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Big Four remain a force in China

China has built an impressive new accounting industry to support its burgeoning commercial power – but the Big Four firms are not beaten yet.

Foreign firms in China have followed a
pattern, notes Peking University’s Professor Jeffrey Towson. They sweep in and
do well for a few years. Then the local companies learn, take market share and
eventually marginalise the foreigners in the Chinese market. This story has
played out in industries from smartphones to real estate.

In accounting, however, that hasn’t
yet proved the case. More than three decades into the modern era of the Chinese
accounting industry, the big western accounting firms still dominate.
PricewaterhouseCoopers Zhong Tian, Deloitte Huayong, BDO China Shu Lun Pan,
Ernst & Young Hua Ming and KPMG Huazhen are the five largest Chinese
accounting firms by revenue – and some of the fastest-growing.

Will it last? For most of the past
decade, the indigenous Chinese firms looked poised to take over. But in the
past few months, the timing of their ascendancy has become far less clear.

Growth of the Big Four

The stakes are high – revenues of the
leading 10 Chinese accounting firms together topped US$4 billion in 2017. Professor
Paul Gillis, a colleague of Towson’s, estimates that PwC, the top firm in
China, has around 13,000 staff in the country. He sees it quickly becoming the
second largest PwC branch, with more staff than the firm’s UK arm.

Gillis, a former head of PwC in China
turned academic at Peking University’s Guanghua School of Management, is now
the pre-eminent foreign analyst of the Chinese accounting industry. His 2014
book The Big Four and the Development of
the Accounting Profession in China
is recognised as the definitive account
of the industry’s re-emergence in that country. He tells the story of the modern
Chinese accounting industry after 1978, as the country began opening to the

As Gillis explains, the then Big
Eight western accounting firms saw the opportunity clearly in the 1980s. They began
building up representative offices to advise foreign firms entering China, at
first often working out of hotels. By 1992 they had won the right to audit,
working with Chinese partners, and were helping to develop Chinese accounting
standards. They pulled in all manner of outside experts to help them understand
the country; former Australian diplomat and future prime minister Kevin Rudd
worked as a KPMG China consultant before entering politics.

But the real boom began after China joined
the World Trade Organization in 2001, when the Big Four were allowed to operate
in their own right. They worked with multinationals setting up in China, and
then signed up most of China’s largest state-owned businesses as audit clients.

As Chinese commerce expanded, Chinese
firms sprang up to perform audits. Soon smaller firms joined forces and the
first large indigenous Chinese accounting firms emerged. Gary Biddle, professor
of financial accounting at the University of Melbourne and a veteran of Hong
Kong accounting, says the Chinese government rapidly committed itself to modern
accounting and adopted global and US standards. Chinese universities began
pumping out high-quality accountants; the number one university for Big Four
recruits globally, according to Gillis, is now the Shanghai University of
Finance and Economics, which supplies the Big Four with hundreds of recruits a year.
More students go overseas to universities in countries such as Australia, New
Zealand, Canada and the US. Chinese accounting standards were high from the
start, Gillis says, and accounting quickly gained great prestige in China –
more, perhaps, than in the US.

Chinese resentment

All through its modernisation, China remained a highly
nationalistic entity that Gary Biddle describes as “like a giant conglomerate”.
The domination of Chinese accounting by the Big
Four soon began to rankle. Gillis writes that by 2006 Ding Pingzhun,
director-general of the government-aligned Chinese Institute of CPAs (CICPA),
spoke of the Big Four as firms that “lord themselves arrogantly across China”.
The Big Four had done in 10 years, Ding said, what might have taken them “more
than 100 years if in other countries”.

In his 2014 book, Gillis suggests
that the Big Four have met their match in China. Ian Gow and Stuart Kells, in
their 2018 book The Big Four: The Curious
Past and Perilous Future of the Global Accounting Monopoly
(see Acuity Aug/Sep 2018), similarly argued
that China might be “the first place where the Big Four fall from their
pedestal”. The main threat they cited was an organised push against the Big
Four by large parts of the Chinese state.

Gow and Kells’ book also documents a
long campaign by the CICPA to promote indigenous Chinese accounting firms. That
included an effort to create a national accounting champion outside the Big
Four – a “fist”, as Ding Pingzhun put it. When that failed, Gow and Kells
reported, CICPA in 2007 adopted “a strategy to create 10 internationalised
accounting firms capable of serving Chinese companies globally”.

This multi-firm strategy won official
government backing. In 2010, China introduced mandatory rotation of auditors of
financial institutions and state-owned enterprises. This was depicted as a move
to improve audit governance in an emerging accounting profession. It might also
have been expected to reduce the Big Four’s grip and give indigenous Chinese firms
a shot at the big time.

Yet when the first rotation arrived
in 2012, the target firms mostly simply swapped one Big Four member for
another. The main effect was to cut the fees; Gillis estimates they fell 25%.
The Chinese firms felt they lacked the skills to audit a large bank and aimed
to win audit roles at second-tier banks instead, Gillis believes. One Chinese
firm told him it had passed up an opportunity to audit the huge state-owned
Industrial and Commercial Bank of China (ICBC), now the largest bank in the
world by total assets.

Chinese firms

Nevertheless, by the mid-2010s the
new multi-firm vision seemed to be forming into reality. Yang Jiantao founded
Ruihua in the 1990s and built it to the point where by 2013 it was the Chinese
firm for not one but two second-tier accounting networks, RSM and Crowe
Horwath. CICPA estimated in 2016 that the indigenous Ruihua had reached the
number three spot in China by revenue.

Ruihua was a product of the Chinese
state’s sympathy for local accounting firms. Yang told Accounting and Business magazine in February 2016 that Ruihua
served the largest number of state-owned firms. Yang was reported as crediting
government departments for creating a favourable environment for Chinese
accountancy firms to grow. Paul Gillis predicted in 2016 that Ruihua would soon
overtake PwC as the largest Chinese accounting firm.

As Yang was first building Ruihua in
the late 1990s, Zhang Ke was running Coopers & Lybrand’s Chinese affiliate.
After Coopers merged with Price Waterhouse to form PwC, he was widely seen as
the heir apparent to the job of PwC managing partner in China. Instead, fed up
with tutoring western staff about China as they swung through for three-year
stints, Zhang left with a number of other Coopers partners and set up
ShineWing. He designed it from the start as a Chinese multinational
professional services business. It took over Australia’s Moore Stephens in
2015, has offices in South-East Asia, Japan, Europe and Egypt and by 2016 was
China’s tenth-ranked firm. Gillis calls Zhang “probably the best accountant in
China” and ShineWing “probably the highest-quality local firm” in the country.

Triumph delayed

But the latest CICPA figures,
released in mid-2018, show that the fall of the Big Four and the predicted
triumph of indigenous firms will have to wait at least a year or two yet. In
the past two years, three of the top 10 Chinese firms have grown by more than
20%: Deloitte Huayong; KPMG Huazhen; and at the top, ranked number one by
revenue, PricewaterhouseCoopers Zhong Tian. The Big Four plus BDO China Shu Lun
Pan together make up China’s top five accounting firms. And if the official
figures are right, the Chinese versions of the Big Four have been collectively growing
faster than the fast-growing Chinese economy itself.

In contrast, the two best-known
home-grown Chinese firms – Ruihua and ShineWing – have both shrunk
significantly in the past two years.

This failure of the indigenous
Chinese firms to take market share was a major surprise to almost everyone.
Just when it happened is a little unclear, because the CICPA seems to have
mysteriously failed to produce any figures for 2016. But if CICPA was hoping
that the big Chinese firms would recover quickly, the 2017 figures removed that

Gillis speculates that both Ruihua and ShineWing fell foul of
China’s tough accounting regulations in their work with some of the smaller
audit clients, businesses too small to attract the Big Four. The Four’s target
market is cautious multinationals and globally ambitious Chinese firms such as Alibaba,
Xioami and PetroChina.

But they have some other advantages.

“The Big Four had a one-hundred-and-fifty-year head start,” says
Gillis. They are centrally managed and have integrated their long-established
Hong Kong arms into their Chinese operations; some have even brought in their
operations in Taiwan or Singapore. They invest more in high-quality managers,
standardised practices and risk management. “It’s unrealistic to think you
could create a global network today running up against the established firms,” Gillis
says. The smarter Chinese firms, he says, have joined existing global networks
like RSM or Grant Thornton.

Chinese firms face an additional hurdle, he notes many of the larger firms have grown
through mergers and remain to some extent “a collection of sole practitioners
who share some of the overhead”. That makes the firms weaker than their revenues
would indicate; they don’t operate with the cohesion of the Big Four.

“The Big Four have an amazingly valuable franchise and access to
clients,” says Gillis.

Accounting in Xi’s China

Gillis expects the indigenous Chinese firms to poach staff from
the Big Four over the next two years and make their move on Big Four clients in
2020, when the next audit rotation arrives for large firms.

Gary Biddle, however, looks at Chinese accounting’s future
through a different lens: the increasing centralisation of Chinese President Xi
Jinping. He sees a possibility that Xi could rein in the competition between
the Chinese firms, or even nationalise them. The Chinese state wants a strong
accounting sector, he says – but it might be willing to get it through central

As Biddle reminds people, China’s economy remains very different
from those of western developed nations. Success still often relies less on the
firm than on the opinion of the Chinese Communist Party. For that reason, Biddle
expects the Chinese firms to struggle if they try to expand into foreign
markets. China remains “a completely different system”, he notes – in
accounting as in much else.

Trade war?

The Chinese accounting industry could
conceivably face disruption from an unexpected direction: the current US
administration. Under President Donald Trump, the US is pursuing trade
restrictions against China; China has begun retaliating. That retaliation could
drag in the Big Four.

The Big Four have many of their roots
in the UK and Germany (and KPMG was for a while technically Swiss), but Paul
Gillis says they are widely seen in China as US institutions and could face
restrictions. On the other side of the ledger, Gillis points out that the US
could have Chinese firms deregistered with the Public Company Accounting
Oversight Board (PCAOB), leading to their delisting in US capital markets.

Involving accounting in a trade war
might damage the US more than China. US exports of accounting services,
including exports to China, more than doubled between 2006 and 2016. And the US
consultancy TradePartnership worldwide estimated in a June report that just the
Trump administration’s steel and aluminium tariffs could affect more than
26,000 US business and professional services jobs.

David Walker is the former editor of Acuity.

This article was originally published in the October 2018issue of Acuity.