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May 13, 2012

Big Four in China must restructure

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.

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