Part 1: China Factfile
1. China in Brief
1.1. Geographic Location: China is located in the eastern Asia and the west coast of Pacific Ocean, in a changing configuration of broad inland and vast territorial sea. The nation has oriented itself with the inland as its back and in the face of the sea.
1.2. Population: China is the country with the largest population in the world. By the end of 2007, the total population of China amounted to about 1.32 Billion (Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan excluded), occupying one fifth of the world’s total.
1.3. Total Area: China’s total area is about 9.6 million km², covering one fourth of the Asia’s total and one fifteenth of the world’s total. China is the third largest countries in the world, only smaller than both Russia and Canada.
1.4. Administrative Divisions: China has 34 provinces, autonomous regions and municipalities directly under the Central Government (Hong Kong SAR, Macao SAR and Taiwan included) with the capital Beijing.
1.5. China is a united multi-ethnic nation of 56 ethnic groups.
2. Political System
China’s political system here refers to the political structure, fundamental laws, rules, regulations and practices that are implemented in China's mainland and regulate the state power, government, and the relationships between the state and society in the People's Republic of China since its founding in October 1949.
Here we would like to introduce to you the system of People’s Congress, the System of Chinese People’s Political Consultation, the Administrative System, the Judicial System and the System of Self-government of Ethnic Autonomous Areas.
2.1. The System of People’s Congress
The Constitution of the People’s Republic of China stipulates that, the People’s Republic of China implements the System of People’s Congress, “All power in the People's Republic of China belongs to the people. The National People's Congress and the local people's congresses at various levels are the organs through which the people exercise state power.”
The National People’s Congress is the highest organ of state power and exclusively exercises the supreme state power. The System of People’s Congress is China’s fundamental political system, an organizational form for the people's democratic dictatorship and also the regime of China.
The National People’s Congress (NPC) and local people’s congresses are established through democratic elections, responsible to and supervised by the people.
State administrative, judicial and procuratorial organs are created by, responsible to and supervised by the people’s congresses.
The National People’s Congress is elected for a term of five years and meets in session once a year. When the National People's Congress is not in session, its permanent body, the Standing Committee of the National People's Congress shall exercise the supreme state power. The Standing Committee of the National People's Congress is composed of the chairman, the vice chairmen, the secretary-general and the members.
The National People’s Congress exercises the following functions and powers: to amend the Constitution; to supervise the enforcement of the Constitution; to enact and amend basic laws governing criminal offences, civil affairs, the state organs and other matters; to examine and approve the plan for national economic and social development and the report on its implementation; to examine and approve the state budget and the report on its implementation; to approve the establishment of provinces, autonomous regions, and municipalities directly under the Central Government; to decide on the establishment of special administrative regions and the systems to be instituted there; to decide on questions of war and peace; to elect or decide on the choice of, the leaders of state organs, namely “to elect the members of Standing Committee of NPC, to elect the President and the Vice President of the People’s Republic of China, to decided on the choice of the Premier and the other members of the State Council, to elect the Chairman of the Central Military Commission and to decide on the choice of all other members of the Central Military Commission, to elect the President of the Supreme People’s Court, to elect the Procurator-General of the Supreme People’s Procuratorate;” the NPC has the right to remove the above-mentioned functionaries.
2.2. The System of Chinese People’s Political Consultation
The System of Chinese People’s Political Consultation means the system of multi-party cooperation and political consultation under the leadership of the Communist Party of China. The Communist Party of China and eight other political parties work in the principles of unity, cooperation and mutual supervision, and jointly participate in the great undertakings of building socialism with Chinese characteristics and promoting the reunification and rejuvenation of the country. The system of multi-party cooperation and political consolation under the leadership of the Communist Party of China is a basic political system in China and a socialist party system with Chinese characteristics.
The Chinese People's Political Consultative Conference (CPPCC) is an organization of the Chinese people’s patriotic united front, an important institution of multi-party cooperation and political consultation under the leadership of the Communist Party of China, an important form of the socialist democracy in the political lives of China and the most important political and organization form of the multi-party and political consultation system under the leadership of the Communist Party of China.
Major functions of the Chinese People’s Political Consultative Conference are political consultation, democratic supervision and participation in the management and discussion of state affairs. The main forms of multi-party cooperation are participation in the management and discussion of state affairs, democratic supervision and holding leading positions in the government and judicial organs at various levels upon recommendation by the CPC.
2.3. The Administrative System
The administrative system refers to a series of organizational framework and macro administration regulations and practices that are implemented by the Administrative organs in accordance with the Constitution and relevant laws, and regulate politics, economy, culture, military, foreign affairs and other state affairs. The administrative system covers various links including planning, organization, human resources deployment, command and control.
The current state administrative system means: the State Council and people’s governments of provinces (autonomous regions, municipalities directly under the Central Government), counties (autonomous counties, cities at the levels of counties, districts under the cities, prefectures, and municipal districts), towns (cities townships, ethnic townships and sumu).
Under the market economy conditions, government functions include economic regulation, market supervision, public administration and public services. Ever since the adoption of reforms and opening up policy, China has witnessed a number of restructurings in the administrative management system and made noteworthy achievements. One of the signs is the positive change of the way government functions. The government tends to cut down its interventions over micro economy and starts to establish a macroeconomic regulation framework featuring indirect management tools. With the general set-up of market mechanism, the government has put its function of cultivating, regulating and monitoring market to the full play and attached more and more importance to its function of public administration and public services. In general, the administrative system in China basically proceeds in line with development of socialist democracy and the socialist market economy.
In the year of 2008, the new-elected government of China initiates the reform of “Big Department System” (or called super-ministries system) which mainly centers on changing the way the government functions.
The so-called “Big Department System” explores ways to establish larger departments that organically integrate the functions of smaller departments and exercise a unified administration over issues concerning the similar scope of business and relevant government functions. This kind of government bodies realigning shall avoid overlapping of government functions and the phenomenon of “stepper motor missed steps”, improve administrative efficiency and decrease administration cost.
In the next round of reform of bodies of the State Council, the priorities are as follows:
1). to intensify macroeconomic regulation and reduce micro intervention regarding the departments responsible for the regulation of economy and the market；
2). to promote the restructuring of public institutions regarding the departments responsible for public services；
3). to create favorable competition environment for the further development of market economy regarding the state-owned enterprises.
The adoption of “Big Department System” shall be more conducive to the improvement of administration efficiency and the overall planning and coordination of the problems in the industrial development. It proceeds better in line with development of socialist democracy and the socialist market economy; works better to address risks and challenges in the new era and shall create a benign environment for advancing the cause of reforms and opening up.
2.4. The Judicial System
In China, the structure of judicial system is as follows: the judicial organization (People’s Court), the procuratorial organization (the People’s Procuratorate), the investigative organization (the Public Security Organization and the State Security Organization) and the judicial administrative organization.
The judicial system also covers the investigation system, the procuratorial system, the prison system, arbitration system, judicial administrative system, mediation system, lawyer system, notary system, state compensation system and legal aid system.
The people's courts of the People's Republic of China are the judicial organs of the state. The People's Republic of China establishes the Supreme People's Court and the people's courts at various local levels, military courts and other special people's courts. The higher People's Courts are set up at the levels of provinces, autonomous regions and municipalities directly under the Central Government, and the Intermediate People's Courts and the grassroots People's Courts are set up at lower levels. Except in special circumstances as specified by law, all cases in the people's courts are heard in public. The accused has the right to defense. The people's courts exercise judicial power independently, in accordance with the provisions of the law, and are not subject to interference by any administrative organ, public organization or individual.
• The people's procuratorates of the People's Republic of China are state organs for legal supervision. The People's Republic of China establishes the Supreme People's Procuratorate and the people's procuratorates at various local levels, military procuratorates and other special people's procuratorates. The people's procuratorates exercise procuratorial power independently, in accordance with the provisions of the law, and are not subject to interference by any administrative organ, public organization or individual.
2.5. The System of Self-government of Ethnic Autonomous Areas
• Under unified national leadership, regional autonomy is practiced in areas where people of minority ethnic groups live in compact communities of Chinese territories; in these areas organs of self-government are established to exercise the power of autonomy. The system of self-government of ethnic autonomous areas is a political system with Chinese characteristics ensuring the minority ethnic groups to manage their own affairs and administer the right of self-government.
• The People’s Republic of China has 5 autonomous regions: Inner Mongolia Autonomous Region, Xinjiang Uygur Autonomous Region, Ningxia Hui Autonomous Region, Guangxi Zhuang Autonomous Region and Tibet Autonomous Region.
The administrative divisions of ethnic autonomous areas are: autonomous regions, autonomous prefectures, autonomous counties and ethnic townships. The organs of self-government of ethnic autonomous areas are the people's congresses and people's governments of autonomous regions, autonomous prefectures and autonomous counties.
• The rights of organs of self-government of ethnic autonomous areas include: law-making power, flexible executive rights, power of autonomy in administering finances, the self-government right concerning languages and culture, the right to organize public security forces and the preferential employment of minority ethnic groups cadres.
China, economically extremely backward before 1949, has become one of the world's major economic powers with the greatest potential, and the overall living standard has reached that of a fairly well-off society, ever since the establishment of the new China and the adoption of reform and opening-up policy in particular. By strengthening and improving its macro control with the adoption of a series of policies addressing new phenomenon and problems in the economic operation, the Chinese government has held the fast development momentum of national economy steady into the 21st century and the economy enters its benign development state featuring relatively fast growth, optimized structure, improved performance and development of people’s livelihood.
In 2007, the Chinese economy has presented itself with the following features: a sustained fast and stable growth of national economy; fast growth of investment and exports and gradually accelerated growth of consumption; accelerated increase of market price, especially that of real estate; stable monetary situation and continuous active capital market; relatively fast growth of government financial revenues.
3.1. A sustained fast and stable growth of national economy
It is manifested as follows: GDP enjoys a sustained fast growth. The GDP of 2007 amounts to 24661.9 billion RMB (about 3000 Billion USD), 11.4% higher than the previous year and 0.3% more that the growth rate of the previous year. For five consecutives years, the growth rate reaches or exceeds 10%. Agriculture production has a sustained stable development. In 2007, the total grain production reaches 501.5 million tons, 3.5 million tons more than the previous year with a growth rate of 0.7%. The industry enters an accelerated growth. In 2007, the total industry added value reaches 10736.7 billion RMB with a growth rate of 13.5%. The growth rate of large-scale industry added vale amounts to 18.5%
3.2. Fast growth of investment and exports and gradually accelerated growth of consumption
It is manifested as follows: Relatively fast growth of investment: In 2007 the social investment of fixed assists totals 13723.9 billion RMB with a growth rate of 24.8%, 0.9% more than that of the previous year. The city and township investment of fixed assets reaches 11741.4 billion RMB, with a growth rate of 25.8%, 1.5% more than that of the previous year. Relatively fast and stable growth of exports: In 2007, the total volume of annul imports and exports reaches 2173.8 billion USD, with a growth rate of 23.5%，0.3% less than that of the previous year. The exports volume is 1218 billion USD, with a growth rate of 25.7%, 1.5% less than that of the previous year. The imports volume is 955.8 billion USD, with a growth rate of 20.8%, 0.8% more than that of the previous year. The surplus reaches 262.2 billion USD, 84.7 billion USD more than the previous year. Gradually accelerated growth of consumption: In 2007, Retail sales of consumer goods totals 8921 billion RMB0, with a growth rate of 16.8% and 3.1% more than that of the previous year.
3.3. Accelerated increase of market price, especially that of real estate
It is manifested as follows: Sharp increase of consumer price: Consumer price index (CPI) increases with a rate of 4.8%, 3.3% more than that of the previous year, recording the highest growth rate since 1997. The increase of the price for food and houses is the main reason for driving up the CPI. Increase of price growth rate of Upstream products: Producer price index (PPI) increases with the rate of 3.1%, 0.1% more than that of the previous year. Repetitively fast increase of Real Estate price: In 2007, the sale price of houses in 70 large and medium cities increases by 7.6%, 2.1% more than the growth rate of the previous year. The price of (economically) affordable housing increases 2.5%, 1.2% less than the growth rate of the previous year. The price of ordinary housing increases 8.6%, 2.7 % more than the growth rate of the previous year. The price of top grade commercial housing increases 9.2%, 1.5% more than the growth rate of the previous year.
3.4. Stable monetary situation and continuous active capital market
It is manifested as follows: Relatively fast growth of Monetary Aggregates and loans: by the end of Dec. 2007, M2 reaches 40300 billion RMB, with a growth rate of 16.7%, 0.2% less than that of the previous year, M1 reaches 15300 billion RMB, with a growth rate of 21.0%, 0.6% less than that of the previous year. Compared with the volume at the beginning of the year, RMB Loans of monetary institutions increase by 3632.3 billion RMB，483.1 billion RMB more than the growth of the previous year. RMB Appreciation and Fast Increase of Foreign Exchange Reserve: by the end of Dec. 2007, 1 USD equals to 7.3046 RMB, recording the accumulated appreciation of RMB by 6.5%. By the end of Dec. 2007, Foreign Exchange Reserve reaches 1530 billion USD, recording a 43.3% growth than the previous year and a 13.1% increase of growth rate. For the whole year, foreign exchange reserve increases by 461.9 billion USD. Surging of Stock Exchange Index and a more active futures market: by the end of 2007, Shanghai（securities）Composite Index reaches 5262, with a growth rate of 96.7%；Shenzhen Stock Exchange Component Index reaches 17701, with a growth rate of 166.3%. By the end of the year, the total value of stock exchange amounts to 32714.1 billions RMB, recording 265.9%’s growth. For the whole year, futures market has total exchange transactions of 728 million, 62.1% more than that of the previous year, with the total transaction volume of 4.097 billion RMB, recording 95.1%’s growth.
2007年财政总收入累计完成51304.03亿元, 比上年同期增收12543.83亿元，增长32.4%。其中， 全年税收收入49449亿元（不包括关税、耕地占用税和契税），比上年增加11813亿元，增长31.4%。
3.5. Relatively fast growth of government financial revenues
In 2007, total government financial revenues reach 5130.403 billion RMB, with a growth of 1254.383 billion RMB and a growth rate of 32.4%. Among them, tax revenues reach 4944.9 billion RMB (custom tariffs, tax on the use of arable land and deed tax excluded), with a growth of 1181.3 billion RMB and a growth rate of 31.4%.
Entering 2008, the world is facing stern challenges and various factors like economy slump, inflation, expanding impact of sub-prime mortgage crisis in US, depreciation of USD, surging of world oil price and shortage of grains supply have affected the world economy to a great extent. After 5 years’ high growth and low inflation, the Chinese economy also seems to become overheated since the mid of 2007. So the Chinese government has put forward in the beginning of 2008 that the task for macroeconomic regulation is to “prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation” and China shall follow a prudent fiscal policy and a relatively tight monetary policy. By intensifying the coordination of various macroeconomic regulation policies and deepening the reforms to improve the effectiveness of macroeconomic regulation policies, China has made positive results. In the first half of 2008, China enjoys a steady and rapid economic development. The growth rate of GDP decreases as in the first half of 2008 GDP amounts to 13061.9 billion RMB with a growth rate of 10.4% compared to the same period of the previous year, 1.8% less than that of the previous year. Government financial revenues continue a rapid development though upward pressure on prices will remain great this year.
In the first half of 2008, various factors also adversely affect the Chinese economy. In the beginning of 2008, large scale disaster resulting from snow and ice storms affects South China, catastrophic earthquake hit Wenchuan, Sichuan in May and the whole economy also faces various challenges like decreased growth of exports, inflation, downward turning of real estate market and steep decline of stock market. In view of the current international and domestic economic situation, the Chinese government has made prompt adjustment by listing the primary task for macroeconomic regulation is to “keep a steady and rapid development and bring price increases under control”. For this task we shall: appropriately control the scale of fixed asset investment and improve the investment structure; further promote the pattern of economic growth that is driven by consumption; continue the regulation over real estate market; have a stable and improved foreign trade policy and optimize imports and exports pattern; closely coordinate supplies and transportation, of coal, electricity, petroleum and natural gas, and enhance and improve the demand management with the focus on guaranteeing the major demand. Meanwhile we also shall: bring the price increases under control; expand the production of the basic necessities of life such as grain, vegetable, oil and meat to ensure the adequate supply in the market; make price regulation more proactive and effective; enhance finance and monetary regulation; endeavor to improve the credit structure; further promote steady and sound development of the stock markets and guard against and defuse systematic financial risks.
From the current situation, we have achieved very prominent results of macroeconomic regulation and the Chinese economy still maintains a healthy and benign performance.
Part 2: Overview of Government Auditing in China
1. Brief History
China has a long history and brilliant civilization. The practice of an auditing supervision system in China can be traced to the early days of the dynasties.
It originated as early as Western Zhou Dynasty, 3,000 years from now, in Zaifu, which was established as an official position with the function of performing audit duties and regarded as a rudimentary form of auditing. Both in Qin Dynasty and Han Dynasty, 2,000 years from now, a system of Shangji was adopted in China and the government intensified its supervision over economic activities. During Sui Dynasty and Tang Dynasty, about 1,300 years from now, an agency named Bibu Department was established under the Ministry of Justice, by which relatively independent audit institutions were set up. A royal audit court was set up in Song Dynasty in 992 A.D, which was the first time when audit institutions were officially named with the formal appearance of the term “audit”. No special audit institutions were established during Yuan Dynasty, Ming Dynasty and Qing Dynasty. The duties of auditing supervision were performed by the Institution of Censor and Inspector. After the Revolution of 1911, the Government of Northern Warlords set up Chamber of Audit and issued Audit Law, which was followed suit by the Kuomintang Government in Nanjing.
During the Second Revolutionary Civil War period, the system of auditing supervision was also put into effect in the revolutionary base areas under the leadership of Communist Party of China. In 1932, the Audit Committee of the Central Soviet Government was set up in the Central Revolutionary Base area. In 1934, the Central Government of the Chinese Soviet Republic promulgated Audit provisions, stipulating duties, powers, audit procedures and audit rules of audit institutions in the Chinese Soviet Republic. This is the first comprehensive audit law issued by the Central Soviet area.
There were no independent government audit institutions in the first 34 years from October 1949 to August 1983 after the founding of the People’s Republic of China. The control of state revenues and expenditures was conducted by internal supervisory bodies of departments of public finance. Constitution of the People’s Republic of China adopted in December 1982 prescribed that China practice an independent auditing and supervisory system. Thereafter, in September, 1983, the National Audit Office of the People’s Republic of China (hereafter referred to as the CNAO) was established as a ministry under the State Council, with provincial, municipal and county people’s governments setting up their local audit institutions in succession and audit carried out gradually all over the country. On August 31 1994, Audit Law of the People’s Republic of China was formally promulgated and entered into force as of January 1, 1995. The Amended Audit Law of the People’s Republic of China was formally promulgated on February 28, 2006 and went into effect as of June 1, 2006.
2. Legal Status
The legal status of auditing and supervision in China has been explicitly written in the Constitution of the People’s Republic of China.
Article 91 of the Constitution of the People’s Republic of China stipulates that: The State Council shall establish audit institution who will take charge of auditing revenues and expenditures of public finance of departments of the State Council and local governments at various levels, revenues and expenditures of state banking institutions, state enterprises and undertakings. The audit institution shall be under the direct leadership of the Premier of the State Council and exercise its power of supervision through auditing independently in accordance with the law and subject to no interference by any administrative organ or public organization or individual.
Article 109 of the Constitution of the People’s Republic of China stipulates that: People’s governments at and above the county level shall establish corresponding audit institutions. Local audit institutions at various levels shall be accountable and report on their work to the people’s governments at the corresponding levels and to audit institutions at the next higher levels.
The Constitution of the People’s Republic of China also stipulates that: the Auditor General shall be a member of the State Council. The Auditor General shall be nominated by the Premier and, subject to approval by the National People’s Congress or its Standing Committee, shall be appointed or removed by the President of the State.
The administrative leaders of local audit institutions in various levels shall be members of the people’s governments at the corresponding levels. They shall be appointed or removed in accordance with legal procedures. None of them may be removed or replaced at will unless they are found guilty of illegal acts, or negligent or no longer qualified for the appointment.
3. Auditing System
Audit institutions in China are established by the State Council and governments at and above county levels and affiliated to the executive branch of the state.
As the supreme audit institution of China and one of the ministries of the State Council, the CNAO, directly under the leadership of the Premier, organize and administers audit work of the whole country and reports its work to the State Council.
Local audit institutions, under the dual leadership of the administrative heads of their corresponding level governments and the audit institutions at their next higher levels, organize and manage audit work within their jurisdiction. Their audit work should be directed mainly by audit institutions at the next higher levels and reported to their corresponding level governments as well as the next higher level audit institutions.
At present, the number of audit institutions at the provincial level, the Municipal level and the County level has reached 31, 434 and 3,075 respectively. The staff of local audit institutions nationwide has totaled about 80,000.
Besides, the governments of Hong Kong Special Administrative Region and Macau Special Administrative Region have also established audit offices in light of Basic Law of the Hong Kong Special Administrative Region and Basic Law of the Macau Special Administrative Region respectively. An audit office was also set up in the province of Taiwan.
4. Duties and Responsibilities
4.1. According to the stipulation of the Audit Law of the People’s Republic of China and the Implementation Rules for the Audit Law, the basic duties and responsibilities of audit institutions in China are:
n budget implementation and other government revenues and expenditures at the corresponding levels;
n budget implementation, final accounts and other government revenues and expenditures of the departments (including the units directly subordinate to them) at the corresponding levels and of the people's governments at lower levels;
n financial revenues and expenditures of the State institutions as well as other public institutions using government funds;
n financial revenues and expenditures of the Central Bank;
n assets, liabilities, profits and losses of the State-owned monetary institutions and the monetary institutions with State-owned capital controlling their shares or playing a leading role;
n assets, liabilities, profits and losses of the State-owned enterprises and the enterprises with State-owned capital controlling their shares or playing a leading role;
n budget implementation and final accounts in respect of the construction projects fully or mainly financed by government investment;
n financial revenues and expenditures involving social security funds, public donations and other related funds and capital which are managed by government departments and other units authorized by the government;
n financial revenues and expenditures in connection with the projects for which aid or loans are provided by international organizations or governments of other countries;
n in accordance with the relevant regulations of the State, the principal leading persons of government departments and of other units subject to auditing by audit institutions as stipulated by law as to how they perform, during their terms of office, their economic accountabilities;
4.2. The National Audit Office shall exercise supervision through auditing over the implementation of the budget of the Central Government as well as other government revenues and expenditures, and submit audit reports thereon to the Premier. Local audit institutions at various levels shall exercise supervision through auditing over the budget implementation at the corresponding levels as well as other government revenues and expenditures, and submit reports on the audit results to the people's governments at the corresponding levels and to the audit institutions at the next higher levels.
4.3. Every year, audit institutions at various levels shall present a report on the audit of budget implementation and other government revenues and expenditures to the standing committee of the people’s congresses at their corresponding levels on behalf of their corresponding level people’s governments.
4.4. With regard to the specific matters relating to State revenues and expenditures, audit institutions shall have the power to carry out special investigation through audit and report the results thereof to the people's governments at the corresponding levels and to the audit institutions at the next higher levels.
4.5. Audit institutions shall provide professional guidance and supervision over internal auditing and have the power to check the audit reports produced by the public audit firm.
In accordance with the stipulations of the Audit Law of the People’s Republic of China, the Implementation Rules for the Audit Law and other relevant regulations, audit institutions are entitled to enjoy comprehensive audit powers, or known as audit mandate in the course of auditing supervision. Audit mandate consists of the following categories:
l Power to require the provision of information—audit institutions shall have the power to require auditees to provide, as specified by the audit institutions, their budgets or plans for financial revenues and expenditures, statements about budget implementation, final accounts and financial statements, electronic data for government or financial revenues and expenditures stored and processed by computers and the necessary computer technology documents, information about their accounts in monetary institutions, audit reports produced by public audit firms and other information relating to their government or financial revenues and expenditures.
l Power to conduct audit review—audit institutions shall have the power to examine the auditees’ accounting documents, account books, financial statements, the computer system used for the management of electronic data for government and financial revenues and expenditures, and other information and assets relating to the said revenues and expenditures.
l Power to investigate and obtain evidence—audit institutions shall have the power to carry out investigation among units or individuals concerned into issues relating to audit matters and obtain relevant testimonial materials. An audit institution shall, with approval of the leading person of the audit institution of the people’s government at or above the county level, have the power to inquire about the accounts of an auditee in monetary institutions. Where an audit institution has evidence to prove that an auditee deposits public funds in the name of an individual, it shall, with approval of the principal leading person of the audit institution of the people’s government at or above the county level, have the power to inquire about the savings of the auditee deposited in monetary institutions in the name of an individual.
l Power to adopt mandatory measures—the audit institution shall have the power to stop the ongoing acts committed by an auditee in violation of the regulations of the State governing government and financial revenues and expenditures and notify the department of finance and the relevant department in charge to suspend allocation of the funds or to suspend the use of the funds already allocated; if an auditee transfers, conceals, falsifies or destroys its accounting documents, account books, financial statements or other information relating to government or financial revenues and expenditures, or transfer or conceal the assets in its possession that are obtained in violation of State regulations, an audit institution shall, with approval of the leading person of the audit institution of the people’s government at or above the county level, have the power to seal up the relevant materials and the assets obtained in violation of State regulations.
l Power to request assistance—the audit institution may request the departments in charge of public security, supervision, finance, taxation, customs, pricing, administration of industry and commerce, etc. for assistance.
l Power to refer to the competent authorities—if the audit institution considers that the persons directly in charge and the other persons directly responsible for the violation of the regulations of the State governing government and financial revenues and expenditures, should be given administrative sanctions or disciplinary sanctions, it shall have the power to refer to judicial organs or administrative inspection organs for further disposal; if such violation constitutes a crime, it shall have the power to refer to judicial organs for the investigation of criminal responsibility; if the audit institution considers that the regulations of the department in charge at a higher level governing government and financial revenues and expenditures implemented by an auditee contravene laws or administrative regulations, it shall suggest that the department in charge revise its regulations; audit institutions shall have the power to make recommendations to the legislative, executive or other competent authorities for amending relevant laws, regulations, policies, measures, or intensifying and improving macro adjustment and control.
l Power to deal with and punish—audit institutions shall have the power to deal with or punish, in accordance with law, the acts of auditees in violation of State regulations governing government and financial revenues and expenditures.
l Power to announce and publish audit findings—Audit institutions may issue circulars about their audit results to the relevant government departments or publish such results to the public.
5. Built-in Departments of the CNAO
The CNAO headquarter has an authorized establishment of 352 persons with 15 functional departments, five of which belong to general service and the others audit work units. The CNAO has also established 7 logistics service units and subordinate undertakings whose staff is not classified as civil servants. Catering to the demand of audit work, the CNAO dispatches 25 audit offices to departments and direct subordinate undertakings of the State Council with an authorized establishment of 316 persons. The CNAO has also established resident offices in China’s 18 largest cities with an authorized establishment of 2710 persons.
Both dispatched audit offices and resident offices are directly administered by the CNAO with human, financial and material resources being subject to the allocation and management of the CNAO. Such offices shall report to Auditor General of the CNAO on their work and they are subject to professional guidance and management of relevant departments of the CNAO on relevant audit issues.
Dispatched audit offices are entitled to audit revenues and expenditures of departments and direct subordinate undertakings of the State Council as well as their Beijing-based affiliated units.
Resident Offices of the CNAO are responsible for auditing final account of public finance at the provincial level, revenues and expenditures of local branches of Customs, State Administration of Taxation and the Central State Treasury, assets, liabilities, profits and losses of branches of state monetary institutions and state-owned enterprises, revenues and expenditures of undertakings which are directly subordinated to departments of the State Council as well as budget implementation and final accounts of key state construction projects.
6. Audit Procedures
Audit procedures followed by government audit institutions in China are usually divided into four stages: audit planning, audit preparation, audit implementation and conclusion of audit.
Audit planning-audit institutions should, according to the situation of the State and current practice of audit work, prepare audit assignment plans by making detailed advance arrangements for audit objectives and tasks, priorities of contents and implementation measures.
Audit preparation-an audit institution shall form an audit team on the basis of the audit matters specified in the plan for the projects to be audited and shall serve an audit notification on the auditee three days prior to execution of audit; under special circumstances, the audit institution may, with approval of the people’ government at the corresponding level, directly execute audit on the strength of the audit notification. Audit institutions at higher levels should prepare audit programs for audit assignments to be carried out by subordinate audit institutions at lower levels in a uniform manner within their jurisdiction. Every audit team should carry out pre-audit surveys and prepare their own audit implementation programs.
Audit implementation-auditors shall conduct audit and obtain testimonial materials through examining accounting documents, account books, financial statements, consulting documents and data relating to the audit matters, checking cash, material objects and negotiable securities, and conducting fact-findings among the units and individuals concerned. Auditors shall, in accordance with relevant stipulations, compile audit logs and prepare audit working papers.
Conclusion of audit-after executing audit of the audit matters, the audit team shall submit its audit report to the audit institution. However, prior to submission of the report to the institution, the team shall solicit opinions of the auditee. An audit institution shall produce its audit report after deliberating the audit team’s report. Where violations of State regulations governing government and financial revenues and expenditures should be dealt with or punished in accordance with law, it shall, within the limits of its statutory functions and powers, make an audit decision or put forward to department in charge its suggestions as to how to deal with or punish the violations.
7. Audit Work
The Chinese audit institutions have always put people first, carried out audit in accordance with the law and explored the way to improve the audit methodology and audit professional work. The development of audit team, audit regulatory framework and audit measures and methodology has provided a fundamental guarantee for the audit course.
7.1. Building of Audit Team
The National Audit Office pays utmost attention to the re-education and training of work force, especially the building of top management team in the audit institutions at all levels and has stipulated strict procedures for recruitment, examination and promotion in order to pool capable professionals. The CNAO also intensifies its efforts for training and established a lifetime vocational education framework for auditors. The CNAO has also introduced the system of examination and appraisal for technical qualification titles of the auditing profession and executed the training for various qualification tests like ACCA, CGA, CISA and CIA. In 2005, the CNAO has initiated “Elite Project”, centering on the task of improving the professional abilities of auditors in the CNAO and targeting at training a team of high-quality leaders, audit experts and management. It shall provide human resources guarantee and intellectual support for the development of auditing work in China. Up to now, 37,000 auditors have attained intermediate or senior technical qualification titles and more than 3,000 auditors have been granted to the international qualification titles like ACCA, CGA, CIA and CISA. The CNAO has established a team of politically-reliable, professional and capable auditors.
7.2. Audit Regulatory Framework
At present, the CNAO has basically established an audit regulatory system, with the Constitution as main basis, the Audit Law and its Implementing Rules as the core, auditing standards as professional guidelines, audit manual as the operational guidance, and provided a reliable guarantee for the independent performing of duties and responsibilities endowed by the Constitution. The Constitution stipulates the basis system, mechanism and status of auditing; the Audit Law stipulates the basic functions, powers and main procedures of the auditing; the Implementation Rules for the Audit Law stipulates the concrete tasks and procedures for the auditing and audit standards have the basic benchmarks for auditing and audit manuals shall clearly define what to audit, how to audit and to what extent. Now the CNAO has promulgated 21 auditing standards including National Auditing Basic Standard, Audit Evidence Standard, Auditing Working Paper Standard, etc as well as Project Quality Control Measures. Meanwhile the CNAO also issues Financial Audit Manual for Enterprises, Audit Manual for Commercial Banks and Audit Manual for World Bank Loan Projects and 19 audit guidelines still effective today. Auditing in China has gradually taken the path of legalization, systematization and standardization.
7.3. IT Development
Audit institutions in China have attached great importance to the IT development and intensified the used of IT in audit work, resulting in the positive progresses in both office automation and computer-assisted audit. “The Golden Audit Project”, an important part of IT Development Scheme of China, is now under active construction by the CNAO. In 2005, the first phase of “the Golden Audit Project” has initially concluded “six achievements” and currently the CNAO is organizing the program-design for the second phase of the project and planning to establish the national audit information system initially before 2010. The achievements of “the Golden Audit Project” have been used and disseminated among audit institutions at all levels and auditors, bringing positive effects to the improvement of the role of audit supervision.
Through these years, the CNAO has cultivated a team of auditors with computer audit techniques. The CNAO has actively promoted the IT audit and disseminated the use of Audit Management System and Field Audit Implementation System in the audit work which improves the audit efficiency and audit coverage. Progress has also been made in on-line audit as on-line trial audits have been carried out in audit over monetary institutions, audit over information system and audit over central budgetary units. Concurrent audit, dynamic audit and remote audit, by the use of computer audit techniques, have also been explored and achieve satisfactory results.
7.4. Audit Work
Ever since the establishment, government audit institutions in China, focusing on reform, opening up policy and the central task of government work, have carried out audit of various kinds with the priority placed on auditing authenticity, lawfulness and efficiency of the government or financial revenues and expenditures. Auditing has played an active role in facilitating revenue increase and spending cut, intensifying macro-control, promoting the exercise of administrative functions according to law, safeguarding the interests of the people and building a clean government.
The CNAO has mainly carried out Public Finance Audit, Audit of State-owned Enterprises, Monetary Audit, Audit of Agriculture, Resources and Environmental Protection, Social Security Audit, Audit of Fix Assets Investment, Audit of Foreign Funds Application, Performance Audit and Audit of Economic Accountability of Leading Persons.
Public Finance Audit
Public Finance Audit is the eternal theme of Government Auditing and basic responsibility of audit institutions. Public finance audit departments at all levels have earnestly followed the stipulations in the Constitution and the Audit Law and carried out the following audits: audit over the Ministry of Finance in terms of the central budgetary implementation, audit over National Development and Reform Commission in terms of the central government investment, audit over the bodies of the central government, special public finance audit, audit investigation and economic accountability audit over leading persons of the government. In conducting public finance audit work, the auditors have paid special attention to the following issues: disclosure and disposition of serious irregularities and clues for economic crimes; disclosure and reporting problems of common tendency, high-frequency occurrence or depicting macro features, and proposing solutions and recommendations accordingly; promotion of rectifications through disclosing problems. Public finance audit has played an active role in the fields such as regulating budgetary management, promoting public finance reform, establishing public finance framework, safeguarding public finance security, improving performance of public finance and building a mechanism of public finance.
Audit of Enterprises
In recent years, audit institutions at various levels have actively carried out the audit of enterprises with the priorities placed on the economic accountability audit of leading persons. They also conducted various kinds of audit of enterprises and audit investigation, emphasizing on the following items: quality of state assets and truthfulness, legality and completeness of enterprise accounting information; disclosure and disposition of serious irregularities and fighting against economic crime; servicing enterprises for a better and faster development; performing the duty of supervision. Audit of enterprises have played an important role in maintaining financial and economic order, promoting the intensification of reforms of state-owned enterprises, guarding against risks, enhancing management and improving performance, and provided important reference for the macro economic decision-making by the government.
Monetary audit in China has been exercised by centering “Risk, Performance and Management”, with the truthfulness verification as the basis, checking over internal control system as the starting point, disclosure of severe irregularities as priorities and submission of opinions and recommendations with regard to enhancing management, improving performance and guarding against risks as ultimate targets. Monetary audit in China has mainly includes the following types: budgetary implementation audit over “the Central Bank of China and three monetary supervisory bodies”, audit over state-owned commercial banks, audit over securities insurance institutions and policy banks, special monetary audit and audit investigation and economic accountability audit over leaders of monetary institutions. Monetary audit has laid stress on the following items: disclosure of severe problems which have impact on the implementation of macroeconomic regulation and material risk in the management of monetary institutions; disclosure and disposition of severe irregularities and clues for economic crimes; enhancing of the service-oriented attitude of monetary audit and the promotion of intensifying and improvement of internal management of monetary institutions. Monetary audit has played an important role in promoting the management of monetary institutions, improvement of their systems and regulations, operation in accordance with the law and the advancement of economic results, as well as promoting the better fulfillment of supervisory duties of competent monitoring departments and guarding against monetary risks.
Audit of Agriculture, Resources and Environmental Protection
One of the important measures taken by the auditors for servicing rural area inhabitants and maintaining sustainable development is to carry out audit of agriculture, resources and environmental protection in an efficient way. Through these years, audit institutions in China have conducted auditing in the following fields: audit over the funds of converting the farming land for forestry, audit over preventing and controlling of water pollution in major river basins, audit over fund for environmental protection of the Qinghai-Tibet Railway, audit over the natural forest resource protection project, audit over land transfer fees, audit investigation over the water pollution prevention program in 13 cities of Bohai Sea area and audit over the central budgetary implementation. Audit of agriculture, resources and environmental protection has centered the priorities of agriculture, resources and environmental protection work and auditors have carried out performance audit and IT audit commensurate with the characteristics of agriculture, resources and environmental protection. Auditors have also paid their attentions to the cooperation with competent authorities for resources and environmental protection for a joint promotion of resources and environmental protection undertakings and the establishment and improvement of environmental audit coordination system. Audit of agriculture, resources and environmental protection has played an important role for promoting the quality of audit work and capabilities of auditors with regard to their service to agriculture, rural areas and farmers as well as resources and environmental protection. Their active role is also witnessed in the fields of promoting the implementation of investment in the areas of agriculture, resources and environmental protection, maintaining financial and economic order and advancing the regulated management.
Audit of Fixed Assets Investment
Audit of fixed assets investment is an effective tool for supervising the activities of fixed assets investment as well as an important content of audit supervision. Ever since the establishment of audit institutions, intensified efforts have been taken to exercise audit supervision over key construction funds and major construction projects and a series of severe irregularities have been disposed. Audit has played an important role in intensifying reform of investment system, saving government investment, improving investment management and performance, and building an improved policies and regulations framework. In recent years, the CNAO has carried out the following audits: audit over projects and funds of public debt, audit over public debt investment and other government investment projects (like Three Gorges project, the project to divert water from southern China to northern China, Olympic games project and grand theater project); investment performance audit and audit of the central budgetary implementation. In the audit work, auditors have stressed the following issues in order to play an important role in the audit supervision in the relevant fields: disclosure and rectification of severe loss and waste, combining of financial audit and performance audit, disclosure and reporting of problems affecting the vital interests of the people, the use of public agencies and external experts, and the adoption of new audit methodology.
Foreign Funds Application Audit
Foreign funds application audit refers to the audit supervision exercised by government audit institutions in accordance with the law over the economic activities involving the use of foreign funds by the Chinese government as well as the truthfulness, legality and performance of government and other financial revenues and expenditures and is an important type of government auditing in China. Its main contents include: assurance audit over foreign loans and assistance projects, performance audit over foreign-funded projects, special audit investigation over foreign-funded projects (For example, special audit investigation over performance of 50 foreign-funded projects in 2007 and special performance audit investigation over 100 loans projects financed by the World Bank and Asian Development Bank in 2006) and the audit over the central budgetary implementation. Foreign funds application audit has struck to the principle of “disclosing all the facts to relevant authorities home and abroad” and placed emphasis on the disclosure and disposition of severe irregularities, exploration the audit methodology for performance audit and IT audit, and reporting the problems affecting the vital interests of the people. The role of auditing in promoting the management, improving the system and advancing the performance of funds utilization has been put into full play.
Social Security Audit
Ever since the establishment of audit institutions, audit supervision over various kinds of social securities funds have been intensified and it has played a positive role of safeguarding the vital interests of the people as the watchdog over the security and completeness of “life-guarantee funds” of the people. In recent years, social security audit has concentrated on the following assignments: audit over social insurance funds, audit of disaster relief funds, audit investigation over funeral undertakings, audit over rural area pension funds, audit over accumulation funds for housing and audit over the central budgetary implementation. By conducting the above-mentioned audit, auditors attached great importance to the reporting of problems affecting the vital interests of the people, disclosure and disposition of severe irregularities, ensuring the truthfulness, security and regulated management of social security funds and making innovations in the way auditing assignments are organized and audit methodology. They have made great achievements.
In May of 2008 when earthquake hit Wenchuan, China, the CNAO has immediately mobilized auditors from the Department of Social Security Audit, Public Finance Audit Department and Social Security Audit Office as well as relevant resident offices and local audit offices to exercise tracking audit over disaster funds and materials managed by 18 central departments and relevant provinces. In three heavily-stricken areas such as Sichuan, Gansu and Shaanxi, auditors from both local audit offices and dispatched audit offices of the CNAO have been reassigned to different audit teams according to the unified audit implementation program and intervenes in the whole flowing process of disaster funds and materials from receiving, distributing, transferring to allotting. Auditors take both the roles of supervision and service and exercise their service by fulfilling the task of supervision in order to have a timely and appropriate solution to the problems disclosed. In the disaster-free provinces, local audit offices are mobilized to carry out a comprehensive and synchronous audit over the collection and appropriation of donated funds and materials in order to ensure the security and effectiveness of the donation. Meanwhile a reporting system for audit findings is also set up so as to be acquainted with the audit details as well as the problems discovered in the audit.
The most important feature of the audit over disaster funds and materials is “tracking audit covering the whole process” which means that the intervention by auditors has been made in the initial stage so as to have concurrent audit supervision upon the management. For the issues disclosed in the audit, we have required the competent authorities to make timely rectifications and make the role of audit supervision into full play. If the management system for disaster funds and materials is found to be with loopholes, audit institutions shall help them to establish a comprehensive and scientific internal management and control mechanism. If the irregularities such as detainment, concealment, embezzlement, and misappropriation of disaster funds and funds are found, audit institutions shall deal with them in accordance with the law and regulations and transfer the relevant individuals and cases in violation of disciplines or laws to disciplinary inspection organs and judicial organs.
In this audit, audit work has played the following functions: 1) give assistance to the decision-making process. The timely intervention of auditing has managed to report to the State Council, local governments and relevant departments the existing problems and recommendations with regard to disaster funds and materials, which have been used by the top management as the bases for making timely and scientific decisions; 2) play a constructive role in the management. Audit institutions at all levels have fully used the advantages of tracking audit and make 2.642 recommendations for the problems disclosed in the audit. Competent authorities haven though highly of these recommendations, adopted 2,542 recommendations and made rectifications over the issues reported by 2,009 recommendations; 3) play a warning and deterring role. The CNAO has managed in the shortest period cultivated an environment of deterring and enjoyed favorable social effects by disclosing typical irregularities, announcing key audit findings and disposing severe irregularities; 4) further increase the influence of audit. The society, people and the government have a full understanding of the auditors and the audit work. After the tracking audit, donators home and abroad become rest assured of the security of funds and materials and are willing to make donations. Through the timely intervention of audit, the function of auditing as an immune system has been put into full use and no serious irregularities have been detected in the disaster funds and materials.
Audit of Economic Accountability of Leading Persons
Audit of economic accountability of leading persons is an audit mode of Chinese characteristics and comes into being against the background of ever-intensifying of the Chinese economic system restructuring. It has become one of the important contents of government audit in China and played an important role in checking and balancing the power and building a clean government and party. At present, the audit of economic accountability of leading persons mainly includes: audit of economic accountability of government leaders, audit of economic accountability of department leaders and audit of economic accountability of leaders of state-owned enterprises. We have already established a relatively regulated audit of economic accountability of leaders of state-owned enterprises and enlarged the scope of auditees to Director-General level officials for audit of economic accountability of party and government leaders. We also have trial audits over the Minister-and-Governor-level party and government leaders. The audit of economic accountability audit has paid special attention to the scientific and effective way for the leader system and working mechanism, the disclosure and disposition of severe irregularities, combining of audit of economic accountability and performance audit, and integration of audit of economic accountability and accountability system. This kind of audit has played an important role in economic development, management of human resources and building of a clean government and party.
8. Future Orientations
Government auditing in China has experienced a development of more than 20 years with the existence of both achievements and shortcomings. The CNAO has attached great importance to the future development of government auditing in China. In accordance with the guiding principles set out at the Seventeenth CPC National Congress as well as the 11th Five-Year Plan for Economic and Social Development, the CNAO has combined the development conditions of audit work and audit practice and stipulated the Strategic Plan for the CNAO during the Period of 2008-2012, indicating the future orientations for the development of government auditing in China.
In this Five-Year Strategic Plan, the guiding principles of government audit in China is as follows: we should make sure audit be guided by socialism theory with Chinese characteristics, Scientific Outlook on Development taken as the soul and guidance, scientific audit theory be firmly established, audit working principles of “conducting audit in accordance with the law, serving the overall targets, centering around the core tasks, laying stress on the audit priorities and pursuing truthfulness and carrying down-to-earth attitude” be adhered to, duties and responsibilities endowed by the Constitution and law be earnestly performed, truthfulness, legality and performance of government and other financial revenues and expenditures be comprehensively supervised and role of audit in promoting economical, political, culture and social development be put into full play.
The general targets of government audit in China are as follows: to promote law-based administration, to safeguard the livelihood of the people, to advance the reform and development, to make a full play of the function of auditing as the immune system to protect the economic and social operation, to improve in a comprehensive way the audit capabilities and level of audit work, to realize the law-based, well regulated and scientifically guided audit work, and to build an audit supervision system commensurate with the socialist market economic system.
The main tasks of government audit in China are as follows: to earnestly implement the Audit Law and the Implementation Rules for the Audit Law; to further enhance audit supervision as well as its proactive, macro, constructive, open and scientific roles; to achieve a better integration of audit work into the undertakings of building a moderately prosperous society in all respects; to promote democracy and law-based administration; to safeguard national security, protect national interests and promote a comprehensive, coordinated and sustained economic and social development. Five-Year Strategic Plan also includes many other measures and targets including explorations of innovative audit mode and methodology, intensifying of the five basic buildings to have a solid foundation for sustained development, and enhancing audit work and the building of regulatory framework.
In general, under the leadership of the CNAO, and with the concerted efforts of all Chinese auditors, government audit shall implement the targets and measures stipulated in the Five-Year Strategic Plan and move forward in an effective and practical way for promoting a better and fast development of government audit work. Audit in China shall have a brighter future.