Study on the Auditing System of Socialism with Chinese Characteristics. Liu Jiayi

and development, inevitably requires the continuous improvement of the auditing system, so as to better meet development needs. Now China has entered a new period featured by a new normal of social and economic development. The strategic layout and requirements for comprehensively building a moderately prosperous society, comprehensively deepening the reform, comprehensively implementing the rule of law, and comprehensively strengthening the Party discipline building, as proposed by General Secretary Xi Jinping, make clear the strategic direction of China’s future development. In line with the situation and needs of national governance, the auditing system of socialism with Chinese characteristics must be developed and improved through continuous reform and innovation according to the requirements of national governance modernization, and enable itself to better exert its functions in the national governance. Through in-depth and systematic study, we can objectively realize and analyze the weak links of development and improvement of the existing auditing system according to the needs of national governance as well as the new situation and new requirements of socioeconomic development; make appropriate adjustment and continuous optimization in an innovative, reform-driven manner during national governance modernization; accelerate the development and improvement of the auditing system of socialism with Chinese characteristics; and continuously improve the level and capacity of government auditing in promoting the modernization of national governance.

      Chapter 1

      The Birth and Development of the Auditing System of Socialism with Chinese Characteristics

      HISTORY IS THE ROOT OF REALITY.”20 China has a time-honored history of auditing. To embark on any study of it, we need first to clarify the historical origins of the People’s Republic of China’s (PRC) government auditing system and the development course of the auditing system of socialism with Chinese characteristics established on the basis of past experiences. Only in this way can we have a profound understanding of the internal relation between government auditing and national governance, the development trend of government auditing and how the auditing system of socialism with Chinese characteristics will be further advanced.

      1. HISTORY OF THE CHINESE AUDITING SYSTEM

      Government auditing in China has a long history. Ancient Chinese used words such as investigating, listening, counting, checking, comparing, and so on to describe “audit” activities. The contemporary Chinese term for audit first appeared in the Foreword to Sun-Tzu, written by Cao Cao (155–220), a major warlord in the Three Kingdoms period, who proposed, “Audit, as a well-planned action, should be precise and profound, without any misrepresentation.” The first government institution using the term audit was the Court of Auditors established in 1127 during the Southern Song Dynasty (1127–1279). Documentary resources appearing at different stages reveal the features and history of auditing system.

      (1) Official Auditing System 21 during the Shang and Zhou Dynasties

      The Official Counting System and Administrative Report System in the Shang and Zhou Dynasties were collectively referred to as the Official Auditing System. A great number of tribute activities were recorded in the Yin Ruins’ Oracle-Bone Inscriptions of the Shang Dynasty (1600–1046 BC), and the tortoise shell-bridge inscription, with records of tributes on the right bridge and verification words on the left bridge, is regarded as the earliest verifiable records of audit activities. After King Wu had overthrown the Shang Dynasty, Ji Zi, an aristocrat of the former dynasty wrote the Great Plan, summarizing the experience of the ousted dynasty in country administration, and presented it to King Wu. According to the Great Plan, the supreme ruler should insist that government officials give top priority to the “Eight Government Affairs” including the administration of the people’s food and wealth as well as the five critical factors of ruling the nation, including “Listening,” and not seeking private benefits and tyrannically abusing their power. “Listening,” meaning “Listening and Accounting,” covered the administrative performance of officials and the careful maintenance of financial records. Through proper listening, the supreme ruler can ensure officials are honest and never engage in fraud by applying supervisory tools such as accounting, auditing, and the like. Hence, the audit supervision connotation contained in “listening” is the same anywhere and at any time. In Chinese history, audit was always described as “Listening and Accounting” or “monthly and yearly accounts by listening to differences.” Both audit in English and audition in French were originated from audier in Latin. In the fourteenth century, the audit work of the United Kingdom was carried out by hearing a statement of the accounts.22 Even today, State organs exercise their important powers of economic supervision by listening to budget and audit reports.

      The official ranks system of the Western Zhou Dynasty (1046–771 BC) was a political system used to appraise and supervise the administrative performance of officials in regard to finance and the economy. This took the form of accounting annually or every three years. The head of the accounting department undertook overall responsibility for the national finances and their accounting, and for related auditing; Zaifu (an official taking charge of the qualification assessment of all the officials and reporting the results to the monarch) mainly inspected and supervised decrees, policies and financial revenues and expenditures under the control of all officials. In the bureaucratic system of the Western Zhou Dynasty, Taizai (official rank), the head of six major ministers, took charge of national events, while Zaifu was affiliated to Xiaozai (official rank) under Taizai. According to the literature, such as the Rites of Zhou, Zaifu was responsible for supervising the implementation of decrees and rites, that is, to supervise the authority and the rankings of the king, ministers, and officials; conduct national governance and investigate offenders; report on governance performance and effect and achievements in finance and economy to the imperial court; audit and review government officials; recheck the accounts of income and expenditure; and report offenders found to be involved in document forging, manipulation of accounts, extravagant waste, and improper expenditure to the Taizai for punishment according to the laws and regulations. On the positive side, the recommended rewards for persons who saved on expenditure, sufficiently protected the treasury reserves and managed money well. The Zaifu could report any problems to the Taizai or even directly to the king of Zhou.23 In summary, the Zaifu mainly performed the duties of “guiding the methods of managing State affairs and formulating the laws governing the actions of officials” and achieved the governance goal of “defining the authority and rank of the king, ministers and officials” by audit supervision, which played an important role in maintaining the structure and capacity of national governance. Professor Michael Chatfield, an expert on the history of accounting and auditing in America, wrote in his book A History of Accounting Thought: “In the aspect of internal management, budgets and audit procedures, the Western Zhou Dynasty was unsurpassed in the ancient world.”24

      The Spring and Autumn Period (770–476 BC) and the Warring States Period (476–221 BC) witnessed changes in the system of public land into private ownership with taxation on land and the system of enfeoffment changed into the system of prefectures and counties, while a hereditary system regarding appointments changed into one of recruitment and dismissal. To meet the needs of national governance, the official rank system was replaced by the System of Administrative Reports. Accordingly, local officials were supervised and restricted. They or personnel sent in their place had to regularly report to the imperial seat the situation regarding any changes in the revenue and expenditure related to households, farmlands, taxes, property, and so on within their jurisdiction, while such officials as Chuanji (official rank), Neishi (clerk of the capital), minister, and counselor-in-chief assisted the ruler in investigating, assessing, and meting out rewards and punishments. In the development of the auditing system, the Administrative Reports System made great progress in three aspects.

      First, certain important auditing concepts appeared. Guan Zhong (c. 720–645 BC), a legalist chancellor, wrote in the book Guanzi Youguan, “If a country is dedicated to developing agriculture, industry and commerce, it will get rich; if a country can establish a

20

Xi Jinping’s speech at the College of Europe in Bruges, April 1, 2014.

21

In some studies of audit history, the auditing of this period was called official auditing, which was a designation relative to the “social (nongovernmental) auditing.” There was no “non-governmental auditing” in the Shang and Zhou Dynasties. To summarize the features of auditing system during this period more precisely, this book uses official auditing.

22

Wen Shuo, The World History of Auditing, Rev. ed. Beijing: Enterprise Management Publishing House, 1996.

23

Li Jinhua (chief editor), The History of Audit in China, Vol. 1. Beijing: China Modern Economic Publishing House, 2004.

24

(U.S.) Michael Chatfield, A History of Accounting Thought, translated by Wen Shuo, Dong Xiaobo, et al. Beijing: China Commerce and Trade Press, 1989.