Caixin has an interesting article about audit rotation in China. All SOEs are now required to go through an audit tender process every three years, and an auditor cannot serve for more than five years. The big Chinese banks are now coming up for rotation, with Bank of China due to replace PwC next year, and the Agricultural Bank of China (ABC) scheduled to rotate away from Deloitte at the same time. The Industrial and Commercial Bank of China (ICBC) will drop Ernst & Young in 2014.
There is a lot at stake for the accounting firms. PwC charged Bank of China $34 million for the 2011 audit. The accounting firms would prefer not having audit rotation - they have fought auditor rotation proposals in the U.S. and the E.U. Yet, if they are forced to rotate, they hope to just shift the clients between each other.
Chinese regulators have stepped in to disrupt those plans. According to Caixin, the Ministry of Finance called executives at ABC and ICBC and told them to include local firms in the bidding process. Bank of China's tender process is coming to a close, and no local firm was included. The bidding process creates a chicken and egg problem for local firms; bidding requirements include deep experience in auditing banks, yet that experience is unattainable for local firms since they do not have any large banks as clients. The local firms that will be bidding are likely to be affiliated with the second-tier of global accounting firms, which includes BDO, RSM and Crowe Horwath.
Investors may be concerned about a second-tier accounting firm auditing banks that rank among the world's largest. A quote from a Bank of China executive in the Caixin article does not inspire confidence in the present auditors either:
"PwC's unqualified audit opinion helped Bank of China ride through the most difficult times after the global financial crisis, even when concerns mounted over an increase in non-performing loans tied to local governments' financing platforms", an executive with the bank said.
I guess that's client service. Then again, not many alarms were sounded in New York by auditors of the failed financial institutions.
Audit rotation is already changing the competitive landscape in China. PwC, which has the largest SOE practice with giants Bank of China and PetroChina, has the most to lose. Time will tell whether the requirement will break Big Four domination of the market for auditing large SOEs.