By Song Yanhua

The ink was barely dry on the latest quarterly financial statements when the Chinese Institute of Certified Public Accountants (CICPA) warned members about major bookkeeping risks, including some tied to the global financial crisis.

CICPA, which regulates public accountants, said in its annual  announcement of requirements for year-end audits that the nation’s financial checkers should pay close attention to bond restructurings, financial instrument categorization, and other matters with bedeviling risks.

CICPA’s annual announcement was released two months earlier than usual. It cited 10 critical issues, up from seven last year – an expansion reflecting major risks exposed during last year’s accounting as well as key issues raised by the financial crunch.

According to the announcement, which carries administrative authority, accountants should watch for risks in areas including income sources from debt restructurings, write-downs, and categorizing and pricing financial instruments.

Debt restructuring was cited as the top risk issue. Some public companies struggling to maintain profitability use this as a vehicle for whitewashing income statements.

Under an accounting rule that took effect in 2007, income generated from a debt restructuring may be included in that year’s income statement. So a company with a pile of debt could use this measure to maintain listing status.

According to the Chinese financial data tracker Wind, more than 70 companies that were black-marked by stock exchanges for losses by receiving a “special treatment” (ST) status were able to off-load debt and turn a profit in 2007.

Under normal conditions, profits should come from business operations and major shareholders waive debt deliberately to help companies return to profitability. This shareholder action allows companies to trade stock, release a clean income statement, and shed the ST label.

Since the U.S financial crisis began, many experts have argued that accountants should replace their “mark to market” measure with “mark to model.” Meanwhile, Chinese accountants are looking at assets and provisions for companies that will comply with international accounting measures for 2008 annual reports.

Listed companies have posted hefty losses in the past year, as reflected by the slumping Shanghai stock market, where the composite index has fallen nearly 70 percent since last year. But most public companies have set aside provisions to weather a downturn.

CICPA said it would watch for violations in 2008 financial statements and pay particular attention when accountants who issue unflattering annual reports are fired.