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July 12, 2011

China Development Bank uses Big Four clause

A Big Four only lending clause has been discovered in a loan agreement issued by a Chinese bank.

The insertion of the anti-competitive clause is peculiar in China as it challenges a high profile Ministry of Finance policy to build domestic Chinese firms to a size that can tackle the dominance of the Big Four – PwC, Deloitte, Enrst & Young and KPMG.

Paul Gillis, a visiting professor of accounting at Peking University’s Guanghua School of Management, discovered the Big Four lending clause while reviewing the SEC filings for Harbin Electric’s proposal to be sold to its chief executive Tianfu Yang.

Yang proposed to privatise Harbin Electric with $400 million of funding from China Development Bank (CDB), a state-owned bank directly under the supervision of the China’s State Council.

While trawling through CDB’s loan facility agreement, Gillis discovered clause 21.24 Auditors, which states:

‘No Group Member may replace the Auditors, unless the new auditor to be appointed is any of Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG.’

Clause for concern

In his blog, Gillis suggests the ‘boilerplate’ clause was inserted by White & Case, CDB’s US legal counsel. Regardless of who is at fault, this discovery confirms the practice is much more widespread than previously thought.

The fact that a state-owned Chinese bank has included a Big Four lending clause in its loan agreement will concern non-Big Four firms such as BDO, Grant Thornton, RSM International and Crowe Horwath, and their Chinese affiliates. Non-Big Four firms have long held the belief that restrictive lending clauses are a major barrier to competition in the audit market.

BDO global chief Jeremy Newman described the spread of these clauses to China as worrying.

“The longer it takes governments and regulators to ban Big Four only clauses the more damage they will do,” Newman commented on his blog.

The International Accounting Bulletin believes anti-competitive measures such as restrictive lending clauses should be abolished and such practices are under review as part of audit industry consultations in the EU and UK.

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