Understanding Statutory Audit Services in China
Under the Company Law of the People’s Republic of China and related regulations, all foreign-invested enterprises in China, whether they are wholly foreign-owned enterprises, foreign joint ventures, or representative offices of foreign enterprises, are required to prepare annual financial statements, including balance sheets, income statements, and cash flow statements, for submission to the China Administration for Industry and Commerce for annual statutory audits.
The annual statutory audit can only be performed by a Chinese-certified public accounting firm. The foreign company can’t send its profits and dividends back to its home country until it has finished its annual audit and paid all taxes that are due.
When performing the statutory audit, the Certified Public Accountant (CPA) shall comply with the “Independent Auditing Criterion for Chinese Registered Accountants” established by the Chinese Association of Public Certified Accountants. The purpose of a statutory audit is for the CPA to express an opinion on the legality and fairness of the audited company’s financial statements in all material respects, including the company’s financial position as of year-end and the performance of its operations and cash flows for the year, in accordance with the Chinese Accounting Standards for Business Enterprises as well as the accounting system of business enterprises.
Statutory Audit Process
In China, the fiscal year is the calendar year, such as January 1 to December 31. After the annual statutory audit, the annual filing process, also known as the Joint Annual Inspection, needs to be completed. This process requires foreign companies to submit statutory audit reports, including but not limited to financial reports, tax audit reports, and foreign exchange audit reports, to various governmental agencies in accordance with Chinese law. The annual filing process needs to be done in order to renew the company’s business license and other documents.
The annual filing period starts in May of the following year. For example, a company’s annual income tax return (based on audited financial data used for the fiscal year ending December 31 of the previous year before any tax adjustments are made) is due by May 31 of the following year. The statutory filing deadline is indicated in the annual bulletin issued by the relevant government department and is generally published after the end of the year. This means that a statutory audit must be executed by the statutory filing deadline.
When the government conducts an annual audit, the following audit reports or relevant financial data from the audit report are requested:
- Annual corporate income tax return – as of May 31
- Disclosure of corporate credit information at the Administration for Industry and Commerce – as of June 30
- Customs inspection – as of June 30
- Joint annual report – as of August 31
- State Administration of Foreign Exchange of China – as of September 30
Foreign-owned enterprises in China are required to comply with the Chinese Accounting Standards for Enterprises and the Accounting System for Chinese Enterprises, collectively referred to as “Chinese GAAP,” which are not fundamentally different for domestic and foreign enterprises. Foreign enterprises, including corporate entities, are solely responsible for the truthfulness, legality, and integrity of their corporate financial statements.
