The annual Strategic and Economic Dialogue has come to a close a few hours ago. If past practices are followed, fact sheets on what was agreed will come out in a few more hours.
China’s securities regulator announced that it will begin providing certain requested audit work papers to our market regulators, an important step towards resolving a long-standing impasse on enforcement cooperation related to companies that are listed in the United States.
Those remarks are consistent with reports in the Chinese press from earlier this week. No mention is made of the issues with respect to PCAOB inspections. Maybe that will be in the fact sheets, but I think it would have been significant enough for him to mention, especially in response to the Reuters question.
My reading is that the Chinese have decided to diffuse the SEC case by providing the requested audit working papers, but are unprepared to concede the principle that they control access to these working papers and that PCAOB inspectors cannot operate on Chinese soil.
The Chinese Institute of CPAs is out with their annual rankings of the Top 100 CPA firms in China. The big news is that KPMG is no longer in the Big Four in China. It has been replaced by Ruihua China CPAs, the firm formed by the merger of Crowe Horwath and RSM, which also pushed E&Y to 4th place. The merger did not take place until April 30th of this year, but the CICPA apparently decided to make it effective for their list as of 2012.
The top 10 firms in China for 2012 are:
The new Ruihua firm have asked to remain members of both RSM and Crowe Horwath, but that seems unlikely to work. I believe they will ultimately have to make a choice, and I expect they will choose RSM, which is the larger network (RSM goes by McGladrey in the United States). The decision may be critical to the future of both the winning and losing network. China appears to be the place where the global dominance of the Big Four has been broken, and the firm that allies with Ruihua will be well positioned to serve Chinese companies as they venture abroad. The loser needs to tie up with one of the unaffiliated firms on this list, and it needs to do fast.
This is probably the biggest week in the 30-year history of the Big Four in China.
Today, the hearings before the administrative trial judge of the SEC commenced at 10 am in an auditorium at the SEC headquarters in Washington. At stake is the right of the China affiliates of the Big Four and BDO to audit U.S. listed companies, and more importantly, the ability of U.S. listed Chinese companies to keep their listing.
On Wednesday, the U.S. and China will begin their annual Strategic and Economic Dialogue (SED). I expect that resolution of the standoff between U.S. and Chinese regulators over audit working papers will be on the agenda and I am hopeful that a diplomatic breakthrough will be reached.
The accounting firms and U.S. listed Chinese companies should hope that I am right. I do not think the SEC case will go well for the accounting firms. The final round of pre-trial sparring ended in a ruling requiring the firms to disclose their fees from auditing U.S. listed companies. The firms resisted providing this data, but the judge noted …”it would be helpful to know if a permanent bar on practicing before the Commission for any purpose, even in connection with performing audit work for non-China-based U.S. issuers, would essentially put a Respondent out of business entirely.” I know the answer to that question. No, it would not put the firms out of business entirely, but it will hurt really badly.
The Wall Street Journal printed an op/ed about the auditing of China’s big banks. The op/ed makes a number of misleading or incorrect statements about what is going on with the auditing of China’s big banks.
The piece says that Chinese banks are about to select new auditors because of Chinese rules “seemingly designed to unfairly promote the interests of less-experienced-and more easily influenced-local accounting firms”. What they are talking about is the mandatory audit rotation rules that have been put in place for state-controlled enterprises. What the authors seem to have missed is that this rotation has already taken place.
All of the Big Four banks have already rotated auditors. I wrote about this process last October. Rotation is required every five years, and three of the Big Four banks rotated auditors for 2013. China Construction Bank fired KPMG in 2010 over a fee dispute and selected PwC. CCB will rotate again in 2015, the others in 2018. Despite the author’s fear that “less-reputable” accounting firms will get the work, the Big Four accounting firms captured all of the Big Four banks. Despite the “rule” cited by the authors that no accounting firm can have two banks, PwC now serves two.