The pending restructuring of the Big Four was big news yesterday. I spent the day talking to reporters from all over the world and in a TV studio near my home. This morning I Googled my name and found I was quoted in 212 newspapers yesterday. Of course, that is part of what the university pays me to do – to provide to the public my analysis of the important social issues of the day.
What surprises me is the near complete radio silence by the Big Four. The Big Four public response to what is probably their biggest issue in their 30 years in China is mostly “no comment”. One exception came from one of the colonial remnants in Hong Kong who said that China needed to offer its CPA examination in English. (China offered that in WTO negotiations provided that the U.S. offer its CPA examination in Chinese, an offer that the Americans rejected).
I think it was foolish for the Big Four to allow others to define the meaning of this important issue. The near 100 comments on the Wall Street Journal article mostly reflect concern that the changes will undermine audit quality in a market where audit quality is already suspect. The Big Four need to hire public relations advisors.
Perhaps one reason that the Big Four have been silent is because they have some very difficult negotiations ahead with their local partners. Each of the firms currently operates China and Hong Kong as a single practice, and some firms include other territories like Taiwan and Singapore in the combination. From a legal standpoint, there are still separate legal entities which are owned by local partners, but these entities agree to be commonly managed and to combine their profits for distribution. The joint venture in China was mostly owned by the Hong Kong firms, so control of China has been automatic. That changes with the new rules.
While the new rules require that the management committee of the China firms consist mostly of locally qualified partners, that may be meaningless if the present combinations continue. If the China firm agrees to participate in a regional consortium of firms, its local management committee may cede its authority to a management committee of the regional consortium. Under such arrangements, the China senior partner and the China management committee may simply be symbolic positions with no real power. While the new rules will create the appearance of local control of the China firm, the rules may be completely undermined by these regional arrangements.
The firms are going to want to preserve the present regional arrangements because they would allow existing expatriate management to retain power and would not alter existing income distribution methodologies. One of the first issues that will need to be negotiated with the local partners is whether the China firm will agree to join the existing combination of firms that have agreed on common management and division of profits. The State Council, in Document 56, encouraged these types of arrangements, provided they are entered into on the basis of “equality and mutual benefits.” It will be up to the local partners who now control the firm to decide whether the proposed arrangements provide equality and mutual benefits. They will be wise to deliberate carefully on this issue. They hold the cards. Regulators ought to watch this process.
I spent five years analyzing this issue as part of my doctoral studies. Local partners might benefit from reading Chapter 10 of my thesis, where I set forth a counter-hegemonic strategy that includes a revolution. So far, this is playing out just as I predicted.