A golden opportunity

There’s been a lot of talk about making money from accountancy in China
recently, but if the latest reports are anything to go by, Chinese audit firms
could soon be spreading their wings and making their profits overseas.

And this is not just speculation based on market observations. The tip comes
straight from the director general of the Chinese Ministry of Finance’s
accounting regulatory department. Liu Yuting was quoted in the Western media
saying he wanted local firms to expand overseas and compete with the Big Four.

But given the sophistication of Western finances and accounting, is this
really feasible? Could we consider a Chinese auditor operating in Paris, New
York or London? Experts will immediately dismiss the suggestion, but clearly the
Chinese have the political will to see their home-grown firms expand.

Up until now the audit market for international companies in China has been
dominated by the Big Four, which have shown dramatic increases in their Chinese
incomes over the past year. PricewaterhouseCoopers has grown by 38%, KPMG by
65%, Deloitte by 74% and Ernst & Young by 90%.

Indeed, the firms are reported to be planning increases in head count of
around 10,000 new employees in the next five years. This year alone, PwC will
recruit 1,500 new employees.

One of the reasons the Big Four has enjoyed such an incredible boom is
because they receive a special ‘ultra national’ treatment from the Chinese
state. It gives them benefits such as preferential tax rates and the ability to
create joint ventures and relationships in China, which are not available to
local firms.

The other advantage is that only foreign auditors are permitted to audit
Chinese companies listed overseas, whether they are in Hong Kong or even New
York, according to laws set down by the China Securities Regulatory Commission.
Chinese firms lose a chunk of potential profits because of this restriction.

In many senses, the Big Four are more privileged than local counterparts
because they work under a much lighter regulatory burden, although according to
an official at the Ministry of Finance, this will be eliminated at some point
soon. Those changes could open the way for Chinese auditors to set their sights
on foreign markets.

Zhang Ke, chairman and managing director of Shinewing Certificated Public
Accountants, told Accountancy Age that international expansion for Chinese firms
could take place at two levels.

First, lots of new foreign businesses have entered China, and they could be a
good source of new clients for local audit firms, which could also encourage
them to become more international.

Second, and most importantly, more big Chinese companies are rapidly
expanding into the US and European markets. Some have listed in Hong Kong and
New York, while others are planning to do so. Such expansion could provide a
great opportunity for local audit firms to head abroad in a bid to extend their
services for Chinese clients.

But if the auditors decide to expand overseas, there are some significant
risks. Two key issues that need to be overcome are cost and accounting
standards.

Zhang Ke believes that the minimum number of staff a branch requires is 20
professional accountants. Until now, Chinese auditors have not been able to
afford this, and it remains a major stumbling block.

However, a more significant issue arises from the different accounting
standards that are applied in the US, Europe and China. Chinese accountants are
unfamiliar with US and international standards, presenting an enormous
regulatory barrier for Chinese audit firms.

Firms could find a way around this by acquiring a local audit firm to make a
breakthrough. But this would also require a big chunk of initial capital, and
long-term maintenance costs. These hurdles may make an acquisition a risky
venture for Chinese firms.

Shinewing has expanded overseas in recent years and is regarded as the first
company to make the breakthrough after acquiring a Hong Kong audit firm in 2005.
In 2006, Shinewing is expected to continue on the acquisition trail in South
Korea and Japan, as part of its efforts to take a larger piece of the audit
market in east Asia. After their successful Hong Kong deal, it might not be too
long before they become the first global Chinese audit firm.

COUNTING ON CHINA

Recent times have seen a welter of activity with China in the accountancy
sector. In June this year Liu Yuting, director general of the Ministry of
Finance’s accounting regulatory department, revealed that he hoped to see local
firms eventually compete with the Big Four.

Meanwhile, UK professional bodies have been cementing their relationships
with Shanghai. The ICAEW revealed its qualification would be available in China
for the first time. ACCA recently announced it had10,000 students inside the
superpower.