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April 30, 2008

Chinese checkers

Chinese checkers

China plans to create several national accounting firms that are large enough to tackle the Big Four in audit. Arvind Hickman speaks to four different mid-tier networks about their strategies to become a part of China’s Big Ten and what may stop them from achieving that goal.

The Chinese government has unveiled an ambitious plan to tackle the Big Four head-on with local indigenous Chinese firms. It wants to create ten fully-fledged firms in ten years that can provide comprehensive audit services to reduce reliance on foreign firms.

The policy, aptly titled ‘bigger, stronger, self-reliant’, was first outlined in a Chinese Institute of Certified Public Accountants paper last year. It airs concerns about weaknesses that presently exist in China’s domestic accounting infrastructure and aims to wean China’s reliance on foreign audit firms to service the country’s burgeoning capital markets and Chinese companies that list on overseas markets.

While this may sound like a challenge for global accountancy groups trying to establish their slice of the professional services market, some mid-tier networks and their Chinese representatives are embracing the plans as an opportunity to grow.

Baker Tilly International tells IAB it plans to support government policy and that high level meetings between Chinese officials and its senior partners are already taking place. “Our senior partner there has had a number of meetings with senior Chinese officials to talk about that firm’s strategy and how it might fit in with and be able to assist the Chinese government in a whole range of areas,” Baker Tilly chief executive Geoff Barnes says.

Horwath International plans to work alongside the Chinese Government in order to help its representative firm “nationalise” and “globalise”, according to chief executive Frank Arford. He says: “All of the firms of any size are trying to make sure they have presence in key cities and link up by either acquiring other firms or establishing umbrella agreements so we are trying to work through changes in China as it continues to evolve.”

Grant Thornton International has warned it is naive to believe that only international networks will form part of any Big Ten. Grant Thornton UK partner and head of the China Group Stephen Weatherseed, who has extensive professional experience in China, says indigenous firms are capable of developing into global networks.

“The international accounting profession needs to be cautious about being arrogant about whether or not the Big Ten automatically means ten of the big accounting international networks. It has to beggar the question in my mind as to whether the PRC [People’s Republic of China] Government has in mind building up domestic PRC firms to be part of those ten firms,” he says. Interestingly, Weatherseed tells IAB he was recently quizzed at a seminar of Chinese accountants about how to set up an international network.

Quality first Grant Thornton claims it has not been aggressively acquiring Chinese firms in the interest of maintaining quality. Weatherseed says the network wants to merge the operations of its various mainland offices and Hong Kong member firm in order to create a single China firm. GT reveals that the network is pursuing growth organically and now also through some mergers, a recent shift in strategy.

Other groups that spoke to IAB plan to increase in size and capacity through mergers and acquisitions. Barnes says Baker Tilly China is talking to a couple of firms at the moment. “I mean when you get to a critical mass of 1,500 people… you know you are able to offer technical expertise, critical mass, marketing, IT, to those firms. It is the same all over the world,” Barnes says. He notes that China’s ten-year audit rotation laws would present firms outside the Big Four more opportunities to take on big clients. However, Barnes believes the profession needs to develop and embrace international financial reporting and auditing standards if plans of a Big Ten are to succeed.

Local focus

MSI Legal & Accounting Network Worldwide’s Chinese representative, Lehmanbrown, plans to become part of China’s Big Ten. Senior partner Dickson Leung explains: “Our strategy is to focus more on the Chinese companies who have potential regarding mergers and acquisitions, initial public offerings and internal control and advisory. We believe that as China continues to develop, Chinese firms will both increasingly demand and be required to have the highest quality accounting and financial advisory services.”

Horwath’s representative, HW Intertrust China, is also likely to go down the path of acquisitions. “I don’t see so much our member firms combining or establishing relationships with competing network member firms. I see it more as the firms that would be part of our network trying to, either by acquisition or by setting up their own offices, make sure they have locations in the key cities and then go about a plan to nationalise in China as well as globalise,” said Arford.

The future of China’s accountancy profession is complicated. As firms jostle for a slice of the action, it is clear the profession needs international help to develop. The question remains whether that help will open doors for accountancy networks or slam them shut.

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