- Regulatory Challenges for the "Big Four"
- March 8, 2012
- Law Firm: Sheppard Mullin Richter Hampton LLP - Los Angeles Office
The “Big Four”, which dominate the Chinese market, are facing regulatory changes that could mean that only accountants with Chinese qualifications can be partners in their China-based audit practices.
At the time of China’s accession to the World Trade Organization in 2001, the Big Four successfully lobbied to have an exception to China’s requirement that only Chinese certified accountants could own Chinese accounting firms. As a result, the Big Four were allowed to maintain their foreign ownership in their existing joint ventures. However, the exception only applied to the Big Four’s existing joint ventures, which have 20 year terms. As a result, the joint venture agreements signed by KPMG, Deloitte & Touche, and Ernst & Young will expire later this year, with PricewaterhouseCoopers’ to expire in 2017.
China’s Ministry of Finance has indicated that, upon the expiration of the terms of the Big Four’s respective joint ventures, they will be required to convert into the same mode of practice as local firms (i.e. limited liability partnerships). This would require that all partners are Chinese certified accountants, which would present a major challenge given that such exams are in Mandarin and notoriously difficult.
Many of the Big Four partners in China are foreigners, including many from Hong Kong. Few of such foreign partners are certified in China. Further, it has been reported that although the number of Chinese partners in the Big Four has increased significantly in recent years, China’s accounting industry remains relatively young and there may not yet be enough highly experienced and locally qualified accountants to take the helms at the Big Four’s China based operations.
The potential changes come at a sensitive time for the audit industry, in light of the highly publicized accounting irregularities of some Chinese companies listed in the U.S. and other markets. Further, some commentators have noted that any reduction in the capacity of the Big Four in China (or the control of the Big Four’s China practices by their global headquarters) could result in increased concern by foreign regulators and investors about the integrity of auditing and the financial markets.
It has been reported that the Big Four are currently in discussions with Chinese regulators. The position of China’s regulators is consistent with international practice. That is, in most countries the Big Four are owned by local partners, and such partners are required to be locally qualified.