The Chinese government has issued new rules that would require the Big Four auditing firms in China to hire more Chinese citizens as partners.
Under the new order from China’s Ministry of Finance on Thursday, by August no more than 40 percent of partners at the four major audit firms would be allowed to be foreign-certified, and by 2017 the cap would be lowered to 20 percent. All senior partners by that time would need to be Chinese nationals.
Those rules would be a major change for the Big Four. Currently most of the senior partners at the firms are foreign-born, and only about 30 percent are locally certified, according to the Los Angeles Times. The Big Four currently employ approximately 10,000 people in mainland China, Taiwan and Hong Kong, dominating the industry there, and their audit practices earn a combined revenue of around $1.5 billion, according to Reuters. The firms contend they have been steadily localizing their practices, but the new order from the Chinese government would certainly force them to accelerate their hiring plans, while quickly increasing the number of Chinese nationals who become partners.
The new rules come at a time of heightened activity between U.S. and Chinese audit regulators. The Public Company Accounting Oversight Board has been pushing for access to inspect accounting firms in China that audit the books of U.S.-listed companies amid allegations of accounting irregularities. PCAOB chairman James Doty recently visited China with a U.S. delegation and reported that the talks with the Ministry of Finance and the China Securities Regulatory Commission have been making progress (see PCAOB Sees Progress in China Talks). He told The New York Times he expects to have an arrangement for mutual inspections by U.S. and Chinese officials by the end of the year.
Meanwhile, the Securities and Exchange Commission has been pressuring the Chinese affiliates of U.S.-based auditing firms to provide access to their audit work papers, even if it would violate Chinese laws. On Wednesday, the SEC filed charges against Deloitte’s member firm in Shanghai, accusing the firm of violating U.S. securities laws by refusing to produce audit work paper documents (see SEC Charges Deloitte with Refusing to Produce China Work Papers). Deloitte has argued that “accounting firms in China are not permitted to produce documents directly to any foreign regulator without Chinese government approval.”
The Chinese government clearly does not approve of U.S. domination of its auditing industry.