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October 16, 2014

BDO China and BDO Hong Kong near integration

By Vincent Huck

BDO International and BDO China have invested in a shareholding in BDO Hong Kong, effective 1 January 2015.

The agreement will combine the business and advisory services in China and Hong Kong and is a first step towards the integration of the two firms, according to a statement by BDO International.

The announcement comes a little over a month after the standoff between BDO Hong Kong and BDO China. In September, BDO China had set up two firms in Hong Kong, which BDO Hong Kong quickly argued was a violation to BDO’s territorial regulations as member firms are not supposed to compete with each other.

This incident led to some speculation that both firms would merge which was quickly denied by BDO Hong Kong.
However commenting on this week’s announcement, Paul Gillis, professor of practice at Peking University told IAB: "It would seem this is the first step towards a merger of BDO Hong Kong and BDO Mainland."

Hong Kong Stock Exchange rules require a Hong Kong accountant to sign off on mainland audits, and the mainland has proposed rules to require Hong Kong firms to use mainland affiliates to do those audits, Gillis explained. "If these two firms did not find a way to work together, they were both going to suffer immensely."

However asked what BDO International and BDO China meant when they announced that they have invested "in a shareholding in BDO Hong Kong", Gillis replied: "That is a bit confusing. It seems BDO International is taking up an ownership interest in Hong Kong. I speculate that provided some funds to give to partners to make this medicine taste a little better."

IAB asked BDO International to clarify the meaning of "an investment in a shareholding" to which the global network answered: "BDO China and BDO International have taken a "minority interest" in BDO Hong Kong."

BDO Hong Kong and BDO China are two separated firms with different owners and therefore do not share profits. While a 2011 a deal between China and Hong Kong allows BDO China to sign off on H-shares, it cannot do so on Red Chips or P-Chips, Gillis said. "Why not use BDO Hong Kong to sign off? This is probably because BDO Hong Kong wants to do the audit and keep all the fees."

The Big Four dealt with the issue over a decade ago when it combined their Chinese and Hong Kong operations. In 2010, Grant Thornton International 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 Hong Kong, and they should be unsurprised to see the issue arise again at their new firm," Gillis said.

Related articles:

BDO Hong Kong refutes speculation about BDO China merger

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