Overview of National Situation and Government Auditing in China

1. Overview of National Situation and Government Auditing in China Presented by Dr.DONG Dasheng October 2008

2. Main Contents 2 1 Overview of Government Auditing in China China Factfile

3. 1 China Factfile ＊China in Brief ＊Political System ＊Economy

4. China in Brief 1 4 3 2 5 Geographic Location：Eastern Asia, West Coast of Pacific Ocean China Population: about1.32 Billion(HK, Macao and Taiwan excluded) Total Area:about 9.6 million km² Administrative Divisions: 34 (HK, Macao and Taiwan included) Ethnic Groups: a united multi-ethnic nation of 56 ethnic groups

5. 2 4 The System of People’s Congress 1 The System of Chinese People’s Political Consultation Political System The Administrative System 3 The Judicial System The System of Self-government of Ethnic Autonomous Areas 5

6. The Constitution 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 system of people’s congress is an organizational form for the state power (people's democratic dictatorship) in China. It is China’s fundamental political system. The National People’s Congress is the highest organ of state power. Local people’s congresses are local organs of state power. 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 NPC 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. 1 The System of People’s Congress

7. 1 The System of People’s Congress (continued) • The NPC 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 the Standing Committee of NPC, to elect the President and the Vice President of the People’s Republic of China, to decide 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.

8. 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 (CPC). 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 consultation 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 mutli-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.

9. 3 The Administrative System • The current state administrative system means: the State Council and people’s governments of provinces (autonomous regions, municipalities directly under the Central Government), cities, counties (autonomous counties, cities at the levels of counties, districts under the cities, prefectures, 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 realized in a gradual way the targets of changing functions, straightening out inter-departmental relationships, improving the structure and raising efficiency in order to make innovations in the administrative system and build a service-oriented government. • 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 an unified administration over issues concerning the similar scope of business and relevant government functions.

10. 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 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. 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. The Judicial System 4

11. 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 rights of organs of self-government of ethnic autonomous areas include: law-making power, flexiable 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. 5 The System of Self-government of Ethnic Autonomous Areas

12. A sustained fast and stable growth of national economy Fast growth of investment and exports and increasing-growing consumption Economy in 2007 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

13. A sustained fast growth of GDP 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%. A sustained stable development of agriculture production 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%. A sustained fast and stable growth of national economy • An accelerated growth of industry production • 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%

14. Relatively fast growth of investment In 2007 the social investment of fixed assets totals13723.9 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 reachs 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. Fast growth of investment and exports and increasing-growing consumption • 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.

15. Sharp increase of consumer priceConsumer 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 Relatively 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. Accelerated increase of market price, especially that of real estate • 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

16. 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%. Compared with the volume at the beginning of the year, RMB Loans of monetary institutions increase by 3632.3 billion RMB. 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 6.9%. By the end of Dec. 2007, Foreign Exchange Reserve reaches 1530 billion USD. For the whole year, foreign exchange reserve increases by 461.9 billion USD. Stable monetary situation and continuous active capital market • 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%.

17. 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%. Relatively fast growth of government financial revenues

18. What happens in the world economy in 2008 Sub-prime Mortgage or financial Crisis in US Depreciation of USD Economy slump and Inflation ? Shortage of Grains supply Surging of Oil Price

19. What happens in the Chinese economy in 2008 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” Decreased Growth of Exports, Price Increases Downward Turning of Real Estate Market Steep Decline of Stock Market Snow and Ice Storms Wenchuan Earthquake ? 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%. Government financial revenues continues a rapid development though upward pressure on prices will remain great this year. In view of the current economic situation,the Chinese government has listed the the primary task for macroeconomic regulation is to “keep a steady and repid development and bring price increases under control” in the second half of 2008

20. 2 Overview of Government Auditing in China ＊History ＊ Legal Status ＊ Audit System ＊ Duties and responsibilities ＊ Built-in Departments ＊ Audit Procedures ＊ Audit Work ＊ Future Orientation

21. History Auditing in Ancient China Auditing in P.R. China 1. Originated as early as Western Zhou Dynasty 2. A system of Shangji in Qin Dynasty and Han Dynasty 3. Bibu Department in Sui Dynasty and Tang Dynasty 4. A royal audit court was set up in Song Dynasty 5. Yuan Dynasty, Ming Dynasty and Qing Dynasty: Institution of Censor and Inspector 6. the Government of Northern Warlords set upChamber of Audit and issued Audit Law, which was followed suit by the Kuomintang Government 1. 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. 2. Establishment of the CNAO in Sep.1983 3. Audit Law in August, 1994 4. Audit Implementation Rules in Oct. 1997

22. 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.

23. Audit 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. Ministries……the CNAO State Council Departments……Provincial Audit Office Provincial Government Bureaus…….City Audit Office City Government County Government County Bureau…… County Audit Office Organizational Affiliation Directing relationship

24. Duties and Powers Duties Powers • information • Audit review • Investigate and obtain evidence • Mandatory measures • Request assistance • Refer to authorities • Deal with and punish • Announce and publish audit findings • Audit • Audit results report • Audit work report • Special Audit Investigation • Guide and supervise the internal audit and check the report of public audit firms

25. Built-in Departments 7 Subordinate Undertakings CNAO 15 Internal Departments 25 Dispatched Offices and 18 Resident Offices

26. Audit Procedure 3 Implementation 1 Planning 2 Preparation 4 Conclusion • Form audit team • Audit implementation plan • Pre-audit training • Audit notificationTEXT • Audit • Evidence • Working papers • Review • Classification • Audit team’s report • Opinion of the auditee • Summit report • Review report • Produce report and issue audit decision • Follow-up work • Audit file • Investigation • Audit assignment plan • Summit for approval • Adjustment • Audit program TEXT TEXT

27. Audit Work Audit Team Audit Legal Framework IT Development

28. Audit Team Building of top management team in the audit institutions at all levels and strict procedures for recruitment, examination and promotion in order to pool capable professionals. 1 2 Efforts for training and a lifetime vocational education framework for auditors. 3 System of examination and appraisal for technical qualification titles of the auditing profession and training for various qualification tests like ACCA, CGA, CISA and CIA. 4 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.

29. Legal Framework Audit Implementation Rules Constitution Audit Law Audit Standards Audit Manual basis system, mechanism and status basic functions, powers and main procedures concrete task sand procedures for the auditing basic benchmarks for auditing (21 auditing standards as well as Project Quality Control Measures.) what to audit, how to audit and to what extent (2 manuals and 19 audit guidelines )

30. IT Development Management Audit operation Network Golden Audit Project Data resources Service system Security System “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. 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.

31. Audit Reform and Opening Up Public Financial Audit Enterprise Audit Monetary Audit Agriculture,Resources and Environmental Protection Audit Fixed Assets Investment Audit Foreign Funds Application Audit Social Security Audit Economic Accountability audit Performance Audit Truthfulness Legality Performance Central Task of Government Work 详细介绍

32. Audit Public Finance Audit Contents Features 1. Disclosure of serious violations and clues for economic crimes 2. Disclosure of issues of common concerns, macro phenomenon and provision of solutions and recommendations 3. Rectification 4. Announcement of auditfindings 1. Central Budget implementation 2. Central Government Investment 3. Audit over central government 4. Special Audit and audit investigation 5. Economic Accountability Audit of leading persons

33. Auditing Contents Features 1. Reflecting assets quality and truthfulness, legality and completeness of accounting information 2. Disclosure of serious irregularities and fighting against economic crimes 3. Service enterprises for a better and faster development 1. Centering on Economic Accountabilities Audit of Leading Persons 2. Special Audit and Audit Investigation Enterprise Audit

34. Audit Monetary Audit 1. Disclosure of serious problems and risks 2. Disclosure of serious irregularities and clues for economic crimes 3. Service Monetary Institutions for better management 1. Budget Implementation Audit over central bank and commissions 2. Audit ove state commercial banks 3. Audit over securities insurance institutions and policy bank 4. Special audit and investigation 5. Economic Accountability Audit of leading persons Contents Features

35. Audit Audit over Agriculture Resources Environmental Protection Contents Features 1. Reforestation Funds 2. Water Pollution Prevention 3. Environmental Protection Funds for Tibet Railway 4. Protection Project of Natural Forest 5. Transfer Fee for Land 6. Water Pollution Prevention in Bohai Sea 7. Central Budget Implementation 1. Centering on the major work of agriculture, resources and environmental protection 2. Performance Audit and IT Audit 3. Promote Environmental Protection through cooperation with competent authorities 4. Improve Environmental Auditing Coordination System

36. Audit Contents Features Fixed Assets Investment Audit 1. Disclosure of loss and waste 2. Combination of financial audit and performance audit 3. Disclosure of problems damaging the interests of the people 4. External experts 5. New audit methodology 1. Public Debt 2. Government Investment 3. Investment Performance Audit 4. Central Budget Implementation

37. Audit Foreign Funds Application Audit Contents 1. Assurance Audit over Foreign Loans and Assistance 2. Performance audit over foreign-funded projects 3. Special audit investigation 4. Central budget implementation Features 1. Disclose the irregularities according to the facts 2. Disclosure of serious irregularities 3. Performance audit and IT audit methodology 4. Disclosure of problems damaging the interests’ people

38. Audit Social Security Audit Contents Features 1. Disclosure of problems damaging the interests of the people 2. Disclosure of serious irregularities 3. Truthfulness, Security and regulation of social security funds 4. Creative methodology and organization of audit 1. Social security funds 2. Disaster relief funds 3. Investigation over Funeral industry 4. Pension funds 5. Accumulation funds for housing 6. Central budget implementation

39. Audit Contents Features Economic Accountability Audit 1. Economic Accountability Audit of Leading persons 2. Economic Accountability Audit of Department Leaders 3. Economic Accountability Audit of Enterprise Leaders 1. Leader system and work mechanism 2. Disclosure of serious irregularities 3. Combination of Economic Accountability Audit and Performance Audit 4. Combination of Accountability and Audit

40. Audit Five Building Future Orientations Audit Mode and…… Targets Tasks 6 kinds of Auditing Team, Law, IT, Theory and Culture Audit laws, standards and guidelines 2008-2012 Strategic Plan Legal Framework Combination of various audits; tracking audit, performance audit evaluation and organization of audit Guiding Principle Implementation of Law and Regulation; Intensifying audit supervision; Promoting democracy and law-based administration; Safeguard national security and interests; Promote the sustainable development of economy and society Promoting law-based administration; Safeguarding livelihood, Promoting reform and development;Immune System; Auditing in accordance with the law and regulations; Audit supervision with Chinese Characteristics Socialism with Chinese characteristics; Outlook for scientific development; Twenty-word Guideline; Fulfillment of duties; Supervision in an all-round manner; Promotion of Economy, Politics. Culture and Society

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