"Big Four" auditors brace for big changes in China

Tue Feb 28, 2012 12:15am EST
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By Rachel Armstrong

(Reuters) - The Big Four global audit firms, which dominate the Chinese market, are negotiating with Beijing to lessen the impact of forced changes that could mean only accountants with Chinese qualifications can be partners in their audit practices.

The overhaul comes at a delicate time for an audit industry reeling from a rash of accounting scandals at Chinese companies, particularly those listed in high-profile overseas markets such as the United States.

Any reduction in the audit capacity of KPMG, Deloitte Touche Tohmatsu, Ernst & Young and PricewaterhouseCoopers (PWC) would increase foreign regulators' and investors' concerns about Chinese auditing.

"The Big Four play a critical role in the integrity of financial markets, it's essential they have the right to practice in China," said Paul Gillis, visiting professor of accounting at Peking University and author of the China Accounting Blog.

The foreign joint venture arrangements signed in China 20 years ago by KPMG, Deloitte and Ernst & Young expire later this year. PWC's joint venture expires in 2017, but it is also involved in restructuring discussions.

China's Ministry of Finance (MOF) is using the expiry milestone to force the global auditing giants to form special group partnerships, which in theory would mean all partners would need to hold notoriously tough Chinese accountancy qualifications.

But China's young accounting industry means there aren't yet enough experienced Chinese-qualified accountants to run these businesses, say people close to the Big Four, who did not want to be identified as they are not authorized to talk to the media.

"The Chinese authorities have indicated for some time that the four will have to convert into the same mode of practice as local firms when the joint venture terms end," said Winnie Cheung, chief executive at the Hong Kong Institute of Certified Public Accountants (HKICPA).   Continued...