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.

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 analysts at the China Speakers Bureau? Do check out this list.  

How KPMG Hong Kong got itself into serious problems - Paul Gillis

Paul Gillis

Beida accounting professor Paul Gillis describes on his weblog how auditor KPMG Hong Kong got itself into trouble for signing off papers on China Medical, a company convicted in 2012 for looting US$400 million from its investors. Problem: KPMG Hong Kong was not really in charge and now the Hong Kong legal system caught up with this omission.

Paul Gillis:

Matt Miller of Reuters has an interesting update on the troubles KPMG is having in Hong Kong with a failed US listed Chinese company. In my view the problems are of its own making. 

KPMG Hong Kong was the auditor of China Medical Technologies Inc., which failed after management was charged by the US Securities and Exchange Commission with looting over $400 million from the company. The company was put into liquidation in 2012 in the Cayman Islands, where it was incorporated. 

Actually, KPMG Hong Kong was not the auditor, and that is the problem. Several years ago I wrote about KPMG’s labeling problem where they had a practice of using Hong Kong letterhead to sign audit opinions on audits done by KPMG Huazhen, KPMG’s China affiliate. To me, this was like a Wenzhou shirt maker sewing a made in Italy tag on a shirt made in China.   ... 

KPMG Hong Kong is in a terrible place. They signed off on an audit without doing one. The Hong Kong Institute of CPAS (HKICPAs), regulator of Hong Kong accountants, should investigate this violation of auditing standards, but I think it is unlikely they will.  The HKICPAs is a feckless regulator and is unlikely to pursue a case against a Big Four firm, especially a case that relates to a company not listed in Hong Kong. There are legislative proposals to strengthen audit regulation in Hong Kong, but the proposals will likely have no effect on this case. 

KPMG was the most egregious at mislabeling their audit work, but all of the Big Four in Hong Kong have had this problem, which I believe came about because the firms failed to recognize the importance of respecting their legal structure. While the China member firms of the Big Four have generally been managed from Hong Kong since the early 2000s, they have always been separate legal entities.

More at the Chinaccountingblog.

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.  

KPMG partners sued over another US accounting spat - Paul Gillis

Paul Gillis

China and the US worked out a deal on the age-old argument where Chinese firm are not allowed to hand over paperwork to US institutions for audits. But the agreement is not valid for Hong Kong, and so close to a hundred current and former KPMG partners got sued over the case of the bankrupt US-listed China Medical, reports Beida accounting professor Paul Gillis last week at his weblog.

Paul Gillis:

It is a bad day for KPMG. Reuters reports that the Hong Kong High Court has issued a contempt summons to 91 current and former KPMG partners for their failure to hand over audit working papers for US listed China Medical. China Medical is in liquidation and the court apparently has been overseeing the liquidation of Hong Kong subsidiaries. The case is a repeat of an earlier spat with EY over working papers for Standard Water, which was resolved when EY “found” the working papers on a server in Hong Kong. 

KPMG says it cannot turn over the working papers without permission from mainland regulators. The US PCAOB reached an enforcement agreement with China that allowed it access to working papers in connection with investigations (but not inspections). Hong Kong has no such arrangements, and this is private litigation. 

China has argued national sovereignty and state secrets concerns trump foreign laws requiring the production of documents on Chinese companies listed abroad or doing business abroad. Hong Kong, while part of China, is being treated the same as the United States, presumably to avoid undermining arguments used against the U.S. I seriously doubt there are any state secrets in these working papers.

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.  

Big Four face rough market in China - Paul Gillis

Paul Gillis

Accounting professor Paul Gillis published on his weblog the annual top-10 accounting firms in China for 2015, based on audit revenue. PwC is still leading the pack, but might lose its no.1 position soon, and drop, like the other three foreign audit firms, losing ground to domestic competition, he predicts.

Paul Gillis:

There was a shakeup in the Top 10 firms. PwC remains #1, but is likely to fall to #2 Ruihua in 2016. Ruihua is a member firm of both RSM and Crowe Horwath. Deloitte slipped from #2 to #4, falling behind both Ruihua and BDO. Grant Thornton replaced UHY Vocation in the #10 slot with remarkable growth of 32.5%. 

The accounting market in China remains highly competitive. The Herfindahl Hirschman index of market concentration fell slightly from 446 to 444, well below the level of concentration in Western economies which tends to be above 1500. 

The Big Four face a challenging market in China. Overseas IPOs of Chinese companies have slowed, and that was a market that the Big Four owned. The Big Four has not found the key to unlock the A share market, which is dominated by local firms. The biggest challenge for the Big Four comes in 2020, when the next big round of mandatory audit rotation for large state owned enterprises occurs.  I think it is likely we will see some of the rapidly growing local firms winning audits of some of China's flagship companies. 

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 experts to manage your China risk at the China Speakers Bureau? Do check out this list.  

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Why China is not set to become an innovative country - Bill Dodson

Bill Dodson

A KPMG report on China's innovative strengths went viral an suggests the country's disruptive power will change the world. China veteran Bill Dodson advises on his weblog the researchers to have a closer look and disagrees with their optimistic take.

Bill Dodson:

Closer examination – that is, living and working in China – shows that most of the engineers that have graduated university have only the most abstract and theoretical notions of the subjects in which they’ve received their degrees due to the stultified education system; and that standardized testing in China does not reflect the degree to which test-takers are able to solve real-world problems with creative approaches in dynamic, heterogeneous conditions; and the companies setting up R&D centers are multinationals here to localize their product lines for the domestic markets and are loathe to expose their most precious IP to the Chinese elements. 

Further, most design engineers in China are insulated from the marketplace by their marketing and purchasing departments: marketing doesn’t wants to and still can play it safe while China’s consumer market grows; and purchasing is charged with ever greater pressure for “cost-down” from suppliers who theoretically are a great source of inspiration for new products and materials. 

Instead, with stalling domestic and international markets, companies are playing safe with innovation, making most of it incremental at best, revisionist at its most uninteresting. 

In other words, the statement that China has fostered an environment for disruptive technologies rather smacks of an accountancy that would like to be a consultancy to any of the businesses popping up in China with its new-found cash and the appeal of nearly 1.5 billion shoppers.

More at Bill Dodson's weblog.

Bill Dodson 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.

On Thursday we organize the next Google+ Hangout on China. When you are interested, you can pick one of our planned subjects, and register for our broadcast here. 

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