China accounting market is turbulent | China Accounting Blog | Paul Gillis

China accounting market is turbulent

 For many years I have been analyzing the accounting market in China based on data released by the Chinese Institute of CPAs. The data tell an interesting story of the development of the accounting profession.  

Here are the top ten firms for 2018:

Among the more notable observations is that only one purely local firm (Pan China) has made the top ten.  Most people consider all of the non-Big Four firms to be local, however.  Unlike the Big Four, which tend to be managed from Hong Kong, local firms (including those with global affiliations) tend to have local Chinese leaders. Last year there were two purely local firms in the list, but Shinewing, once thought likely to lead the profession, dropped out of the top ten. 

With the exception of PwC, the Big Four enjoyed strong growth rates in 2018.  The Big Four grew 8% in 2018, while local firms (including those affiliated with international networks grew at a slower pace of 6.1%. While the Big Four grew faster until the global financial crisis, local firms then enjoyed faster growth rates until 2016, when the Big Four once again began growing faster. 

Overall, the revenue of the Top 100 Chinese CPA firms (including the Big Four) grew at 6.7% - equal to the growth in GDP in China for 2018. Revenue of CPA firms has been growing faster than GDP for many years indicating continued investment by China into accounting. While it is expected that the revenue growth of firms would eventually fall in line with GDP growth, it is happening faster than I expected and I find it troubling. 

I ascribe part of the reason for the weaker performance by local firms to enhanced regulation of these firms. The two largest local firms (BDO and Ruihua - Crowe Horwath) faced debiliating suspensions from practice last year for quality issues. Ruihua is currently under investigation and that has led many of its clients to suspend fund raising efforts. I wonder if Ruihua will be with us much longer.  The Big Four have a small share of audits on local stock exchanges. It appears to be audits of locally listed companies that get the most attention by regulators, which means that local auditor are more likely to get into regulatory problems since the larger local firms audit thousands of these companies. 

China had a policy to promote the development of local CPA firms, but it no longer seems to be on that path. The first indication was mandatory audit rotation on companies with state ownership. The first large scale rotation was in 2012 and somewhat surprisingly nearly all of these companies simply moved from one Big Four firm to another, albeit with significant fee reductions. The government strongly encouraged companies to select a non-Big Four auditor, but they were largely ignored. The next round of audit rotation takes place in 2020, and if local firms do not win some of the large state-owned enterprises I think the Big Four will be cemented into these slots. 2020 is shaping up to be one of the most significant years in the development of the CPA profession in China.  If the Big Four can retain the large state controlled enterprises in the 2020 audit rotations they are likely to retain a strong market position for the foreseable future. 

The Big Four have over 27,000 employees in China, led by PwC at 9,460 out of 250,000 PwC employeees worldwide. Overall, there are 120,604 people working for accounting firms in China. 

Big Four firms do not release information on profitability.  But since payroll is the largest expense for accounting firms, a good measure is revenue per employee. As expected, the Big Four have significantly higher revenue per employee than local firms, with a notable exception of PwC. PwC has revenue per employee of RMB 540,635 compared to an average of RMB 652,390 for the other Big Four.  This suggests PwC is likely less profitable than the other firms and is potentially overstaffed. 

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