China orders big four audit firms to restructure

The Big Four auditors — Deloitte Touche Tohmatsu, Pricewaterhouse Coopers, Ernst & Young and KPMG — must start to convert their practices this August and comply with all the new rules by the end of 2017.

The rules require them to ‘localise’ their operations so that they are led by Chinese citizens and dominated by accountants holding China’s 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. 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 new rules will force the proportion of foreign partners at the Big Four to be a maximum of 40% when the structure is adopted in August, and fall to under 20% 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. Tougher though, will be the requirement that each of the Big Four’s senior partner be a Chinese citizen. All are currently led by foreigners.

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. Since then, the firms have come to dominate the country’s accounting industry, having won much of the lucrative work to audit the books of stateowned enterprises when they first listed.

In 2010, their audit practices, excluding their consultancy businesses, had combined revenue of more than 9.5 billion yuan (INR93 billion), according to the Chinese Institute of CPAs. However, their market share has slipped in recent years to about 70% of the revenue among the top-10 auditors, down from 85% in 2006.