China Inc. Takes on Big Four Audit Firms

It appears that China, Inc. the growing economic juggernaut is turning its focus on the Big Four Accounting firms. The Big Four - Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers have each around 4,500 staff and looking to add an additional 20% . But the country, which has one of the largest GDP growth rates in the world and fast becoming an economic superpower with a formidable industrial base wants to promote its own local accounting firms to enter an industry hitherto the domain of the Big Four. Chinese companies are now wholly dependent on non-Chinese firms to get audits done so that they can get capital and list abroad. These so called "national champions" are "encouraged" to gain business from other local businesses but these are not pressured to give business to local firms. The intent is to reduce dependence on foreign accouting firms. According to a Chinese official, "As Chinese companies list abroad, we also hope the audit firms can go global too." "After all, the entry of foreign companies into China happened alongside the introduction of foreign audit firms here." But this appears to be a long shot, accounting firms and tradition and integrity and investor confidence are built up over decades. Consider that the second-tier firms like Grant Thornton and McGladrey Pullen in the US even have a hard time becoming a Big Four firm. Chinese accounting firms generally have low experience of global accounting rules and audit procedures or disclosure requirements. But the Chinese government is not to be underestimated. In industry after industry, toys, shoemaking, steel, chemicals, automotive, electronics, software they have determinedly penetrated and gained global prominence. Accounting is a regulated industry and the local business situation has a large impact on Big Four fortunes. With the might of the government and support of local officialdom, Chinese accounting firms can quickly arm up and start getting larger sized accounts. The 5,600 or so accounting firms, which include around 70 that are authorised to audit listed companies, could consolidate to produce some large, deep firms with decent depth to challenge the Big Four. Recently Bank of China, which was audited by PricewaterhouseCoopers, went public and the IPO was well received globally. Some of the investor confidence is certainly due to a clean audit opinion by the largest accounting firm in the world. Could investors have felt so comfortable with an audit by a not-so-well-known auditing firm. History shows that this is not the case. Brand does add value and comfort. The Big Four firms are of course highly sensitive to Chinese government needs, consider that Ernst & Young held back a report on the level of bad debt at China's top banks, which we covered in a recent blog. The Big Four need to keep watch in their rear view mirrors for local competitors. Now they all seem far away, but one could sneak into a blind spot close behind and then zoom ahead. Article provided by www.big4.com