PracticeAccounting FirmsChina in their hands

China in their hands

Mark Godfrey reports from Beijing on how the Chinese accountancy profession is dealing with the demands of the country’s rise, and highlights the accountants who are leading the charge

THE RUSH IS ON to do business with China. Its economy’s continued double-digit growth and strategic positioning make it the headline partner for western business leaders. But can the country’s accountancy profession keep up with developments?
Government officials are making the right noises. China’s ministry of finance continues to emphasise its achievements in moving towards a principles-based accounting regime. Liu Yuting, director general of the accounting regulatory department at the ministry, underscored his commitment to IFRS this summer by issuing a “roadmap for continuing convergence of the Chinese accounting standards for business enterprises with the international financial reporting standards”.

A global presence

The issue is urgent for China, which wants to see its corporations build their global presence – a task made difficult by controversy over the accuracy of financial data produced by Chinese firms listed, for instance, in New York.

The ministry and the Chinese Institute of Certified Public Accountants (CICPA) are equally keen on grooming the country’s own accounting talent. A 2006 pledge by CICPA secretary general Chen Yugui to create ten national-champion major accountancy firms within ten years seems to have been ambitious, as was the plan to groom 100 quality firms servicing local businesses.

Like many sectors of the Chinese economy, accountancy is badly in need of consolidation of thousands of small-time, low-end operations scattered across the country. Barely 100 of China’s 5,600-odd accounting firms are authorised to audit listed companies, meaning the country relies on the Big Four to audit Chinese corporations seeking stock exchange listings abroad.

CICPA data, however, suggests the Chinese accounting industry is in rude health: the revenues of Chinese-based accounting firms rose fr

om CNY8bn (£762m) in 2000 and then soared to CNY32bn by the end of 2009. This, however, masks an over-reliance on assurance work, which accounts for 90% of earnings among local firms. Chen Yugui says he wants firms to earn half their revenues from non-assurance services, such as valuation and tax. For that to happen, local certified public accountants (CPAs) will need to improve their skills, and achieve certification by

myriad public bodies that oversee taxation and valuation work separately. Beijing-based CPA Russell Brown, who heads up the LehmanBrown practice, says China’s accounting scene is “not mature yet in terms of consistency of quality of services and fee levels”. Nationwide, he says: “Many firms compete only on price. However, charging cheap rates does not allow firms to provide quality work and to hire and train quality people.”

International collaboration may offer a way forward. Because local regulators forbid multinational accounting firms from operating fully-owned firms, the Big Four are affiliated with local accounting firms: thus PricewaterhouseCoopers Zhong Tian is affiliated with PwC while KPMG Hua Zhen is affiliated with KPMG. Ernst & Young operates through Ernst & Young Hua Ming just as DTT Hua Yong is affiliated with Deloitte.

While China is heading in the right direction on standards, knowledge and the implementation of internationally accepted practice remains very patchy in accounting firms across the country. The evolution of more powerful firms in China should improve matters, but more fundamental reforms are needed.
Brown sees the impending move to the new IFRS accounting standards as “very positive” but implementation will be difficult until the country’s tax system is reformed in line with the accounting system.

Chris Devonshire Ellis, principal at Dezan Shira & Associates in Beijing, wants to see more stringent powers being held by the Ministry of Finance and an end to what he sees as “too much cronyism” bet­ween the tax bureau and local firms.
He believes this would promote “more transparency and less collusion between the Chinese tax bureau, errant business practice and accounting firms who can either be duped or bribed into concealing true facts.”


China’s leading lights

Albert NgAlbert Ng, Ernst & Young

Managing partner and chairman of E&Y’s China business, Hong Kong native Albert Ng has more than 25 years of professional experience in the accounting industry in China and Australia. That background will be valuable as he moves the firm on from an embarrassing settlement over its auditing of Akai Holdings, a bankrupt Chinese electronic manufacturer and retailer.

Before joining Ernst & Young, Ng was managing director of China investment banking for Citigroup. Seen as a pioneer in China investment advisory consulting circles, Ng has also been actively involved in IPOs of major Chinese corporations.

He also has the ear of important Chinese officials. In 1996 he was made an adviser for an International Business Leaders’ Advisory Council in Shanghai.

Chen Yugui, CICPA secretary general

While China will not be easing its reliance on the Big Four anytime soon, the CICPA boss thinks China should cultivate ten internationally-focused accountancy firms and another 100 firms big enough to serve large domestic enterprises.

Chinese CPAs are still lacking experience in international accounting and auditing, as well as restructuring and international trade advisory. Chen wants to groom 1,000 accounting professionals or “leaders” to drive the development of large Chinese accounting firms.

Under Chen’s leadership, the CICPA has, since 2006, subsidised nearly 500 accounting students to train with overseas firms.

Russell Brown, LehmanBrown

The managing partner of Beijing-based LehmanBrown International Accountants and a fellow of CIMA, Russell Brown is proof there are ways around China’s market entry restrictions on foreign accounting firms. Over nearly two decades, UK native Brown has built LehmanBrown through different legal entities: one is Chinese owned and licensed, while another is a foreign-owned firm providing cross-border advisory services to local firms. Enquiries from the latter are increasing, says Brown: downsizing and bankruptcies among the country’s manufacturers in 2008 and 2009 hit local accounting firms hard.

Liu Yuting, director general of the accounting regulatory department, Ministry of Finance

Some of the credit for moving China from its heavily prescriptive and rules-based accounting regime towards principles-based national standards must go to Liu Yuting, the key official for accounting reform at the country’s Ministry of Finance. Since 2006, he has overseen the phasing in of IFRS-based Chinese Accounting Standards for local companies with the China Accounting Standards Committee. His next challenge is delivering on a memorandum of understanding he signed with the US aimed at developing the mutual recognition of US and Chinese accounting standards.

Zhang Ke, ShineWing

When Beijing-born Zhang Ke left Coopers & Lybrand in 1999 he took a third of its 180 staff with him to set up his own firm, ShineWing. He has since opened offices in 15 Chinese provinces, with more than 2,500 staff in China and 200 in Hong Kong.

Already one of China’s biggest domestically-owned accounting firms, it recently hooked up with Australia’s Hall Chadwick to create ShineWing Hall Chadwick. Beijing-headquartered ShineWing recently grabbed headlines for auditing Yancoal, a subsidiary of China’s Yangzhou Coal Mining in its acquisition of Australia’s Felix Resources for $3.2bn (£2bn).

Yang Jiantao, Crowe Horwath China

Yang Jiantao is principal partner and CEO of China’s fastest moving and best-connected CPA firm, Crowe Horwath China, in Beijing. To prove the point, Yang has a photo on his wall of a recent visit to the firm by the senior government official Xi Jinping, who is expected to be China’s next president. Yang, who also has ties to deputy finance minister Wang Jun, ranks his firm as China’s ninth largest in accountancy.

Yang was CEO of Wan Long Asia before it became Crowe Horwath’s lead member firm in China in 2009. Crowe Horwarth generated CNY500m (£47m) in revenue in 2009.

Carlson TongCarlson Tong, KPMG

This autumn proved a high point for KPMG’s China chairman Carlson Tong, who will retire in March 2011. The KPMG veteran had ensured his firm was named exclusive provider of accountancy services to November’s Asian Games in Guangzhou. This is despite the Chinese government’s desire to build local accountancy giants.

Tong joined KPMG in Britain in 1979, making partner in Hong Kong in 1989. After heading KPMG’s China audit practice from 2002 to 2006, he was named chairman of the KPMG firms in China and Hong Kong in 2007.

Tong cultivates connections: he is adviser to the Ministry of Finance’s accounting standards committee and is a former chairman of the Hong Kong Stock Exchange’s main board.

Chris Lu, Deloitte

Since taking over as Deloitte China CEO in 2008 Chris Lu, has been entrusted with building the firm’s growth. Deloitte plans to spend $250m expanding its China presence between 2004 and 2012.

Lu oversees an employee headcount of 8,000, working out of 14 China offices. Joining the firm in 1981 in Los Angeles, he transferred to China from the firm’s Taiwan office in 1994. Lu has advised government bodies and, as a regular commentator on financial regulation in China, blogged enthusiastically after listening to premier Wen Jiabao’s recent pledges to improve corporate governance.

Raymund Chao, PwC

Few accountants globally are as busy as Raymund Chao, PwC’s audit and assurance chief in China. He oversees operations at the firm’s PwC Zhong Tian CPA, the joint venture it established to conduct accounting of domestic enterprises. In his role Chao has looked over the books of, among others, China’s key power generation companies Huaneng and Datang.

PwC has 470 partners and 13,000 staff spread between its offices in China, Hong Kong and Singapore (which it operates as a unit), though revenue growth has been driven strongly by mainland China IPOs in Hong Kong. Few firms are as devoted as PwC to securing mainland talent, and Chao’s department is central to this recruitment. More than 1,700 graduates will begin their careers with PricewaterhouseCoopers China and Hong Kong this year.

Chris Devonshire-Ellis, managing partner, Dezan Shira

Chris Devonshire-Ellis, principal of Dezan Shira & Associates, is the epitome of a foreign-owned success story built in China. Dezan Shira has seen a surge of work this year as Beijing clamps down on representative offices, prompting foreign investors to establish fully-fledged local operations.

Though successful and liked, Devonshire-Ellis is sometimes controversial. Recent comments he published, purportedly from Chinese banking regulators suggesting a revaluation of the Yuan, had to be retracted. Dezan Shira has in recent years expanded its reach into India and Vietnam, in particular seeking to represent Indian firms in China.

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