that encourages getting rich by any means - even if that means cutting corners and manipulating accounts," Li and Park wrote.
Accurate information is vital as Chinese firms grow and turn to public financing. To become more financially transparent, China must make the transition to more rule-based governance, with an improved legal system and higher standards of documentation.
In the meantime, the authors said prospective investors should put more weight on cash flow and take a cautious view of profit data when evaluating performance: "In fast-growing emerging markets with questionable moral constraints and information quality, a good motto to follow is 'all data are guilty unless proven innocent.'"
This article was posted on: August 10, 2011
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