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Why the Big Four Accounting Firms Face Big Trouble in China



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Thanks to disasters such as the Guptas in South Africa and Carillion in the UK, the Big Four accounting and audit firms – Deloitte, EY, KPMG, and PwC – are attracting intense scrutiny of late. In China, too, they are under pressure. Regulatory actions by American and Chinese regulators have highlighted critical tensions and vulnerabilities. The firms’ experiences in the world’s most populous country – and soon to be its biggest economy – shed much light on where they’ve been and where they’re heading. That experience is as long and perilous as it is tortuous.

The Chinese revolution of 1949 was a major setback for the firms. By 1962, China’s economy had been nationalized, and for the next eighteen years, the public accountancy profession essentially did not exist in the Middle Kingdom. In the 1980s, however, as China began to open its economy, foreign corporations were lured by the opportunity that the country appeared to offer. The then Big Eight were prohibited from auditing in China, but they were allowed to set up representative offices, through which they could advise the foreign-owned companies doing business there.

Much of the work was conducted in makeshift offices: cramped rooms of the Beijing Hotel or the Jianguo Hotel. The Big Eight was not allowed to employ staff directly, so Chinese government agencies employed and administered local staff for them. For many years, the accounting firms’ Chinese operations depended on well-connected fixers and crafty strategies to get around regulation. Unlicensed foreign partners largely escaped Chinese oversight but were not permitted to sign audit reports there. Having a Chinese partner sign for work done by an unlicensed partner was expedient, though problematic, solution.

After China joined the World Trade Organization in 2001, some of the rules covering the accounting firms were relaxed. The Chinese footprint of international firms grew. Local accountants referred to the incursion of the international firms as a “civilized invasion by gentlemen,” and engaging with them was ” dance with the wolves.” Cultural prejudices infused professional relationships, such as between mainlanders and people from Hong Kong, and between ethnic Chinese and British-born partners, who in Hong Kong were known as FILTH — as in, Failed in London? Try Hong Kong.

By 2006, China had largely adopted the International Financial Reporting Standards. In 2008 a representative of Deloitte said that mainland China needed 350,000 qualified accountants — fewer than the more than 600,000 CPAs in the US at the time, but many more than the 130,000 members of the Chinese Institute of Certified Public Accountants (CICPA). In China, there were more state-owned enterprises than qualified accountants. In a sign of just how much the world has changed, some of China’s largest state-owned enterprises have become Big Four clients.

Since the reopening of China’s economy, government agencies and state-owned enterprises have gobbled up patents and other intellectual property in areas as diverse as microwave ovens, rare earth elements, telecommunications, and solar power. The fields of accounting and auditing, too, were identified as potential areas for the gathering of IP. Chinese officials saw joint ventures with the Big Four as a means to pluck new technologies; until, that is, the officials spent some time with the foreign firms — and discovered there was very little technology for them to transfer.

In recent years, escalating economic and military tensions between the US and China have seen parallels in accounting and auditing. In 2007, the CICPA released its position paper, “Opinions on Promoting More Competitive and Bigger Chinese Accounting Firms,” establishing a plan to reduce the dominance of the foreign firms. At its center: developing ten new China-based accounting firms that could service Chinese companies around the world. The “Chinese Big 10” recommendation was accepted by the State Council, China’s highest executive body. It became government policy.

China took other steps, too, to assert its power over the accounting services market. In cases such as Longtop and Akai, Beijing made crystal-clear its position on the jurisdiction of non-Chinese regulators. According to China’s Securities Regulatory Commission, foreign regulators operating on Chinese soil would be “a breach of China’s sovereignty.” The prohibition on foreign regulators has included a ban on the Public Company Accounting Oversight Board (PCAOB) coming to China to inspect China-based auditors registered in the US.

Regulatory battles are one symptom of a fundamental question about the Big Four in China. Within a system of centralized state capitalism, how viable is a model of external, decentralized, professional scrutiny? Can the old professional services model survive in a world with different governance and very different boundaries between business and state? If it can’t, China is a looming disaster for the Big Four. The soon-to-be-largest economy in the world may well be the first place where the Big Four meet their match.

Stuart Kells’ book Penguin and the Lane Brothers won the 2015 Ashurst Australian Business Literature Prize. He was formerly Assistant Auditor-General of the state of Victoria, and a director at KPMG. He also worked at Deloitte, S.G. Warburg and PPB Advisory. He has a PhD in law from Monash University. He is the coauthor, with Ian D. Gow, of The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly (Berrett-Koehler, August 2018). Learn more at