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May 18, 2009

Mid-tier future looks bright as China reaffirms ‘Big 10’ plans

(FREE) The Chinese Ministry of Finance (MoF) has published key details about its plan to develop 5-10 ‘super big’ domestic public accounting firms within the next decade to challenge the position of the Big Four in China.

The aim of the draft proposal is to create three different firm sizes: ‘super big’, ‘big’ and ‘small to medium’, to help bridge the gap between Big Four revenues and the rest.

According to the MoF, the average audit income of the Big Four in 2008 was about CNY2.4 billion ($352 million).

The Chinese Institute of Certified Public Accountants estimated the next largest firm in terms of audit revenue was BDO firm Shu Lun Pan on CNY666 million. In 2008, the annual income for the whole public accounting sector was CNY31 billion, with the Big Four consuming a third of the pie.

A domestic backbone

It is planned that ‘super big’ local firms would each grow to annual fee income of CNY3 billion, and have strong international reputations, competitiveness and the ability to offer cross-border services.

They would provide the backbone of the industry to serve growing foreign investment and be supported by up to 100 smaller accounting firms.

The MoF estimates there are more than 7,200 accounting firms in China employing more than 85,000 practising accountants. The growth strategy calls for an expansion to 200,000 licensed accountants and 500,000 firm employees within a decade.

The proposals send a strong message to global mid-tier networks that they have a bright future in China.

KPMG Hong Kong audit partner Jack Chow said his firm was not really encouraged by the proposal although it did see this as the way forward for China to have greater influence in the international arena.

“The uprising of the mid-tier firms has always been a threat to us. It just adds to the agenda that the MoF has put in a concerted effort to promote certain firms in China, which changes the landscape,” he said.

Speaking before the announcement, BDO International chief executive Jeremy Newman said the MoF was pursuing a policy of developing large Chinese firms in partnership with established mid-tier networks. This was a departure from the Ministry’s earlier policy to create 10 domestic Chinese firms that could establish their own global networks.

Newman, who recently met with MoF officials to discuss BDO’s plans in China, said authorities were keen for the global network to help grow a significant Chinese-based, Chinese managed firm.

“They were concerned to understand the role that our Chinese firm will have in BDO and to make sure that it will participate as an equal alongside our American firm and our UK firm rather than be regarded as a second-tier firm,” Newman said.

“I hope that within a few years our firm in China will be one of the largest firms in the BDO network.”

RSM China partner Mark Wilson said there did not appear to be anything new in the policy as the MoF has stated in recent years its desire for the profession to develop and be competitive on an international stage.

“The re-affirmation of existing policy does suggest that there should be significant opportunities for the China Top 20 firms to develop strongly in the coming years,” said Wilson.

The ultimate aim of the proposals is to double the size of the public accounting industry to CNY60 billion within the next decade.

BIG 10

Think Big

• Ministry of Finance wants to develop 5-10 ‘super big’ Chinese accounting firms in the next decade.

• Each ‘super big’ accounting firm to have annual audit fee income of CNY3 billion ($439 million).

• Ultimate aim is to double the size of the Chinese public accounting profession to combined audit revenue of CNY60 billion within 5-10 years.

• Expanding number of practising accountants from 85,000 to 200,000.

Source: Ministry of Finance, China

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