The Ministry of Finance has issued a notice recommending that large and medium-sized companies in China should select accounting firms that have been authorized by the State to audit H-share companies. The rules are intended to implement Document 56 of the State Council, which set forth government policy for the accounting profession.
There are 12 accounting firms in China that have been approved to audit H-share companies. The list includes all of the Big Four firms in China. The effect of the notice is to encourage further concentration of China’s accounting profession at the expense of small local accounting firms. Many of China’s medium-sized firms have selected local auditors, many of which are not on the list of H-share auditors. While some large local accounting firms have emerged in recent years (mostly affiliated with second-tier global alliances like BDO, RSM, and Crowe Horwath), none have really established a national network capable of serving companies in all of China’s important cities. This policy may help the larger firms build a true national network.
While the Big Four are on the H-share list, and therefore will possibly benefit from this notice, there are two other provisions that have been drawn from Document 56 that may give them trouble.
First, the notice says that companies should select accounting firms that are organized as partnerships. Most Chinese accounting firms have organized as corporations, and the government has for some time been trying to encourage them to restructure into partnerships. The partnership form is normative globally and Chinese authorities decided it would better promote professionalism. The Big Four in China, however, are not in partnership form, but rather operate in joint venture firms. The Big Four joint ventures begin to expire in 2012, and they are being pushed to reorganize into partnerships – which will have to be owned by local CPAs and not by foreigners. This notice will increase the pressure on the Big Four to get on with this.
Second, the notice repeats the refrain from Document 56 that companies that are critical to China’s infrastructure should consider national security concerns when selecting an accounting firm. This appears to be a direct shot at the Big Four, implying that the foreign partners of the Big Four cannot be trusted with the national secrets that might be disclosed in an audit. China claims to follow WTO national treatment rules in accounting, meaning that foreigners can practice under the same rules as locals – provided they pass the Chinese CPA exam just like locals and meet other local requirements. There is, however, a national security exception to WTO commitments, and it appears China may be invoking it here.
I don’t see anything new in this notice, it seems to simply repeat what had already been disclosed in Document 56. I think increased concentration in the accounting markets is a good step at this stage of development of China’s accounting profession. The country needs larger firms capable of providing high quality services on a national basis. Larger firms will have more at stake, and will be less susceptible to being pushed around by clients or local government officials.