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.