Expansion in China is now not only a route for the Big Four. The next tier of firms are increasingly forging local alliances
WITH the fast-growing Chinese economy looking increasingly to overseas expansion and foreign mergers and acquisitions, it is not surprising so-called second-tier accountancy alliances such as BDO and Crowe Horwath are keen for a piece of the action in China.
Crowe Horwath International CEO Frank Arford claims Crowe Horwath China now ranks among the top-10 accounting firms in the country “and is well positioned to develop business opportunities of our firms’ multinational clients in China”.
Training and access to a global network are attractions for local member firms. Managing partner of Crowe Horwath China, Yang Jiantao, told Accountancy Age that access to the alliance’s training facilities and a staff exchange programme are a means of improving the skills of his Chinese staff. This is especially so for “training specifically designed for China which is better targeted, emphasises practical issues and includes in-depth analysis of case studies”.
Getting local CPAs up to speed may be exactly what Chinese regulators had in mind when easing second-tier alliance access to China. Long locked out as a perceived threat to local auditing firms, second-tier alliances are now being welcomed “provided the partnership is on equal terms” explained Paul Gillis, professor of accounting at Peking University.
Second-tier alliances are seen as a way of giving local firms an international network they need to service local clients keen on overseas expansion, while also recruiting multinational clients, noted Yang. He said joining Crowe Horwath has allowed his firm to sign up more multinational clients when foreign investment into China continues to grow. As for existing clients, “they could witness the enhancement of our professional service offering and our ability to help them achieve continuous growth”.
Meanwhile, the likes of BDO could also benefit from oncoming regulatory change faced by Big Four firms: their 20-year joint venture agreements previously arranged with local partners (PWC Zhong Tian is the country’s leading auditing firm by revenue) will begin to expire in 2012. “They are likely to be required to restructure into partnership form, like the second-tier firms” explained Gillis.
It will not be plain sailing for second-tier alliances, however. George Fang, country coordinator for BDO in China, said the biggest challenge is integrating member firms in line with the alliance’s policy of one member firm per country. He hopes within three years that BDO will have amalgamated five member firms in China into one. Fang explains a key challenge is to cultivate in member firms a mentality of partnership: “These firms must convert from being a LLC to being an LLP”. Other cultural issues must also be faced: partners at local member firms often come from provincial offices of the Ministry of Finance and, while good at bringing in business from local state-owned firms, they lack other soft skills such as marketing.
Similarly, while provincial CPA firms are attracted by the potential for work with blue-chip firms through being in an international alliance, partners are often split on joining: BDO wants the whole firm to join and “given the firm will become a subsidiary of our member firm there’s a huge shift in mentality required” said Fang, adding that the gulf in corporate culture between smaller cities and megacities such as Beijing and Shanghai complicates matters further.
Again, there are ways in which the locally owned partnership model brings advantages to BDO and its peers. Member firms being owned by local CPAs still helps the second-tier: “The State Council [China’s cabinet] has made some noise about how strategically important companies need to be thinking about state secrets when selecting auditors, which was a pretty clear dog whistle they ought to be thinking about switching from the Big Four to locally controlled second-tier firms.”
Recruitment is another area in which alliances have been able to exploit the Big Four’s slowness to localise. While the big firms are formidable in recruiting talent from top-tier universities, BDO has its own strategy of targeting second-tier universities and cities. Fang said that BDO member firms, while lacking the name recognition of the Big Four, are attractive to local talents uncomfortable with the working culture in these firms with their overseas management and long hours. Staff from their local partners simply became “worker bees” said Fang, arguing that Big Four players simply imported management (from Hong Kong, Singapore in particular).
It appears that second-tier firms will now concentrate on integration rather than signing up more local member companies. Competition between alliances might be about to heat up, though. Fang, for instance, said that his firm is bringing more value to local firms than the competition.
Clearly there’s much to play for. “Hong Kong CPAs who typically staff the Big Four mainland offices have been the gatekeepers to the Hong Kong exchange and they are losing that position,” says Gillis. It remains to be seen if second-tier alliances will take their place.