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CIRCULAR OF THE STATE COUNCIL REGARDING STRAIGHTENING OUT ACCOUNTING ACTIVITIES AND FURTHER ENHANCING THE QUALITY OF ACCOUNTING WORK

    During the period of the Eighth Five-Year Plan, the accounting work of
the country has achieved a great deal either in the legal construction and
the transformation of accounting system model or in the development of
accountant undertakings. There are still, however, quite a few problems
existing in the accounting work, such as forging accounting documents,
charging arbitrary expenses to the cost, having "two account books",
concealing incomes, evading taxes, transferring the state's assets, setting
up one's own "treasuries", and other activities violating financial and
economic disciplines. Those activities have seriously obstructed the
development of the economy and the smooth progress of the reform, encouraged
the corruption, and so must be strictly rectified.

    Accounting work is a major foundation of economic management. It is very
important to put accounting activities in order, strictly implement business
accounting and strengthen accounting control, for the consolidation and
improvement of macro-control and the creation of favorable economic
environment and economic order. The rectification of accounting activities
shall be taken as a starting point of the work of putting economic activities
in order and enforcing financial and economic disciplines. With a view to
implementing the Accounting Law of the People's Republic of China
(hereinafter referred to as the Accounting Law), further strengthening the
control over accounting activities and bringing the role of accounting work
into full play in maintaining the economic order and developing the socialist
market economy, this Circular is hereby issued with regard to several
problems concerning rectifying accounting activities and further enhancing
the quality of accounting work.

    1. Rectifying Accounting Activities Throughout the Country

    People's governments at various levels and all departments concerned
shall immediately adopt measures to inspect all-sidedly the accounting work
of their own regions or departments, make rectification in the light of the
actual situation, supervise the units of their regions or under their
departments to conduct accounting work in accordance with law, and establish
a standard accounting order.

    The rectification of accounting work shall be carried out under the
direct leadership of people's governments at various levels, with financial
departments at various levels responsible for the organization and
coordination. The work of rectification shall start with the issuance of this
Circular and be completed before the end of 1996. All enterprises,
administrative and institutional units, and social organizations shall make
their self-examination seriously and the coverage of the self-examination
must be 100%. Each region and department shall, on the basis of general
self-examination, transfer a group of professional key members to form an
inspection group for emphasis inspection. The coverage of emphasis inspection
may not be less than 20%. The role of social intermediary institutions, such
as accounting firms and auditing firms, shall be brought into full play in
the rectification work.

    The rectification of accounting work shall, on the basis of overall
inspection on the implementation of the state's laws and regulations on
finance, taxation, financial affairs and accounting, etc., lay emphasis on
the following problems: (1) Fail to establish accounts which should be
established according to the state's provisions, or accounts are in serious
confusion; (2) Play "two account books", or forge accounting documents,
account books or accounting statements, concealing true financial situation
and management performance; (3) Violate financial and accounting rules,
arbitrarily cut down the cost and use the money for other purposes or charge
random expenses to the cost, reimburse expenses willfully, make random
understatement of profits or overstatement of losses, or arbitrarily eat up
part of the state capital funds; (4) Retain or transfer the state or the
unit's revenue and set up one's own "treasuries"; and (5) Other problems of
which a region or a department deems necessary to make an emphasis
rectification.

    Activities violating financial and economic disciplines discovered in the
inspection shall be seriously dealt with in accordance with relevant
financial and economic laws and regulations. If the violation is caused due
to the bad internal management, the unit shall be ordered to make
rectification and obtain real effect within a prescribed period; if it is
the unit's leader who inspires, instigates or orders the accounting personnel
to fabricate or falsify accounting data, practice fraud and deception, and so
jeopardize the interests of the state and society, the leader shall be
dismissed from his post; if it is the local government or relevant department
that instigates or forces the unit to give false accounting statement, the
leader of the local government or of the department shall be investigated for
responsibility or even be dismissed from his post; in cases where the
accounting worker fails to report what they knows of the activities
violating law and disciplines or acts fraudulently in collusion, in addition
to the investigation of his responsibility, the accounting worker shall be
deprived of his professional qualification. If any of the above-mentioned
activities constitutes a crime, the criminal responsibility shall be
investigated. Each region and department shall choose major typical cases for
handling publicly.

    2. Strengthening the Supervision and Inspection, Establishing and
Improving the Accounting Control System

    Every region, department and unit shall carry out effective supervision
on accounting activities and, with the steady deepening of the reform,
establish and improve an accounting control system with the state
supervision, social supervision and a unit's internal supervision
incorporated, and so guarantee the accounting work conducted in order under
the law.

    (1) Government departments shall strengthen according to law the
supervision over accounting work of basic units. Financial departments and
various responsible authorities shall tighten the control of accounting
statements, investigate and deal strictly with the acts of fabricating or
falsifying accounting statements and other acts of fraud and deception. Each
responsible authorities shall make a general examination of annual accounting
statements submitted by their subordinate units and, in addition, select 20%
of them for emphasis examination, ensuring that the annual accounting
statements tell the real financial situation and management performance of
the units. Auditing organs shall strengthen the supervision over the
financial revenue and expenditure of state-owned financial institutions,
industrial and commercial enterprises and institutional organizations.
Financial departments shall strengthen the control of invoices, progressively
implement an invoice trailing and auditing system and, in accordance with
law, deal strictly with the units and persons who violate the state's
provisions in acquiring or filling in vouchers or in voucher reimbursement
and accounting. The departments for the administration of industry and
commerce shall strengthen the supervision over industrial and commercial
enterprises by combining it with the registration and annual examination,
ordering those enterprises who fail to have necessary accounting personnel in
accordance with stipulations or, according to affirmation of the financial
departments, whose accounting systems are not complete or whose accounts are
not in conformity with stipulations to make correction within a prescribed
period and, if no correction has been made within the period, refusing to
give registration or annual examination.

    (2) Strengthening the social accounting supervision and implementing
according to law an audit system for enterprises' annual accounting
statements. With a view to effectively prohibiting and preventing fraud and
deception in accounting statements and enhancing the quality of accounting
statements, the audit system shall be implemented for enterprises' annual
accounting statements according to law. In the light of the actual situation
of the development of China's accountant undertakings, the audit system of
enterprises' annual accounting statements shall be implemented in the
following stages: foreign investment enterprises and other limited liability
companies and joint stock limited companies which have not implemented the
audit system of enterprises' annual accounting statements must institute the
system before the end of 1996; the state-owned large and medium-sized
enterprises which have not implemented the audit system of enterprises'
annual accounting statements must institute the system before the end of
1997; all enterprises which should implement the audit system of enterprises'
annual accounting statements must institute the system by 2000.

    The state's competent authorities shall strengthen the supervision over
and inspection on accounting firms (auditing firms) and the quality of
registered accountants' service, take a yearly selective examination on
audit reports on enterprises' annual accounting statements, issued by
registered accountants, deal seriously according to law with those accounting
firms (auditing firms) and registered accountants who violate the Accounting
Law or the audit criteria or rules by withholding the actual situation
purposely or even participating in the fraud, and deprive the registered
accountants of their practice qualifications; if the circumstances are
serious, the department for the administration of industry and commerce
shall, in accordance with law, revoke the business license of the accounting
firm or auditing firm.

    The implementing measures for the audit system of enterprises' annual
accounting statements shall be separately formulated by the Ministry of
Finance together with other relevant departments.

    (3) Strengthening the internal accounting control of various units. All
administrative units, enterprises, institutions and social organizations
shall carry out accounting work in strict accordance with the Accounting Law.
Leaders of various units shall conscientiously perform their functions and
duties entrusted by the Accounting Law, urge and supervise the accounting
organs to strengthen the construction of rules and regulations and the basic
management, improve the internal accounting control, and make it a key part
of the unit's self-disciplining mechanism. Accounting offices and accounting
personnel shall perform their functions and powers according to law, make
accounting seriously, enforce the accounting control, so to help strengthen
the economic control and raise the economic efficiency.

    All units shall, in accordance with law and relevant provisions of the
state, accept the accounting supervision of the government departments. They
must provide accurate accounting documents, account books, accounting
statements and other accounting data, and may not refuse to provide, conceal
or falsely provide accounting data.

    3. Strengthening the Control and Further Enhancing the Quality of
Accounting Work

    (1) Strengthening the leadership on accounting work. Financial departments
at various levels shall, in accordance with the need of the establishment and
improvement of socialist market economic system, strengthen the control of
accounting activities over the whole society. Place the accounting control
on the agenda of the work of financial management, amplify necessary organs,
allocate and strengthen necessary cadres. Responsible authorities at various
levels shall formulate measures for strengthening the control of accounting
activities, direct their subordinate units to do accounting work well.

    (2) Further strengthening the accounting law. Continue to strengthen the
construction of accounting law and accounting system, bring about steady
improvement in the accounting law and accounting system, with the Accounting
Law as the core. Further deepen the reform of enterprises' accounting system,
establish an accounting criteria system with Chinese characteristics,
including basic accounting criteria and specific accounting criteria, which
shall be implemented for trial from 1997 in some chosen enterprises with
comparatively good operating mechanisms and sound foundations. Effectively
publicize the Accounting Law and other financial and accounting laws and
regulations, enhance the sense of legality of leaders at various levels and
the mass of financial and accounting workers.

    (3) Enhancing political and professional qualities of accounting workers.
In accordance with the need of strengthening the economic control, try to
effectively accomplish on-the-job training of accounting workers and make
their knowledge enriched and updated uninterruptedly. On-the-job training of
accounting workers shall, under the general planning and control of the
financial departments, be conducted in a planned and organized way. The
professional training shall be combined with the education in legality,
ideological and political education and education in vocational ethics, so as
to promote the quality of accounting workers in an all-round way. All units
shall ensure certain time every year for vocational study to their accounting
personnel. The system of accounting professional qualification examinations,
the system of going to post with certifications and the system of citation
and rewards shall be continuously implemented, so as to arouse and give full
play of the initiative of the mass of accounting workers.

    (4) Strengthening the control over social accounting intermediary
institutions and enhancing the quality of registered accounts' service. The
social auditing control shall be standardized under the principle of
"governing by law, supervision and control by the government, guidance by the
market and self-disciplining within the profession". The state's competent
authorities shall strengthen the construction of standardization of
registered accountants' professional practice and the supervision system of
the service quality, guarantee a steady enhancement of the social auditing
level. Institute and improve the registered accountant examination system and
follow-up education system, build a contingent of registered accountants
having high professional quality, being fair-mined and objective, strictly
abiding by the vocational ethics and service standards and having good social
credit. Progressively reform the management system of accounting firms
(auditing firms), establish an operational mechanism for management by self-
disciplining within the profession.

    All localities and departments shall conscientiously implement the
preceding provisions, and submit a timely report on the planning for the
rectification of accounting activities and the situation of the
implementation to the State Council, with a copy of it sent to the Ministry
of Finance.