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May 23, 2012

Chinese official defends localisation rules

A senior Chinese official has rejected criticism over new rules restricting the number of foreign partners within Chinese audit firms, pointing out the decision is in line with international practice and will not affect audit quality.

Ministry of Finance accounting department director Yang Min defended new localisation rules that mean firms can have no more than 40% foreign partners by August and must have Chinese nationals in key leadership positions. The rules will have the largest impact on the foreign controlled Big Four – PwC, Deloitte, KPMG and Ernst & Young.

“China has properly arranged a transition program for the Big Four accounting companies and taken into account the views of Chinese and overseas partners when we came up with the plan,” Yang said on Chinese radio.

The rules aim to place the control of large firms into the hands of Chinese and ensure voting rights are dominated by Chinese-qualified CPAs.

By 2017, firms must have no more than 20% of partners qualified outside of China. Partners have to be aged between 40 and 65 years old. Overseas partners have been given a grace period of five years to pass the exams to become Chinese Certified Public Accountants.

Chinese Radio International reports that nearly half of overseas partners in the Big Four do not have certificates to practice accounting on Mainland China but have certificates issued by other countries. Most of those partners are residents of the Hong Kong Special Administrative Region.

“The new localised accounting offices will not only come under the supervision of the Chinese government and industrial association but under the guidance of parent companies of the Big Four,” Yang said.

“Judging from their employees, 90 percent of the Big Four’s offices in China are locally staffed, among whom most are graduates from China’s prestigious universities. Thus, we believe the localised offices will further improve their business quality and better protect investor interest and the capital market order.”

Yang said that the Big Four were consulted about the changes when drafting the laws. The Big Four have stated that they are on track for the transition to local ownership but some commentators believe they could struggle to meet the quota.

Protectionist rules that require local audit firm ownership are common across Asia.


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