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IIRC urges firms to improve reporting

By Cong Mu (Global Times)

08:29, June 26, 2013

Major Chinese companies need to adopt better accounting practices to increase transparency and win investor confidence, Paul Druckman, CEO of the International Integrated Reporting Council (IIRC), a London-based global coalition for promoting a value-based holistic reporting standard, told the Global Times during an interview Monday in Beijing.

Failing to do so will put them at a risk of falling behind global competitors, such as Microsoft and Coca-Cola, which have already joined an IIRC pilot program as a way to respond to global investors' increasing demand to understand the business models of the companies they invest in, Druckman said.

Integrated reporting is an emerging long-term-oriented and value-based standard that builds on existing financial and non-financial reporting standards in a bid to lend clarity to currently ambiguous corporate reporting, according to the CEO.

The IIRC is seeking comments by July 15 from regulators and companies from all over the world, including China, on the new reporting standard's framework.

Despite recent signs of improved prospects for Chinese IPOs in the US, experts have warned about the risks of continuing with the existing accounting practices, under which Chinese companies' annual financial reports do not provide enough insight into how they work.

"At the moment, with an IPO, they may well be abiding exactly with the rules, but nobody understands what the business is," Druckman said. "In five years' time, if that IPO happened and there was no integrated reporting, I would be surprised, because the investment community would demand it."

Beijing-based online retailer LightInTheBox Holding Co debuted on the New York Stock Exchange on June 6, becoming the first Chinese firm to list in the US this year, and it soared 22 percent on its first day.

A massive number of Chinese companies delisted from US stock exchanges in 2011 and 2012 thanks to widespread accounting fraud, and the scandals have hurt US investors' confidence in Chinese stocks in general.

Although the LightInTheBox IPO may make it look safe for investors to go back in the water, Paul Gillis, an accounting professor at Peking University, noted on June 7 that there is a lingering technical problem with a type of investment vehicle known as a variable interest entity (VIE), which has yet to be resolved.

Despite the VIE's inherent problems, both accountants and corporate lawyers may be reluctant to negate the enforceability of VIE contracts, which will continue to generate ambiguity in Chinese companies' annual reports, Gillis wrote in his blog on Chinese accounting practices.

Only one Chinese company, Hong Kong-based CLP Group, has joined the IIRC pilot so far, Neil Stevenson, an executive director at the London-based Association of Chartered Certified Accountants, told the Global Times during the same interview.

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