Slamming the door on the Big Four | China Accounting Blog | Paul Gillis

Slamming the door on the Big Four

The State Council Legislative Affairs Office of the PRC has requested public comments on proposed amendments to the CPA Act. The very act of asking for public comments on legislation reminds me how much things have changed in my 15 years living in China. 

The legislation appears to be mostly housekeeping. There is no new policy here, just alignment of existing laws with policy. The most important change is getting rid of all the language about joint venture accounting firms. Instead, accounting firms are required to use either general or limited partnerships, with limited partnerships available only to firms with at least 25 partners and 100 CPAs.

China faced three problems with CPA firms since they first reappeared in 1980. First, all CPA firms were initially affiliated with the state. Of course, in 1980, everything was affiliated with the state. The need for an independent CPA profession was recognized as China’s economy developed, and by the late 1990s all CPA firms were separated from the state. Second, the original CPA law allowed firms to organize as either partnerships or corporations, yet partnerships were unknown in China and it was near impossible to form one. As a consequence, nearly all CPA firms were organized as corporations. That tended to concentrate ownership and management in a single individual, which was considered a poor governance structure for professional accounting firms. The government has been pushing partnerships since the 1990s, and soon it will be the only form available for CPA firms.

The third problem was joint venture accounting firms. China allowed the then Big Six to form joint venture accounting firms in 1992. Three second-tier firms were later allowed to form joint ventures, but all of those ventures failed because of conflicts between the partners. PwC formed a new joint venture in 1997 at the time of the merger of PW and C&L. Since then, no joint venture firms have been allowed. The existing joint ventures were allowed to continue because of a special provision in China’s WTO accession. Three of the JV’s expire this year, having used up their 20-year lives, with PwC getting an extra five years. This legislation slams the door on any hope the firms had of extending the joint ventures. They will be required to restructure into limited partnerships owned by Chinese CPAs – and fast. China has graciously said it will follow its WTO commitments, which expire as the joint ventures expire.

The changes will bring China in line with international practice. I am not aware of any other jurisdiction that allows unlicensed persons to own a CPA firm. This will bring pain to many Big Four partners, who must obtain a Chinese CPA license or lose their right to ownership.  

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