The deadline for Big Four restructuring in China is looming. As I have explained earlier, the joint ventures under which the Big Four operate in China expire in 2012 for three of the firms as they reach the end of their twenty-year life. PwC gets an extra five years because it formed a new joint venture in 1997. Back in the summer of 1992 KPMG rushed to become the first joint venture firm. The other firms all established their joint ventures during the last half of 1982, and they will all (except PwC) begin to expire this summer.
China is forcing the firms to restructure into limited partnerships owned by Chinese CPAs. The problem is that the firms are presently owned in majority by foreign, including Hong Kong and Taiwan, partners. In order to become Chinese CPAs, these partners would have to pass the arduous Chinese CPA examination. Few have succeeded at doing that.
The Big Four have been silent about this process, until now. Dennis Nally, global chairman of PwC gave an interview to Dena Aubin at Reuters. Nally reported that PwC was participating in the talks with Chinese regulators, even though its joint venture still has five years left. He said the firms are near an agreement with Chinese officials that will provide a transition period of several years before the ownership of the firms has to change. Nally said that PwC was in better shape than some of the other firms, indicating that some of the firms were having difficulty finding enough locally licensed senior partners to take over ownership.
I have advocated for Chinese regulators to provide for a transition to local ownership, so I am encouraged by Nally’s comments. Too quick of a transition to local ownership and management could undermine the quality of audits at a sensitive time.
One of the unintended outcomes of the restructuring of the Big Four in China will be that the firms will likely be required to re-register with the PCAOB. That could pose a problem, since the PCAOB has said they will accept no new audit firm registrations from China until the issue of inspections is resolved. It seems to me the PCAOB may have to bend its rules to allow the Big Four in China to remain registered. Stay tuned.