The Kennedy bill has unintended consequences for MNC's - Paul Gillis

Paul Gillis

US legislators are preparing a law to allow US PCAOB inspectors to check US-listed Chinese firms. But - warns auditing expert Beida professor Paul Gillis - the so-called Kennedy law might have unintended consequences for all multinational companies, he writes on this Chinaaccountblog. 

Paul Gillis:

The bill essentially bans trading in companies whose auditors are not able to be inspected by the PCAOB. The bill is limited to covered issuers (essentially any public company) that are audited by an auditor with a branch or office in a foreign jurisdiction that does not allow inspections. 

Those definitions obviously bring most US listed Chinese companies under the jurisdiction of the Kennedy Bill. They are public companies and are mostly audited by the Chinese member firms of the Big Four accounting firms. 

But what about multinationals like IBM? IBM is audited by the US firm of PwC which uses PwC Zhong Tian CPAs, its China firm, to audit China operations.  PwC Zhong Tian is a Chinese limited liability partnership, not an office or branch of the US firm. The Big Four accounting firms are structured more like a franchise operation than an MNC.  Local operations tend to be owned by local partners.   On its face, I don’t think that Big Four firms in China constitute a branch or office of the US firm. This is not an insignificant point. The PCAOB has identified 207 multinationals where it can inspect some, but not all of the audit. 

I don’t think the Kennedy bill is intended to impact MNCs, and based on my analysis in the previous paragraph, I don’t think it does. However, Big Four firms would be wise to carefully review existing business operations to make sure the US firm has not inadvertently established a branch or office in China. I know many of the Big Four firms in China have seen firms in their network sneaking into China to do projects. There will be heightened concern over these activities out of fear they could be treated as a branch or office that would result in serious problems for their multinational clients, even where the activities of that branch or office had nothing to do with the audit.

More at the China Accounting Blog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your (virtual) 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 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.

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

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.  

What do auditors know about HNA? - Paul Gillis

Paul Gillis

Beida accounting professor Paul Gillis points at his weblog at the rumor Goldman Sachs has decided to suspend work on a HNA subsidiary IPO in the US, because they are unable to get enough information on this Chinese conglomerate. Gillis wonders what auditor PwC knows about their client.

Paul Gillis:

There is a shocking report that Goldman Sachs has suspended its work on HNA’s planned US IPO of subsidiary Pactera because it was unable to meet the bank’s internal “know your customer checks”.  HNA has been criticized for its opaque ownership structure, but it is surprising that Goldman Sachs could not get a look under the sheets. 

Bank of America Merrill Lynch, Citigroup and Morgan Stanley were reported earlier to have dropped HNA because of concerns over completing know your customer checks. 

HNA’s public companies are audited by PwC. This raises the question of how PwC is able to continue as auditor. Auditing standards require auditors to annually assess whether to continue a relationship with a client.

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 strategic 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.  

Related articles

• How FinTech Disruptors Are Rewriting The Rules
• The biggest IPO of the year is off to a disappointing start (ZTO)
• Swiss bank UBS in Hong Kong investigation for IPO work
• Risk management experts at the China Speakers Bureau (updated)