China’s accounting firms must be led
by local citizens and ensure the number
of foreign partners does not exceed 40% in a raft of new
localisation rules that begin in August.

The rules are designed to place control of
large firms into the hands of Chinese and ensure voting rights
are dominated by Chinese-qualified CPAs. This will have the
biggest impact on the Big Four, who are currently led by foreign
citizens and have a large number of expatriate partners.

By 2017, the Ministry of Finance announced,
firms must have no more than 20% of partners qualified outside of
China. Partners have to be at least 40 years old and not older than
65.

The rules have been eagerly anticipated by the
four largest firms, PwC, Deloitte, Ernst & Young and KPMG,
whose operating licenses in China due to expire. The Big Four have
operated in China through 20-year joint venture arrangements with
local Chinese firms, with all but PwC set to expire this year.
Because of a World Trade Organisation exception, the joint ventures
have allowed control by partners who are not Chinese CPAs.

Upon expiration of the joint ventures, the
firms must restructure into limited partnerships that requires
local ownership, which is a common requirement in most
countries.

The length of the transition to Chinese
control was described as ‘a relief’ to the Big Four by Paul Gillis,
a professor of accounting at Peking University who closely follows
the Chinese profession on his China Accounting blog.

“The quotas are going to be tough for the
firms to meet. The only data I have on the localization of Big Four
partners is from 2008, when 27.2% of Big Four partners were local.
That percentage has undoubtedly increased since 2008, but I do not
expect it is up to 60%,” Gillis noted on his blog.

Big Four
transition

Three of the Big Four
firms said they welcomed the decision and will work towards a
smooth transition.

Ernst & Young said
the new measures are in line with Ernst & Young’s existing
strategy to accelerate localisation in China.

“Our business is
well-positioned for this transition,” E&Y told
International Accounting Bulletin.

Similarly, PwC China
said the firm has been actively localising its China practice by
investing heavily in developing local talent and promoting local
partners in recent years.

“We will continue to
work closely with MoF and other relevant authorities to ensure a
successful transition of the existing joint venture structure in
China,” PwC said.

KPMG China said it
welcomed the government’s move and said it will work towards a
smooth and successful transformation of structure.

PwC, the market leader
in the country with estimated revenues of CNY3.4bn ($538m) for
2011, said it will closely monitor the developments of E&Y,
KPMG and Deloitte as they seek to renew their expiring
licences.

“The government has said
its objective is to localise Big Four firms as soon as possible so
local CPA talent can take leadership in those accounting firms.
It’s not the case that China is closing the doors on the Big Four,”
PwC China lead partner for public policy and regulatory affairs
David Wu said.

Mainland China’s top 15
firms are growing annual revenue by an average of 20%, according to
International Accounting Bulletin data.

The Big Four contribute
59% of revenue among the firms IAB surveys, making China one of the
least Big-Four concentrated markets in the world.

The government’s plans
for the profession is to reduce Big Four dominance even further by
partnering large domestic firms with global mid-tier networks,
while encouraging Chinese firms to grow by M&A.

The move to localise Big
Four firms will place even greater control of the profession into
the hands of Chinese.