China orders ‘Big Four’ auditors to restructure
Shanghai’s new financial district skyline is seen from the opposite side of Huang Pu river in this file photo. The world’s top four accounting firms – Deloitte Touche Tohmatsu, Pricewaterhousecoopers, Ernst & Young and KPMG – will have to bring in Chinese citizens to run their operations in China under new rules announced by the Finance Ministry. – Reuters picBEIJING, May 10 – The world’s top four accounting firms will have to bring in Chinese citizens to run their operations in China and end the dominance of foreign partners under new rules announced by the Finance Ministry today.
Though the rules on the Big Four auditors – Deloitte Touche Tohmatsu, Pricewaterhousecoopers, Ernst & Young and KPMG – are not as tough as some had feared, they may add to concerns for investors over the quality of auditing in China’s relatively young accounting industry.
The four have to start converting their practices this August and comply with all the new rules by the end of 2017 to meet requirements to “localise” operations so that they are led by Chinese citizens and dominated by accountants holding local accountancy qualifications.
The changes come at a difficult time for the Big Four, grappling with the fall-out from a string of accounting scandals at Chinese companies listed in the US that has left investors questioning the quality of auditing in China.
Yesterday, US securities regulators charged Deloitte’s China practice for refusing to provide audit work papers related to a US-listed Chinese company under investigation for accounting fraud.
The firms are also stuck in the middle of diplomatic discussions between the US and China governments about whether the American accounting watchdog should be allowed to inspect audit firms working on US-listed Chinese companies.
TRANSFER OF POWER
The new rules will limit the proportion of foreign-qualified partners at the Big Four to a maximum of 40 per cent when the structure is adopted in August this year, and to under 20 per cent by 2017.
This is likely to come as a relief to the firms, as there had been concerns that China could force them to convert more quickly to Chinese-dominated practices.
“This is an excellent compromise, China is providing for a transition for the transfer of power from the expatriate partners to the local partners,” said Paul Gillis, Professor of Accounting at Peking University and author of the China Accounting Blog.
“If the firms handle this responsibly, it allows them a period of time to further develop their local partners for senior management responsibilities,” he added.
Tougher though, will be the requirement that each of the Big Four’s senior partners be a Chinese citizen. All are currently led by foreigners.
Sources with knowledge of the discussions say the firms have been in talks with the authorities for several months, and that the firms are generally satisfied with the final result.
One concern though is that when the transition period is over, partners without China’s accounting qualification can only remain in their position if they have the approval of the Ministry of Finance under reciprocal arrangements.
While those partners could opt instead to sit China’s accountancy exams, many are likely to be constrained by the fact the papers can only be taken in Mandarin.
“There needs to be a mechanism so that people can sit those exams in a different language,” said Paul Winkelmann, a partner with PricewaterhouseCoopers in Hong Kong.
Another issue is the shortage of local accountants. There are only around 180,000 qualified accountants, with the number limited by notoriously hard exams – the pass rate is under 20 per cent.
The foreign joint venture arrangements currently used by the Big Four were signed 20 years ago and allowed foreign-qualified accountants to dominate their China practices. All of firms’ licences, aside from PWC, expire this year.
PWC’s licence runs until 2017, although it is unclear from the Ministry announcement whether it will also have to restructure immediately.
Since the joint ventures began, the firms have come to dominate China’s accounting industry, having won much of the lucrative work to audit the books of state-owned enterprises when they first listed.
In 2010, their audit practices, excluding their consultancy businesses, had combined revenue of more than 9.5 billion yuan (RM4.60 billion), according to the Chinese Institute of CPAs (CICPA).
However, their market share has slipped in recent years to about 70 per cent of the revenue among the top-10 auditors, down from 85 per cent in 2006.
Including consulting, the four firms say they each employ around 10,000 people in mainland China, Hong Kong and Taiwan.
Singapore’s accounting industry went through similar changes in the 1980s, as did Hong Kong’s in the late 1990s. In those cases, the local partners used their enhanced voting power to force out many foreign partners.
“I’m hoping China will have a smoother path than was seen before but human nature being what it is, I think that’s unlikely,” said Gillis. – Reuters
