China moves to local control of foreign auditors

China aims at localising the mainland operations of foreign auditing firms, including the "Big Four."

Story highlights

  • Foreign auditing firms will have to appoint a Chinese national as their chief partner in China
  • The regulations aim at localising mainland operations of foreign auditing firms and limiting controversy
  • Over the past years, China saw fraud allegations against Chinese companies listed in overseas markets
Foreign auditing firms will have to appoint a Chinese national as their chief partner in China as part of a sweeping overhaul of the country's accounting industry.
The regulations, unveiled on Thursday, are aimed at localising the mainland operations of foreign auditing firms, but they also provide for a lengthy transition period and wiggle room to limit controversy over the changes.
Chinese auditing standards have come under fire over the past year after a number of fraud allegations against Chinese companies listed in overseas markets. The restructuring of the China operations of foreign auditing firms, including the "Big Four", threatened to fuel concerns by forcing them to replace all of their foreign partners with Chinese partners.
Beijing has tried to allay such fears, however, by giving foreign groups time to adjust. Up to 40 per cent of their partners in China will be allowed to continue operating without Chinese qualifications this year, the finance ministry said. That cap will then be reduced to 20 per cent by the end of 2017.
"They have made huge concessions here to try to have a smooth transition," said Paul Gillis, a professor of accounting at Peking University.
The Chinese joint venture agreements of the four biggest accounting firms -- Deloitte, Ernst & Young, KPMG and PwC -- start to expire this year and Beijing could have imposed the rule changes as soon as they come up for renewal.
"The normal situation in the world is that accounting firms must be owned by locally qualified accountants. That is the case in most countries in the world. China is actually being more open to non-qualified foreigners participating in their practices," Mr Gillis said.
Nevertheless, the restructuring will pose a challenge for foreign firms. Given how young the auditing industry is in China, they have few local employees who are ready to be senior partners.
The restructuring announcement comes a few days after US officials said that China was considering a compromise on another contentious issue: joint US-China audit inspections.
After the rash of accounting scandals at Chinese firms, the US government had asked Beijing to open its doors to the US body that oversees the auditors of publicly listed companies.
James Doty, chairman of the US Public Company Accounting Oversight Board, said last week that China might agree to allow it to observe the audits of Chinese companies listed in the US.
In a reminder of the concerns surrounding the Chinese industry, the US Securities and Exchange Commission said on Wednesday that it was investigating a client of the Chinese arm of Deloitte on suspicion of accounting fraud.
The SEC also filed an administrative action against Deloitte for failing to provide audit documents related to the company -- something which Chinese regulators have barred it from doing.