China To International Auditing Firms: Hire Local Hands

Starting 2012, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers will be required to substitute its expatriate staff with more locals to run accounting operations for its Chinese arms, as announced by the Ministry of Finance.

The Big Four affiliates, which have headquarters in the US, are directed to allow a maximum of 40 percent of foreign-qualified staff to continue running operations until August. The complete overhaul of the management is expected to take place by 2017, with foreign-certified staff dropping further down to 20 percent.

The guidelines also mandate that senior partners of the accounting firm should be Chinese with local accountant certifications. As of now, all senior positions are held by expats, according to Reuters.

So far, only two of the accounting firms have accepted the mandate, reports the New York Times. PricewaterhouseCoopers has reportedly said that it is actively localizing its China practice by investing heavily in developing local talent and promoting local partners in past years. Meanwhile, Ernst & Young L.L is said to have declared that the firm is well-positioned for this transition.

The ministry's new directives to localize mainland operations comes on the heels of last week's US-China talks, where chairman James Doty of the US Public Company Accounting Oversight Board (PCAOB ) said that Beijing may permit PCAOB to oversee audits of US-listed companies in the country.

The guidelines issued have raised several challenges for foreign partners, who fear complete localization of Chinese operations. If the changes lead to greater turnover among partners, or a wholesale replacement of leadership by the local partners, there is risk that audit quality would be affected, Gillis said, according to Reuters.

As of now, Chinese certified staff constitutes just 30 percent of the entire lot at the Big Four Affiliate, Paul Gillis, accounting professor at Peking University, was reported as saying by the Los Angeles Times.

The Accounting Onion publisher, Tom Selling, is also weary of the nation's move to localize mainland operations, saying to the news service that The Chinese ... see this as a way of protecting information and their companies, but there's a big risk for them. The US capital markets and the Big Four are still the gold standard. There's a chance the Chinese are overplaying their hand.

The auditing industry has already caught in the midst of a fraud scandal, with the US Securities and Exchange Commission Wednesday charging Deloitte's Chinese unit of refusing to provide audit information concerning a client. The firm reportedly cited Chinese laws as reason for not sharing the documents.