What does the trade war mean for accounting? | China Accounting Blog | Paul Gillis

What does the trade war mean for accounting?

Donald Trump has declared a trade war against China by threatening higher import tariffs on $153 billion of Chinese exports. China has said it is only polite to reciprocate.

Services are not subject to import duties, but China has shown no qualms about punishing foreign business for the sins of their government. The Big Four are technically not American companies. The operations in China are not subsidiaries, but more like franchises owned and operated mostly by local Chinese. But they are generally viewed as American and may face regulatory crackdowns and may see an acceleration of the process of transferring major accounts to local CPA firms. Some smaller US CPA firms operate in China in ways that are technically illegal under Chinese law and would be easy to crack down on.

It would be easy for the Chinese to crack down on the Big Four. They simply need to strictly enforce their own rules. Few audits can survive a critical examination by regulators, evidenced by the high rate of audit deficiencies identified during inspections by the Public Accounting Oversight Board (PCAOB) of domestic firms. Earlier this year China temporarily banned several local firms for audit deficiencies. The Big Four had best watch their back.

The Big Four will likely also suffer from a decline in business serving US multinationals. All multinationals must carefully reexamine their global supply chains and some of the China business is going elsewhere even if this spat is settled. Even if this dispute is settled, it has highlighted the risk of overreliance on the Chinese market.

The US is in a good position to retaliate.There has been a long simmering dispute over the ability of the Public Company Accounting Board to inspect Chinese accounting firms, including the Chinese members of the Big Four. The PCAOB has been unwilling to go to the mat over this issue and their behavior is the kind of appeasement that Trump has accused prior administrations of conducting. Strict enforcement of US laws would lead to the deregistration of Chinese accounting firms registered with the PCAOB and the consequential delisting of Chinese companies from US capital markets. Like Trump’s trade war, that would hurt Chinese accounting firms (mostly the Chinese member firms of the Big Four), but also US investment banks, stock exchanges and law firms that benefit from US listings. Those listings would inevitably move to Hong Kong.

Buckle your seatbelts.

Copyright 2020 Paul L. Gillis all rights reserved