China orders "Big Four" auditors to restructure

Thu May 10, 2012 12:53am EDT
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By Koh Gui Qing and Rachel Armstrong

BEIJING (Reuters) - The world's top four accounting firms will have to bring in Chinese citizens to run their operations in China and end the dominance of foreign partners under new rules announced by the Finance Ministry on Thursday.

The Big Four auditors - Deloitte Touche Tohmatsu, Pricewaterhousecoopers, Ernst & Young and KPMG - must start to convert their practices this August and comply with all the new rules by the end of 2017.

The rules require them to "localise" their operations so that they are led by Chinese citizens and dominated by accountants holding China's accountancy qualifications.

The changes come at a difficult time for the Big Four, grappling with the fall-out from a string of accounting scandals at Chinese companies listed in the U.S. that has left investors questioning the quality of auditing in China.

On Wednesday, U.S. securities regulators charged Deloitte's China practice for refusing to provide audit work papers related to a U.S-listed Chinese company under investigation for accounting fraud.

The new rules will force the proportion of foreign partners at the Big Four to be a maximum of 40 percent when the structure is adopted in August this year, and fall to under 20 percent by 2017.

This is likely to come as a relief to the firms, as there had been concerns that China could force them to convert more quickly to Chinese-dominated practices.

"This is an excellent compromise China is providing for a transition for the transfer of power from the expatriate partners to the local partners," said Paul Gillis, Professor of Accounting at Peking University and author of the China Accounting Blog.   Continued...