Included in the detailed reform plan that came out of the Third Plenum meetings was an odd statement that restrictions on foreign investment in accounting and auditing firms would be relaxed. What is odd about that is that China already has the loosest rules for foreign investment in auditing and accounting on the planet.
Last year China struck a deal with the Big Four accounting firms to convert their expiring joint ventures into limited liability partnerships. China, like virtually every other country, requires owners of CPA firms to be CPAs. That was a problem for the Big Four, since many of their partners are expatriates (mostly from Hong Kong) who are mostly not Chinese CPAs. The Chinese CPA examination is open to foreigners, but it iis notoriously difficult and more than a few Big Four partners have been humiliated by it. The Big Four firms negotiated a sweet deal with Chinese regulators. They would be allowed to have up to 40% unlicensed partners (the partners are required to have some sort of foreign license) in their limited liability partnership, although that 40% will ratchet down to 20% over five years.
Even at 20%, China will still be the most open accounting market in the world. So why the need for further liberalization? The rule allowing partners without a local CPA qualification applies only to the Big Four. I suspect the plan may be to extend this to other CPA firms.
Who asked for that? I got a glimpse at the process of developing reforms this year, as I believe most every academic and regulator in China (including me) got to contribute their two cents worth. I will speculate that this issue came from the Chinese Institute of CPAs (CICPA) and it was purposeful.
The CICPA has long been championing Chinese accounting firms in their struggle with the Big Four for market dominance. While local firms have made great progress, they are not winning the big prizes. In the recent round of audit rotation for major SOEs, the big SOEs like the Bank of China and Sinopec just swapped Big Four auditors and the local firms came away without a major win.
The reason why local firms cannot win the audits of large SOEs is mainly because they do not have the skills to audit them. Local firms face the chicken and egg problem. To win big jobs they need the experience of doing big jobs. This reform would allow local firms to hire foreign partners with big client expertise so that they can win some of the big jobs.
The next major round of audit rotations will take place in 2020. I predict that China’s stronger local firms (who are mostly affiliated with global second-tier firms like BDO, Grant Thornton and RSM) will be poaching Big Four partners so that they can win some big jobs. And if these firms start winning audits of the giant SOEs, it may be a new game in audit markets worldwide.