Thursday, November 13, 2014

Limited reforms on auditing firms - Paul Gillis

Paul Gillis
+Paul Gillis 
China is officially loosening its rigid regulations, also for auditing companies, who might now be wholly foreign owned firms (WFOE´s) too. But accounting professor Paul Gillis believes the effects of this reform might be rather limited, to smaller CPA firms, he writes on his weblog.

Paul Gillis:
Noteworthy is the inclusion of accounting and auditing as an encouraged in-dustry. Auditors will now be allowed to conduct these services using wholly foreign owned enterprises (WFOEs). 
The Big Four currently conduct their auditing practices using limited liability partnerships that originally had 60% locally licensed partners and 40% un-licensed partners. The 40% reduces to 20% over the next few years, and I think it is at 35% for most of the firms right now. 
The Big Four conduct their consulting practices (including tax) in wholly foreign owned enterprises that are typically owned by their Hong Kong member firm. 
So, will this change result in the Big Four moving their auditing practices to WFOEs? I don’t think so. Under present Chinese rules, a partner in a CPA firm must be licensed as a CPA in China and I expect these rules will also apply to the shareholders of a WFOE. If ownership by unlicensed persons is allowed, then China has just opened the door wider than any other country on earth. Licensing requires the partner to pass the notoriously difficult Chinese CPA examination and meet other not so difficult requirements. The present rules, allowing a per-centage of owners to not have local licenses, is better for the Big Four than al-lowing them to have a WFOE. Additionally, an increasing number of Big Four partners are PRC citizens, and the WFOE alternative does not work for them. 
About the only situation where I see this being used is for a small foreign CPA firm made up of partners who have foreign citizenship and have passed the Chinese CPA examination. They could establish a WFOE and legitimately practice in China. I am not aware of any firm that meets those conditions.
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