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.
"If the firms handle this responsibly, it allows them a period of time to further develop their local partners for senior management responsibilities," he added.
Tougher though, will be the requirement that each of the Big Four's senior partner be a Chinese citizen. All are currently led by foreigners.
None of the accounting firms immediately responded to requests for comment.
The foreign joint venture arrangements currently used by the Big Four were signed 20 years ago and allowed foreign-qualified accountants to dominate their China practices.
Since then, the firms have come to dominate the country's accounting industry, having won much of the lucrative work to audit the books of state-owned enterprises when they first listed.
In 2010, their audit practices, excluding their consultancy businesses, had combined revenue of more than 9.5 billion yuan ($1.5 billion), according to the Chinese Institute of CPAs (CICPA).
However, their market share has slipped in recent years to about 70 percent of the revenue among the top-10 auditors, down from 85 percent in 2006.
Including consulting, the four firms say they each employ around 10,000 people in mainland China, Hong Kong and Taiwan.
Singapore's accounting industry went through similar changes in the 1980s, as did Hong Kong's in the late 1990s. In those cases the local partners used their enhanced voting power to force out many foreign partners.
"I'm hoping China will have a smoother path than was seen before but human nature being what it is, I think that's unlikely," said Gillis.
Additional reporting by Beijing Newsroom and Dena Aubin in NEW YORK; Editing by Don Durfee and Jonathan Thatcher