Big four accounting firms: winning again in China - Paul Gillis

Paul Gillis

The Chinese government has tried to promote local CPA's on the expense of the Big Four, but - says  Beida accounting professor Paul Gillis - the 2018 top-10 CPA ranking shows the Big Four are back winning market shares, with PwC, Deloitte and E&Y in the top three, he writes at his Chinaaccountingblog.

Paul Gillis:

China had a policy to promote the development of local CPA firms, but it no longer seems to be on that path. The first indication was mandatory audit rotation on companies with state ownership. The first large scale rotation was in 2012 and somewhat surprisingly nearly all of these companies simply moved from one Big Four firm to another, albeit with significant fee reductions. The government strongly encouraged companies to select a non-Big Four auditor, but they were largely ignored. The next round of audit rotation takes place in 2020, and if local firms do not win some of the large state-owned enterprises I think the Big Four will be cemented into these slots. 2020 is shaping up to be one of the most significant years in the development of the CPA profession in China.  If the Big Four can retain the large state controlled enterprises in the 2020 audit rotations they are likely to retain a strong market position for the foreseable future. 

The Big Four have over 27,000 employees in China, led by PwC at 9,460 out of 250,000 PwC employeees worldwide. Overall, there are 120,604 people working for accounting firms in China. 

Big Four firms do not release information on profitability.  But since payroll is the largest expense for accounting firms, a good measure is revenue per employee. As expected, the Big Four have significantly higher revenue per employee than local firms, with a notable exception of PwC. PwC has revenue per employee of RMB 540,635 compared to an average of RMB 652,390 for the other Big Four.  This suggests PwC is likely less profitable than the other firms and is potentially overstaffed.

More (including the 2018 ranking) in the Chinaaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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The big four are back in China - Paul Gillis

Paul Gillis

The big four accounting companies - KPMG, EY, PwC, and Deloitte - are back in China, writes Beida accounting professor Paul Gillis at his website ChinaAccountingBlog. The method of counting market share has changed, but Gillis sees around 20% growth, he says.

Paul Gillis:

The rankings have changed quite a bit. The last two years have been very good for the Big Four, which have grown 20% while local firms experienced a minor decline in revenue of less than 1%. The Big Four share of the Top 100 market has grown from 27% to 34%, a remarkable reversal of the market share declines of earlier years. 

I believe that the poor performance of local firms can be explained by regulatory actions. Early in 2017 Chinese regulators shut down two of the largest local firms for several months due to audit failures.  Ruihua, which was ranked second in 2015 and which I thought might climb over PwC to first place, experienced a revenue decline of 29%. BDO, ranked third in 2015, slide to fourth with anemic revenue growth of 5%. While I support strict audit regulation, I fear that the Chinese system is unfair to large local firms that audit thousands of listed companies. 

For the first time, the CICPA has disclosed the split between audit and non audit revenues at the firms. The Big Four earn 84% of their revenue from audit while local firms earn 86%. Those ratios are much higher than accounting firms in other countries. The measures of market concentration reveal an Herfindahl-Hirschman Index of 498, higher than the two years ago measure of 444, but well below the 1500 typical of Western economies.

More at the ChinaAccountingBlog.

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Can a trade war hit the Big Four? - Paul Gillis

Paul Gillis

Import duties - increased during a trade war - focus on goods, not services. Nevertheless, the Big Four accounting firms can still suffer from a trade war, writes Beida accounting professor Paul Gillis on his weblog. But those subtleties might not be spent on China when they are drawn into a full-scale trade war.

Paul Gillis:

Services are not subject to import duties, but China has shown no qualms about punishing foreign business for the sins of their government. The Big Four are technically not American companies. The operations in China are not subsidiaries, but more like franchises owned and operated mostly by local Chinese. But they are generally viewed as American and may face regulatory crackdowns and may see an acceleration of the process of transferring major accounts to local CPA firms. Some smaller US CPA firms operate in China in ways that are technically illegal under Chinese law and would be easy to crack down on. 

It would be easy for the Chinese to crack down on the Big Four. They simply need to strictly enforce their own rules. Few audits can survive a critical examination by regulators, evidenced by the high rate of audit deficiencies identified during inspections by the Public Accounting Oversight Board (PCAOB) of domestic firms. Earlier this year China temporarily banned several local firms for audit deficiencies. 

The Big Four had best watch their back. The Big Four will likely also suffer from a decline in business serving US multinationals. All multinationals must carefully reexamine their global supply chains and some of the China business is going elsewhere even if this spat is settled. Even if this dispute is settled, it has highlighted the risk of overreliance on the Chinese market.

More at the Chinaaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form. 

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.

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Big Four: hit by financial crisis and domestic competition - Paul Gillis

Paul Gillis

Accounting professor Paul Gillis dives further into the demise of the Big Four accounting firms in China, at his weblog. After a successful entry into the China market, both the financial crisis and domestic competition wiped away whatever advantage they had.

Paul Gillis:

This chart tells the story. It shows growth rates of the Big Four compared to local Chinese CPA firms over the past dozen years. The Big Four were growing at a spectacular rate in the early 2000s, with growth peaking at an astonishing 57.4% in 2004, driven by high levels of overseas IPOs by Chinese companies and huge foreign investment in China by multinational corporations. Local CPA firms were growing well, but at a pace behind the Big Four. 

That all changed with the global financial crisis. The Big Four suffered negative growth of 12.1% in 2008, while local firms kept growing at 26.5%. The Big Four returned to growth in 2009, but have lagged local firms ever since. The main reason, from what I can tell, is that Chinese companies shifted from looking overseas for capital to domestic markets that provided higher valuations. The problem for the Big Four is that they have failed to present a compelling case for why they should audit companies listed on Chinese stock exchanges, and nearly all of that work is done by local firms. 

Two local firms that belong to international networks were the 2nd and 3rd largest firms in China in 2015. I expect that earlier this year Ruihua, a Chinese CPA firm affiliated with both Crowe Horwath and RSM, overtook PwC to take the No. 1 slot in China. Ruihua and the Chinese affiliate of BDO had already overtaken the other three members of the Big Four.

More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.

Expected: crackdown on smaller CPA firms - Paul Gillis

Paul Gillis

 New rules apply to foreign CPA firms in China since July 1, and will rely on the cooperation of China´s regulators. The big four might not have much trouble, writes accounting professor Paul Gillis at his website. But the smaller foreign CPA firms might be heading for a hard time.

Paul Gillis:

I believe the real crackdown to come is over the US listed Chinese companies that are audited by small US based accounting firms. Most of these companies came to market through reverse mergers and trade thinly, if at all, on over-the-counter boards. These companies have had a high incidence of fraud and have embarrassed Chinese regulators who have no authority over them. After the NYSE and NASDAQ cracked down on reverse mergers by requiring a seasoning period before listing, the reverse merger market for Chinese companies in the U.S. died, replaced by China’s National Equities Exchange and Quotations(NEEQ – China’s third board). NEEQ has listed over 2,000 small Chinese companies with an average market cap of under $75 million.

Those US CPA firms with a significant client base in China are going to have more serious problems complying with these rules. Some of these firms have set up consulting practices in the form of wholly foreign owned enterprises (WFOEs) that do the audit work on the mainland. Such WOFEs are clearly violating Chinese law by doing auditing, and since most have not registered with the PCAOB, they are also violating US laws. Regulators have looked the other way, until now, perhaps. 

The audit committee of any firm audited by an overseas CPA firms should seek written assurance from its auditor that it will be able to comply with the new rules. The SEC should demand that companies disclose the material risk that the auditor may be unable to complete the audit if the auditor is not in compliance with the new rules. The Big Four all have significant mainland affiliates and should not face any difficulties in complying with the new rules.

More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

Why some US CPA firms might lose their China market - Paul Gillis

Paul Gillis

On July 1, 2015 news rules on CPA practices by the Ministry of Finance will get in place. While the Big Four won´t have a lot of problems, Beida accounting professor Paul Gillis expects that the smaller CPA firms from the US might lose their work on the China market, he writes on his weblog.

Paul Gillis:

The new rules take effect on July 1, 2015. They will require foreign CPA firms that audit overseas listed Chinese companies to cooperate with a Chinese CPA firm that has at least 25 CPAs. An exception exists for companies with Hong Kong, Macau or Taiwan auditors that have more than 50% of the shares held be persons in those provinces that will be allowed to continue present arrangements. I think few public companies will qualify for the exception. 

I believe these rules were directed at the small US CPA firms that audit Chinese firms that mostly came to market through reverse mergers. Most of these firms clients trade thinly, if at all, on the OTCBB or Pink Sheets. Chinese regulators have expressed frustration that Chinese auditors have been tarred with the poor performance by some of these firms in detecting fraud. Many of the companies that use small US CPA firms are likely to have difficulty getting audits done under the new regulations. The auditor will have to align with a Chinese CPA firm yet still do enough work to be considered the principal auditor. The PCAOB has punished firms that outsourced the entire audit to a local firm. In any event, the economics of the business have changed, since the CPA firms are now going to have to share fees with a local firm. This may be the final straw that leads some of these firms to abandon the market.

More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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Expected: Deal between China and US regulators on Big Four - Paul Gillis

+Paul Gillis 

The stand-off between financial regulars in the US and China, and the Big Four accounting firms might be over soon, expects accounting professor Paul Gillis, looking a a recent piece in the Wall Street Journal. Inculding a US$500,000 settlement fee for each of the four, he writes on his weblog.

Paul Gillis.

I suspect that a deal is imminent between the US and China over audit and securities regulation. Given China’s recent proposal to clean up the VIE structure, I think China has decided it wants access to US capital markets and has decided to cooperate with US regulators and remove obstacles to US listings. Consequentially, I expect we will see a deal between Chinese regulators and the SEC and PCAOB before the settlement with the Big Four is finalized. US regulators would be foolish to let the Big Four off the hook before they get such a deal. 

The penalty of $500,000 to each of the Big Four also makes no sense to me. If you accept the firm’s arguments that they were caught between a rock and a hard place when deciding whether to break either Chinese or US law, then no penalty would be appropriate. If you buy the judge’s argument that if the firms had found themselves in such a place because it was their own decisions (to accept clients when they knew that they might be breaking US law) that put them there, then the penalties need to be much larger. Penalties of $500,000 neither punish the firms nor deter bad behavior in such a lucrative market. On the other hand I believe the PCAOB shares some of the blame, since it should never have registered these firms to audit U.S. listed companies when the firms said they might not be able to comply with all aspects of US law. 

Settlement of the regulatory problems and a fix to the VIE structure will go a long way towards removing some of the three terrors associated with US listed Chinese companies. If only someone can find a way to stop accounting fraud.

More at the China AccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you interested in earlier stories by Paul Gillis? Check out this list.

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Big four lose in ranking on China - Paul Gillis

+Paul Gillis 

The trouble the big four accounting firms are having in China is hurting both turnover and their rankings, accounting professor Paul Gillis from Peking University writes on his weblog. "The Big Four had better find their game soon."

Paul Gillis:

The CICPA has issued their annual rankings of Chinese CPA firms for 2013. It is bad news for the Big Four. BDO’s Chinese affiliate Lixin jumped over both KPMG and EY to kick EY out of the Big Four in China. RSM and Crowe Horwath’s shared affiliate Ruihua pushed KPMG out when it passed both EY and KPMG last year. PwC continues to be the largest CPA firm in China, extending its lead over Deloitte. PwC’s growth was a modest 4%, while Deloitte actually shrunk by 5%.

Here are the top ten CPA firms in China in 2013:

...The future does not look bright for the Big Four in China. I expect capital markets to continue to migrate to the Chinese stock exchanges, meaning fewer U.S. and Hong Kong IPOs that the Big Four historically dominate. Other than dual listed companies, the Big Four have a nearly insignificant market share of domestically listed companies. Multinationals, which the Big Four dominate, are also taking a beating in China, likely making it harder for the Big Four to make up the difference from their core international clients. The Big Four had better find their game soon. If the trends of the past five years continue, China may be the place where the Big Four are beaten by the second tier.

More on the China Accounting Blog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you interested in more financial experts at the China Speakers Bureau. Do have a look at this recent list.

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Big Four China trouble needs diplomatic steps - Paul Gillis

+Paul Gillis 

The ongoing dispute where the China units of the Big Four accounting firms are banned from auditing US-listed companies, might drag into next year, fears accounting expert Paul Gillis, missing the fillings for April 2015. He pleads for a negotiated solution, but is not hopeful China and the US can work out a deal.

Paul Gillis:

Relationships between the U.S. and China have been cooling, partly because of issues related to China’s neighbors. But the U.S. action to charge five Chinese soldiers with hacking into U.S. computers this week is certainly not going to warm things up. But perhaps both sides will be looking for an issue to cooperate on, and maybe that will be accounting regulation.

But how much room does the United States have to negotiate? China wants the U.S. to accept a concept known as regulatory equivalence. China has that deal on accounting regulation with the European Union. If a Chinese regulator like the MOF or CSRC regulates a Chinese accounting firm, EU accounting regulators are to accept that work as if it were their own work. U.S. laws generally do not provide for U.S. regulators outsourcing their responsibilities to foreign regulators. Amendments to Sarbanes Oxley allow greater exchange of information with foreign regulators, but do not go so far as to allow U.S. regulators to outsource their responsibilities to foreign governments.  Conservatives who already panic when a American judge reads a foreign legal opinion for ideas to solving a U.S. case are unlikely to agree to change the rules to accommodate regulatory equivalency. There is also the question of focus and expertise. Would a Chinese regulator have the skills to determine whether accounts were prepared under U.S. GAAP and audited under PCAOB auditing standards? Would they even have any interest in looking into U.S. listed Chinese companies? History indicates they will not. No Chinese company or executive has been charged with a Chinese crime related to the many heists that have taken place in U.S. listed Chinese companies, even when Chinese laws have clearly been broken.

I am becoming increasingly pessimistic about a positive outcome.

More at Paul Gillis´ ChinaAccountingBlog.

Beida professor Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for other financial experts on China? Do check our updated list here.   

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Accounting firms show stiff growth - Paul Gillis

+Paul Gillis 

Accounting is one of the industries that almost had to start from scratch, as China started to open up economically in the 1980s. But a annual growth of 22% shows that China keeps on investing in account, writes financial analyst Paul Gillis at his weblog.

Paul Gillis:

(What the figures show)  is that over the last ten years, revenue of accounting firms in China has grown at an average annual rate of 22%. Big Four and local firms have grown at the same average rate, but their annual performance varies quite widely. GDP growth during this period averaged 10%, meaning that the invest-ment in accounting services was more than double the GDP growth. That is great news. Not only has investment in accounting kept up with the growth in the economy, there has been additional “catch-up” investment. Clearly, the catch-up investment is needed and it probably needs to continue for another decade at least. 

The difference between Big Four and local firm growth rates is telling. Big Four firms had a higher growth rate than local firms until 2009, when the financial crisis hit. The Big Four actually shrunk by 12% in 2009. Local firms also slowed down in 2009 but still grew at 24%. The Big Four returned to growth in 2010, but have not been able to match GDP growth since. I think that is the future for these firms in China. The Big Four will struggle to find growth equal to GDP growth, while local firms will grow faster. 

But I see a continued investment in accounting, and that is good.

More at the China Accounting Blog.

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The Big Four in China - Paul Gillis

Paul Gillis

The academic book The Big Four and the Development of the Accounting Profession in China  by professor Paul Gillis of Peking University is available at his publisher or at Amazon. Paul Gillis is a thought leader on his profession in China and available as a speaker.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and interested in talking to one of our speakers? Do drop us a line.

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