China Ministry of Finance has issued guidelines for the restructuring of the Big Four in China. As I have previously reported, the joint venture terms for the Big Four expire in 2012 for three of the firms with PwC getting an extra five years. Because of a WTO exception, the joint ventures have allowed control by partners who are not Chinese CPAs. Upon expiration of the JVs, the firms must restructure into limited partnerships, which Chinese law (like most other countries) requires be owned by locally qualified partners.
The MOF guidelines (in Chinese) provide significant relief to the Big Four. The firms can have up to 40% foreign partners with overseas qualifications, ten years of experience and five years in China. The 40% limit drops to 20% by December 31, 2017. Partners have to be at least 40 years old and not older than 65.
Similar rules apply to the management of the firms. The management committee must not have more than 40% foreigners from 2012 also reducing to 20% by 2017. The senior partner must be a Chinese national and a Chinese CPA. None of the present Big Four senior partners meet this requirement. For them, there is also a transition. They can remain in their existing post for up to three years.
I have been calling for a transition period, so I am pleased with the pragmatic solution that MOF has reached. Allowing more experienced “old China hands” to remain for a period of time will help to ensure audit quality.
The quotas are going to be tough for the firms to meet. The only data I have on the localization of Big Four partners is from 2008, when 27.2% of Big Four partners were local. That percentage has undoubtedly increased since 2008, but I do not expect it is up to 60%. I do not expect widespread layoffs of foreign partners; instead I expect they will turn many of them into employees, using a title like principal, which gives partner status without ownership or voting rights.
The real question is how will the local partners handle their newfound power? From December 31, 2012 they will have voting control of the firms and control of the management committees. Will they exercise this power to remove all foreign partners from management roles and to alter the income distribution arrangements in their favor? The local partners are mostly the more junior partners, who are the lowest paid and fill few management roles today. If history is any indication, the path ahead will be rocky. The Singapore offices of the Big Four transitioned from expatriate domination to local ownership in the early 1980s. The Hong Kong firms underwent a similar transition in the late 1990s. In both cases large numbers of expatriate partners left the firms. I hope this does not happen in China. China's complex economy and large companies need the experience and judgment of the gray hair-no hair expatriate audit partners.