China goes local | China Accounting Blog | Paul Gillis

China goes local

The struggle between local Chinese and the Big Four accounting firms has been going on since the return of public accounting to China in the early 1980s. China let the Big Eight firms set up representative offices beginning in 1980, and in 1992 allowed the Big Six to enter joint ventures with state controlled firms.  About 2000, all CPA firms including the Big Four were separated from the state. In 2012, China required the required the Big Four to begin the transfer of the firms from expatriate partners to local Chinese partners.  

Chinese authorities had welcomed the Big Four to China in hopes they would help with economic development, transfer knowledge to locals, and then leave. It was never the strategy of the Big Four to leave, since they saw China as a major market and an important link in their international networks. China launched programs to boost local firms. Looking back on the last decade, those programs have worked very well and China is on the cusp of breaking Big Four dominance of its accounting market. 

This chart tells the story. It shows growth rates of the Big Four compared to local Chinese CPA firms over the past dozen years. The Big Four were growing at a spectacular rate in the early 2000s, with growth peaking at an astonishing 57.4% in 2004, driven by high levels of overseas IPOs by Chinese companies and huge foreign investment in China by multinational corporations. Local CPA firms were growing well, but at a pace behind the Big Four.  

That all changed with the global financial crisis. The Big Four suffered negative growth of 12.1% in 2008, while local firms kept growing at 26.5%. The Big Four returned to growth in 2009, but have lagged local firms ever since. The main reason, from what I can tell, is that Chinese companies shifted from looking overseas for capital to domestic markets that provided higher valuations. The problem for the Big Four is that they have failed to present a compelling case for why they should audit companies listed on Chinese stock exchanges, and nearly all of that work is done by local firms.  

Two local firms that belong to international networks were the 2nd and 3rd largest firms in China in 2015. I expect that earlier this year Ruihua, a Chinese CPA firm affiliated with both Crowe Horwath and RSM, overtook PwC to take the No. 1 slot in China. Ruihua and the Chinese affiliate of BDO had already overtaken the other three members of the Big Four.  

The Big Four still dominate the audits of Chinese companies listed on international stock exchanges, but that may soon change as well. China requires state controlled companies to rotate auditors every eight years, and the next major round of rotations will take place in 2020. Overseas listed state controlled companies are some of the largest companies in the world (Bank of China, Petrochina etc), and if that work goes to local firms it will significantly diminish the Big Four in China. 

Copyright ©  2020         Paul L. Gillis all rights reserved