Big Four in China | China Accounting Blog | Paul Gillis

Big Four in China

Reuter’s Rachel Armstrong has a good story out this week on the restructuring of the Big Four in China. This issue was a key focus of my doctoral dissertation and one of my first posts in this blog.  

The Big Four has been in China since it opened up – actually some of the Big Four reopened offices that had operated before 1949. Like many foreign companies, they started with representative offices and upgraded to joint ventures in 1992. When China negotiated to enter WTO, it argued for national treatment, which meant that only Chinese CPAs could own Chinese CPA firms. Most countries require CPA firm owners to be locally licensed. The problem is that most Big Four partners in China are foreigners, including many from Hong Kong. The Chinese CPA examination is notoriously difficult, and is offered only in Chinese. Few Big Four partners have attempted the exam, and fewer have passed it. Charlene Barshefsky, negotiating for the U.S. (and indirectly the Big Four), argued that the CPA examination should be offered in English. Chinese negotiators countered that they could agree to that if the U.S. CPA examination were offered in Chinese. Failing in this direction, the Big Four then successfully lobbied to have an exception to national treatment included in China’s WTO accession that allowed the Big Four to continue to have foreign ownership in their existing joint ventures. That solved the problem in 2001.  

Fast forward to 2012. The exception to Chinese rules that Chinese CPAs must own CPA firms applied only to the existing joint ventures of the Big Four. These joint ventures had a 20-year life, which expires during 2012 for three of the firms. PwC gets an additional five years because it formed a new joint venture at the time of the PW/C&L merger. The firms had hoped that they would be allowed to extend the terms of the JVs, but Chinese authorities have been adamant that the joint ventures must be migrated into limited partnerships that must be owned by Chinese CPAs.

International practice is on the side of the Chinese regulators. Local partners in each country own the Big Four in most countries around the world. The firms operate more like a franchise than a typical MNC. While they coordinate closely, the separate ownership and management of each country is part of the strategy to ring-fence liability. Transferring the ownership of the firms to Chinese CPAs will simply bring the Big Four’s China practices in line with their practices in most other parts of the world. 

Many of the Big Four partners in China are from Hong Kong. Hong Kong partners fill most of the management positions. Few of these partners have Chinese CPA licenses. While the number of Chinese partners in the Big Four has increased significantly in recent years, they are mostly young and inexperienced partners who do not presently have the skills to manage the firms. A strict application of the rules could cause significant problems for the Big Four firms. If ownership and control were handed over to inexperienced local partners, the local partners may also decide to replace the experienced Hong Kong partners who are currently in leadership roles. That could jeopardize the quality of the firms for a number of years while the new partners gain experience in managing a firm. Transfer of ownership and management would definitely damage the careers of many senior Hong Kong partners. A solution to the issue will need to consider both of these problems. 

The Big Four firms have a number of foreign partners (including Hong Kong and Taiwan partners) who have worked in China for many years. Granting a Chinese CPA license to some of these long serving partners based on recognizing their foreign credentials might offer a solution that meets everyone’s objectives. Such a plan could allow the Hong Kong partners to retain control of the firms for a few more years. This would allow the Hong Kong partners to finish out their careers, and also allow local partners to gain further experience to prepare them for the future leadership of the firms. From the perspective of Chinese regulators, this is a pragmatic solution. This approach puts in place a structure that assures there will be a transfer of control of the Big Four into local hands in a reasonable period of time.  

The Big Four have been close-mouthed about their plans. They argue that they are a private business and that the public has no right to know what they will do. I disagree. The Big Four play a key role in the integrity of our financial markets. They play that role because society has given them a near monopoly on auditing public companies. The price of that monopoly is transparency. 

Copyright ©  2020         Paul L. Gillis all rights reserved