The Chinese government is urging state-owned firms to reduce and eventually eliminate their dependency on the Big Four international accounting firms, citing data security concerns despite a landmark deal to allow audit inspections on hundreds of Chinese firms listed in the U.S.
China’s Ministry of Finance was one of several government entities that issued ‘window guidance’ to some state-owned enterprises (SOEs) as recently as January, urging them to let existing contracts expire and hire local Chinese or Hong Kong accountants for their audit needs, according to people familiar with the matter. Though Beijing has been giving this guidance for a number of years, there has been a recent emphasis on eschewing the Big Four in favor of domestic firms, but no deadline has been set so far.
China’s finance ministry and local representatives of the Big Four firms PwC, EY, KPMG, and Deloitte did not respond to requests for comment made by Bloomberg, which initially reported on the story. The global arms of EY, KPMG, and PwC also declined to comment, with Deloitte not responding to a request. While both the Chinese government and the Big Four are keeping quiet on the situation, the shift to less well-known and trusted firms will have consequences, making it harder for SOEs to attract international capital.
“It builds in a further hurdle for Chinese SOEs in terms of appealing to international capital,” said Richard Harris, Chief Executive Officer of Hong Kong-based investment business consultancy and fund manager Port Shelter Investment Management. “I’m not sure if the data held secret as a result is likely to be important enough to justify inhibiting that access to international capital as accountants have a legal obligation to be confidential.”
While the U.S. Securities and Exchange Commission also declined to comment, the U.S. Public Company Accounting Oversight Board (PCAOB) warned that SOEs traded on U.S. stock exchanges risk being delisted if the auditor watchdog agency is unable to fully inspect and investigate the work papers of their auditors after three years in a row. While some Chinese companies may voluntarily delist from American exchanges, it does not shield them from their audit engagements being inspected or investigated by the agency.
The move could have a significant impact on the Big Four as well, with the firms having earned a combined revenue of $3 billion from all Chinese clients in 2021. Some 60 Hong Kong-listed companies headquartered in China have changed auditors since September 2022, and local firms are preparing to take advantage of the new emphasis on domestically sourced audit services.