China announced new rules directed at the four largest foreign auditing
firms that will require local control over time in one of the fastest
growing markets for professional accounting services.
The new
regulations announced Thursday by the Ministry of Finance could crimp
the expansion of the so-called Big Four auditing firms -- Deloitte,
PricewaterhouseCoopers, Ernst & Young and KPMG -- which have hired
thousands of new employees in recent years to serve the growing number
of Chinese companies listing stocks domestically and overseas.
Under
the guidelines, the firms will first have to limit the number of
foreign-certified partners in China to no more than 40%. By 2017, that
cap will drop to 20% and all senior partners will have to be Chinese
nationals.
Only about 30% of the Big Four's partners in China are
currently locally certified, said Paul Gillis, a professor of
accounting at Peking University's Guanghua School of Management and a
former partner at PricewaterhouseCoopers.
Gillis said the time
frame represents something of a compromise considering China could have
demanded the changes take place this year. That's because three of the
four firms' joint venture contracts expire in 2012. The firms were
originally allowed to operate largely with foreign partners because
qualified local staff were scarce.
"I can't imagine the Big Four
are overjoyed, but I bet they're relieved," Gillis said of the new
rules. "What China is really doing here is adopting the global norm. If
you look at the Big Four around the world, China is an anomaly where
foreigners control their practices. In the rest of the world, the Big
Four are a collection of practices owned by local partners."
The
changes take place at a time when the Chinese auditing industry has been
hobbled by accounting scandals involving several U.S.-listed Chinese
companies, some of which have seen their shares delisted or halted.
In
the latest move, the Securities and Exchange Commission launched legal
proceedings Wednesday against Deloitte Touche Tohmatsu, the
Shanghai-based unit of the American auditing giant.
American
regulators are demanding that Deloitte hand over documents relating to
their former client Longtop Financial Technologies, a Chinese software
company whose shares were suspended last year on the New York Stock
Exchange because of massive accounting irregularities.
Deloitte says they are prohibited from sharing the documents because it would violate Chinese state secrecy laws.