China Orders ‘Big Four’ Auditors to Restructure

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China requires 60 percent majority Chinese partners upon JV term expiry, 80 percent by 2017.

Devonshire-Ellis: “This is a retrograde step”

May 15 – China’s Ministry of Finance, Administration for Industry and Commerce, Ministry of Commerce, State Administration of Foreign Exchange, and the China Securities Regulatory Commission jointly issued the “Scheme for Localized Transformation of Sino-foreign Cooperative Accounting Firms (hereinafter referred as the “Scheme”)” last Thursday. The Scheme requires the “Big Four” auditing companies of Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers to “localize” their staff in line with Chinese laws that specify the qualifications, age and experience of their management.

The Scheme specifies the four types of qualifications for partners, namely:

  • Partners who hold qualifications to practice as a Chinese certified public accountant;
  • Partners who hold the “three professional certificates” (that is, a Chinese certified public valuer, certified tax accountant, or certified cost engineer);
  • Partners who hold the qualifications of a certified public accountant of another country or region (including Hong Kong, Taiwan and Macau); and
  • Partners who do not hold the above mentioned qualifications but discharge the duties of internal management.

According to the Scheme, the percentage of partners who hold the qualifications of certified public accountants of other countries or regions (non-Chinese-certificated partners) may not exceed 40 percent of the total number of partners upon the issuance of the practicing certificate of the General Special Partnership Agreement, meaning the JV license specifically issued to the MNC audit profession in China. This percentage should be further lowered to no more than 20 percent by 2017. All of the Big Four firms are seeing the terms of their existing joint ventures expire following the granting of the original 20-year licenses. Those agreements are now subject to adjustment by the government and the Scheme provides terms of compliance for contracts to be renewed.

Besides requiring the Big Four to hire more local partners, the Scheme also specifies that the foreign auditing firms have to appoint a Chinese national and Chinese certified public accountant as the chief partner in China. However, the government allows a three-year buffer period for the leadership transition after the issuance of the practicing certificate. None of the Big Four auditing companies currently meet this requirement.

The spokesman of the Finance Accounting Division of the Ministry of Finance pointed out that the localized transformation of Sino-foreign cooperative accounting firms will cast a positive influence on building a fair market and further stated that Sino-foreign cooperative accounting firms led by Chinese certified professionals comply with the development of the industry and the international practice.

Currently, around 50 percent of the partners at Big Four firms do not have local certification, with the majority of them being from Hong Kong. Faced with the challenge of greater turnover of partners, the Big Four companies all responded “positively” to the Scheme, according to State media.

However, Chris Devonshire-Ellis, principal of Dezan Shira & Associates disagrees.

“This is a retrograde step by the Chinese government,” states Devonshire-Ellis. “My personal opinion is that China simply does not have the additional professional audit staff on hand to both allow for implementation of these rules and ensure continued quality of audit. My views are that it will in fact lead to an overall deterioration of audit standards both in China and within its state-owned enterprises, just as Chinese companies are expected to contribute to a larger share of global investment.”

“I also have concerns that, in this instance, the Chinese government is actually increasing barriers to foreign investment and involvement towards commerce in China,” he adds. “This particular legislation is obviously targeted at the international audit profession, but it does not stretch the imagination to suggest that similar rulings in other professions may also be subjected to what amounts to insistence upon Chinese nationality as a qualification to practice, as opposed to professional qualifications and experience. Concerning audit, China needs to be very careful given the already poor reputation and financial behavior of many Chinese companies internationally that they do not close themselves off from the international community and its standards by imposing such internal restrictions. The repercussions for Chinese entities being subjected to global standards when their local standards are not in line with international experience should be sending alarm bells ringing both in China and beyond, especially when dealing with Chinese audited companies overseas.”

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. For further information, please email, visit, or download the firm’s brochure here.

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