China merger

Such is the demand for foreign firms� accounting services in China that more and more of the businesses concerned are turning to Chinese companies for assistance, as Alysha Webb discovers

In mid-March, Deloitte Touche Tohmatsu and Beijing Pan-China CPA Ltd signed an agreement forming China�s newest Sino-foreign accounting firm.

�The merger enables us to better serve the growing Chinese market, especially large state-owned companies,� says Peter Bowie, Deloitte China�s CEO. �It is Deloitte�s vision to become a localised firm.�

This is the first such partnership for Deloitte, but not the first for a Big Four accounting firm. In 2002, Ernst & Young formed a joint venture with Shanghai�s Da Hua Certified Public Accountants Ltd. Demand for foreign firms� accounting services in China is growing faster than the companies� resources can handle, so they are approaching Chinese companies for help. Expect to see many more such partnerships forming in China in the future.

Regardless of the label - merger or joint venture - they are really just examples of the kind of partnerships that are a common occurrence in the global accounting world.

�There are many kinds of Sino-foreign co-operative arrangements right now,� says Hao Zhenping, an accounting professor at Beijing�s Qinghua University. �Furthermore, these kinds of co-operative agreements are very common all over the world. How else did the Big Four become the Big Four?�

China�s entry in the World Trade Organisation is one factor driving the surge in demand for international accounting standard services. As more foreign firms seek to set up offices in China to take advantage of market openings, they need accounting firms familiar with Western accounting principles.

Demand is also being generated from inside China. The Government aims to have 50 Chinese firms in Global Fortune 500, and many of those firms will be in the state-owned sector. They will need to bring their books up to international standards.

Local firms both need, and are needed by, foreign accounting firms. On the one hand, the local firms bring human resources and knowledge of the local market. On the other hand, foreign firms aid local firms in learning international practice.

Competition

�The accession of China to the World Trade Organisation will impose challenges on Chinese companies to deal with foreign competition while establishing themselves as leaders in the global market,� said Anthony Wu, chairman of Ernst & Young China, at the signing of his firm�s agreement with Da Hua.

Local firms in China will face even stiffer competition from foreign firms when China follows through with its WTO promise to allow foreign accounting firms to open offices in China without a local partner. That hasn�t happened yet.

�Up until now, the Ministry of Finance hasn�t passed an act to allow foreign firms to be listed in China as a legitimate China IPA firm,� says KS Heng, a managing partner at Morison Heng, a Hong Kong based accounting firm affiliated with Morison International.

Morison International formed an alliance with Beijing based Yue Hua in 2003. Morison Heng uses Yue Hua human resources when it is helping a Chinese client get ready to list in Hong Kong. Morison Heng will send two or three people to supervise work done by its Yue Hua affiliate, says Heng. The partnership also allows Morison Heng�s clients to meet China�s statutory requirement that audit results of a firm in China be signed by a locally-registered company.

�Whenever our clients go to China, and need their books to be prepared according to Chinese standards, we call on Yue Hua,� says Heng. �We review the audit results to give them the assurance that the audit is done properly.�

Chinese firms also benefit from partnering with foreign firms. �Local firms aren�t as experienced as foreign firms, and their internal management isn�t as strict,� says Hao Zhenping, a professor in Qinghua University�s accounting department in Beijing.

An increasing number of partnerships between Chinese and foreign firms won�t have a very deep impact on the professionalism of China�s accounting industry without changes in China�s regulatory system, however.

For one, Chinese state-owned enterprises rehire an accounting firm every year to audit the books, unlike in Hong Kong, for example, where an accounting firm is automatically re-appointed each year unless voted out by the board. That lowers the quality of audits, says Heng.

�Firms are not certain if they will get the job next year so they don�t do interim audit,� he says. All Chinese firms� fiscal years end in December, and firms end up having to do many audits fairly quickly without the benefit of an interim report, Heng says.

State-owned enterprises hire on the basis of price rather than quality, which encourages firms to cut corners in order to offer a lower rate, he adds.

The foreign-affiliated firms are also only a small percentage of China�s 5,000+ firms, and they impact on a limited segment of the business world.

Benefits

The benefit of using a foreign or foreign-affiliated accounting firm is limited to a few companies in China because of the cost, says Laurence Lipsher. His Guangdong and Hong Kong based firm, Lipsher Accounting Corp, is one of only 24 non-Chinese accounting firms legally registered within China.

�I doubt the mergers will bring a new level of professionalism to the industry here,� he says sceptically. �They are mainly working for the multi-national corporations, and the needs of the future are not for multi-nationals.�

The real driver for widespread reform in China�s accounting industry will be the listing of more shares in state-owned enterprises, Lipsher says.

Only around 70% of state-owned firms� shares are listed; the Government holds the remaining shares. Change may come soon, however. In mid-April, the Chinese Securities Regulatory Commission announced it would start selling off the state-held shares soon. Of course, the Government has said in the past that it would list more SOE shares, only to back down when the market plunged.

�Reform will come from inside China as the needs change,� Lipsher predicts. �If you want to fund companies for privatisation you are going to need a better brand of reporting.�

Deloitte is ready to snap up the larger clients. �Given the complex enterprise transformation needs of China�s SOEs, our multi-disciplinary approach has become a major benefit,� boasts Bowie.

Alysha Webb is a business journalist based in Shanghai.