BDO v. BDO | China Accounting Blog | Paul Gillis

BDO v. BDO 

BDO’s China member firm, Lixin (BDO China), is currently the fourth largest CPA firm in China, ahead of both KPMG and EY. Lixin is not to be confused with BDO Da Hua, a Chinese firm formerly affiliated with BDO that withdrew from the BDO network and abandoned U.S. listed client audits after being sued by the SEC in the working papers dispute. 

BDO China is currently in a tussle with BDO’s Hong Kong member firm. BDO China set up two firms in Hong Kong – Shu Lun Pan Union (HK) CPA Limited and BDO China Shu Lun Pan (HK) Management Limited. BDO HK argues that setting up these companies clearly violated BDO’s territorial regulations and has insisted that the companies be closed immediately.  

Why would BDO China need an operation in Hong Kong when there is already a BDO member firm there? It is because the two firms do not share profits. They are separate firms with different owners. 

BDO China needs to have a Hong Kong CPA firm sign off on Red Chips (state controlled mainland companies with offshore holding companies listed on the HKSE like China Mobile) and P Chips (privately owned companies with offshore holding companies listed on the HKSE like Tencent). A 2011 deal between China and HK allows BDO China to sign off on H-shares, but not Red Chips or P-Chips. Why not use BDO HK to sign off? This is probably because BDO HK probably wants to do the audit and keep all the fees. 

The recent proposal to require overseas accounting firms to use their mainland affiliates for all audit work in China would hit BDO HK particularly hard. Johnson Kong, CEO of BDO HK, told an academic conference in June that if the rule goes into effect BDO may need to lay off half of its HK staff.  

The Big Four dealt with this issue more than a decade ago. Many of the Big Four firms in China were started and funded by their global network. There were big losses in the early years and the Hong Kong partners could not afford to fund them. The global firms found that money given to the Hong Kong firm to develop China was used instead to enhance partner income, so they took away management of the China practices from Hong Kong. In several cases, the mainland firms and Hong Kong firms directly competed for clients, and the Hong Kong firm used its role as gatekeeper to the HKSE to extract concessions from the global firm. Eventually tiring of the battle, each of the Big Four firms turned the China practice over to the Hong Kong firm. Today, all of the Big Four firms run China and Hong Kong as a single business.

Grant Thornton has faced similar issues. In 2010 it expelled its Hong Kong member firm, and started a new firm aligned with its China member firm. Three quarters of the Grant Thornton Hong Kong partners joined BDO HK, and they should be unsurprised to see the issue arise again at their new firm.  

The best solution to the standoff for BDO globally is for BDO HK and BDO China to operationally merge, as the Big Four have done. But that is likely to be resisted by BDO people in Hong Kong. The Big Four mergers of Hong Kong and China led to nearly all audit work on mainland companies migrating to the mainland, and most partners and staff who wanted a future dealing with Chinese companies also relocating to the mainland. 

For its part, BDO HK denies that it is in merger talks with BDO China, yet it confirms that it is in discussions to find ways for closer cooperation between the firms. BDO also denies it has been losing staff to other CPA firms. BDO staff could hardly be faulted for having concern that the dispute could undermine their career prospects. 

Copyright ©  2017         Paul L. Gillis all rights reserved