The office of KPMG in Shenyang, the capital city of Northeast China's Liaoning province. A joint-venture agreement that KPMG entered into 20 years ago when it entered the Chinese market expires next month. Nan Shan / for China Daily

Global accountancy firms face stiff competition from local players to maintain market share in China

Global accountancy firms may find the going tough in China, as recent localization rules aim to establish a level-playing field for domestic firms and end the dominance of the "Big Four" companies in the sector, analysts say.

In May, China told the joint ventures of the Big Four accounting firms - KPMG, Deloitte Touche Tohmatsu, Ernst & Young and PricewaterhouseCoopers - that they must further localize their operations and appoint Chinese citizens to head their operations in China.

"The regulation will change the domination of the market," says James Lee, regional director for the Institute of Chartered Accountants in England and Wales. "If the Big Four are quick enough to adapt the new model of doing business and reinvest themselves, they can retain/improve their market share. If they do not change their style of operations, the domestic accounting firms will soon catch up with them and even outpace them as the new order gives them opportunities to grow stronger and bigger."

Zhang Lianqi, a senior partner with RSM China, the first domestic accounting firm to achieve annual revenues of more than 1 billion yuan ($157 million, 128 million euros), says the Big Four have always enjoyed favored treatment in China. The localization reform has put an end to such favoritism, he says.

"It (the reform) will bring greater balance to the market and boost auditor independence and audit quality," Zhang says. "After the transformation, the shift is likely to have far-reaching implications on China's audit market landscape."

Zhang's comments come close on the heels of the Ministry of Finance giving the green light to KPMG to restructure itself as a special general partnership enterprise from a Sino-foreign cooperative joint venture under contract with a registered capital of 10 million yuan.

Under the new rules, the Big Four are required to cap the foreign-qualified staff in their China operations at 40 percent by August this year and to 20 percent by 2017.

The new guidelines also stipulate that the chief partner - or the top decision-maker - has to be a Chinese citizen with certified public accountant qualifications. At the moment, none of the Big Four meets this requirement. The senior partners also have a three-year grace period to get the required qualifications.

Ernest & Young is the next candidate among the Big Four that is likely to restructure its operations in China, said a recent announcement from the Finance Ministry.

The deadlines in the new regulation have been fixed based on the date on which the current 20-year joint venture agreement expires. All the four accounting firms entered the Chinese market in 1992. The agreements signed by KPMG, Deloitte and Ernst & Young expire in August, while PwC's joint venture expires in 2017.

The announcement has also raised concerns about China squeezing out foreign partners through its tough CICPA, or Chinese Institute of Certified Public Accountants, qualifications exam and compromising the audit quality of the Big Four firms as local accounting professionals may not have the required expertise to conduct high quality audits for complex clients.

"The program is in line with international practice and will not bring down the quality of their services," says Yang Min, director of the accounting department at the Finance Ministry.

"China has not forced the foreign partners in the Big Four firms to quit, as we have listened to both domestic and foreign partners. The program will be a thorough and proper plan for their transition period," Yang told Xinhua News Agency.

Experts say China is still the only market where foreign partners control the practice, whereas local partners head the operations in other regions.

David Wu, lead partner, China Public Policy and Regulatory Affairs at PwC China, feels that the new accountancy business model will usher in a disciplined audit market. He dismissed suggestions that the rules will "close the doors for the Big Four firms in China" or "bring disadvantages to accounting firms during the transition process".

"This is a conversion to a new legal format and the Big Four firms will now be treated on par with local accounting firms. So all the companies more or less operate under the same legal structure," Wu says.

"Under the new dispensation it will mean more pressure on those who are signing off the accounts and carrying out due diligence to fulfill their audit responsibilities."

He says PwC China has not yet to decide whether it will apply for a new license before 2018.

The Big Four accounting firms used to be the first choice for Chinese companies that were planning to raise funds in the overseas markets because of their in-house expertise.

But all that has changed as domestic firms have enhanced their ability to compete with their global peers by hiring top talent from the international firms.

The Big Four dominate the audit industry with 25 branches in China, and did a lion's share of the auditing work for State-owned enterprises when many of them were listed.

Apart from their consultancy businesses, the Big Four earned a revenue of more than 9.5 billion yuan in 2011 from their audit operations. However, their market share slipped to 25.7 percent in 2011 from a peak of 33.5 percent in 2008, according to CICPA.

Zhang from RSM China believes that there is very little gap between the local firms and the Big Four firms in competency, scale and professional accountants.

"The only thing that the Chinese accounting firms can't compete on with the Big Four is the brand image," Zhang says. "The brand name still counts a lot when dealing with overseas floats or in international business operations. But the domestic companies are now trying to promote their brands by expanding their business globally."

He says the recent merger of RSM China with another top-10 Chinese accountancy firm, Guofu Haohua, part of the US Crowe Horwatch network, will create a company bigger than two of the current Big Four firms in China.

At the same time, a number of recent Chinese accounting scandals have also put the Big Four on alert and sparked worries that their reputation could be ruined.

"The Big Four do need to do some soul searching in terms of how to effectively conduct their audits in emerging market economies like China," says Bin Ke, professor of accounting at the Singapore-based Nanyang Technological University. "I expect the Big Four firms to be more vigilant in their audit work due to the publicity of these recent scandals. This also explains the market share decline of the Big Four firms in China from 2008 to 2011."

Wang Xiuli, professor of accounting at the Business School of the University of International Business and Economics in Beijing, says the halo of the Big Four firms is fast slipping.

"Many of my students used to prefer to work for the Big Four companies because of their international expertise and good pay. But that preference seems to be narrowing as the domestic companies are now more or less on the same footing."

luchang@chinadaily.com.cn

(China Daily 07/20/2012 page3)