Caixin
Jun 05, 2012 03:19 PM

'Hire Local' Rule Puts Big Four at Crossroads

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(Beijing)– The countdown has started for staffing overhauls at the world's Big Four auditors' Chinese offices, which, by the time the dust settles, are expected to emerge as thoroughly local firms.

The Ministry of Finance recently told KPMG, Deloitte Touche Tohmatsu, Ernst & Young and PricewaterhouseCoopers they'll have to undergo the transformations and form special partnerships by the time their current joint-venture contracts with Chinese firms expire.

PwC was given the longest lead time, as its contract expires in March 2018. But Deloitte will have to adjust its Chinese operations by next February, while Ernst & Young only has until September to change and KPMG's fast-approaching deadline is August 17.

When China let the Big Four open the nation's first foreign-owned accounting operations in 1992, the government gave them permission to staff offices with expatriates and thus offset a shortage of qualified, local accountants.

The finance ministry, which licenses the firms, in May decided the time had come for local workers certified under Chinese accounting standards to start replacing the expats.

The new rules say each firm's staff must be capped at 40 percent for foreign-certified accountants under their next contracts, and 20 percent by the end of 2017.

The ministry also said the firms must limit domestic offices' voting rights for foreign-certified management partners. And senior partners must be Chinese citizens with domestic qualifications as well as at least eight years' experience working for Chinese accounting firms.

Accounting partnerships around the world mostly hire holders of locally earned credentials, Paul Gillis, an accounting professor at Peking University's Guanghua School of Management, said, adding that a phase-in period for the new rules would give the firms plenty of time to adjust.

Gillis said the changes for each executive suite pose short-term risks for the firms. Newly introduced Chinese management partners "are going to gain voting control with firms whose joint ventures expire," he said. "If they decide they also want to seize the reins of management and change income allocations, there could be some disruption."

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