China’s accounting market update | China Accounting Blog | Paul Gillis

China’s accounting market update

For the past four years (2011, 2012, 2013, 2014) I have reported on changes in the rankings of China’s largest accounting firms based on the CICPA’s annual rankings. I base my rankings on revenue alone, whereas the CICPA aggregates a number of factors, including quality assessments. The revenue reported is audit revenue alone, since the firms tend to use different entities for consulting services.

The revenue reported is audit revenue alone, since the firms tend to use different entities for consulting services. Because dues to the CICPA are based on revenue, firms are discouraged from overstatements.

Revenue growth for China’s top 100 CPA firms slowed in 2015 to 17.2% down from the blistering growth of 32.8% in 2014. Nonetheless, the growth in accounting firm revenue far outpaced the growth in GDP, indicating that China continues to invest in accounting. The international Big Four firms grew at 7.5% in 2015, significantly down from 18.2% in 2014. Local firms continued to outpace the Big Four in revenue growth, logging a 21.5% increase compared to a 39.5% increase in 2014. That has led to a decline in the Big Four’s share of the Top 100 market to 28% from 31%, continuing a steady slide over the last few years.

There was a shakeup in the Top 10 firms. PwC remains #1, but is likely to fall to #2 Ruihua in 2016. Ruihua is a member firm of both RSM and Crowe Horwath. Deloitte slipped from #2 to #4, falling behind both Ruihua and BDO. Grant Thornton replaced UHY Vocation in the #10 slot with remarkable growth of 32.5%.

The accounting market in China remains highly competitive. The Herfindahl Hirschman index of market concentration fell slightly from 446 to 444, well below the level of concentration in Western economies which tends to be above 1500.

The Big Four face a challenging market in China. Overseas IPOs of Chinese companies have slowed, and that was a market that the Big Four owned. The Big Four has not found the key to unlock the A share market, which is dominated by local firms. The biggest challenge for the Big Four comes in 2020, when the next big round of mandatory audit rotation for large state owned enterprises occurs. I think it is likely we will see some of the rapidly growing local firms winning audits of some of China's flagship companies.

Copyright 2017 Paul L. Gillis all rights reserved