China pushing for shift away from Big Four to local audit firms

With tensions between China and the United States continuing to simmer, China’s Ministry of Finance has reportedly asked state-owned enterprises to stop relying on the Big Four for their audit needs. The Ministry warned against the use of Deloitte, PwC, EY and KPMG amid concerns relating to data security.

As trade wars between China and the United States have escalated in recent years, both nations have steered their economies away from depending on businesses from the other.

In China, this has seen the country’s government become increasingly reluctant to allow firms to disclose their books to offshore entities.

This move has seen tensions grow between Chinese technology firms and US authorities. In March 2022, the US Securities and Exchange Commission (SEC) announced that five Chinese technology companies could be delisted if they could not meet US accounting standards – and did precisely that to 97 companies by May.

While this has placed huge pressure on Chinese technology stocks – shares of Tencent and Alibaba halved year-on-year that March – China has doubled down on its position, and is now pushing its companies away from using Western professional services groups in response to US pressures.

According to reporting by Bloomberg citing sources familiar with the situation, China’s Ministry of Finance has asked state-owned enterprises to stop using Deloitte, PwC, EY and KPMG, due to data security concerns. Offshore subsidiaries will still be allowed to use the Big Four as their auditors, meanwhile, but their parent companies will have to hire local Chinese or Hong Kong accountants when their current contracts expire.

The news is the latest example of China turning up the pressure on the Big Four over the last decade. In 2012, the Finance Ministry launched a five-year plan requiring the audit and advisory giants to form partnerships with local firms. In 2014, it was confirmed this restructuring had been completed, and the firms would now be directly monitored by Chinese regulators.

At the same time, the country’s leaders have attempted to ramp up competition against the Big Four, to give firms more choice when potentially replacing them. In 2016, the Finance Ministry published a document encouraging accountants in Hong Kong and Macau to enter the Chinese markets – though they could own no more than 49% of their mainland branches.

Then, 2019 saw an expert group begin the process of creating a Chinese accounting standard. As of 2023, the Finance Ministry has appointed 54 experts to the group – only two of whom come from the Big Four, alongside Chinese officials, academics and state-owned enterprises’ financial officers.

Neither the Finance Ministry, nor any representative of the Big Four, has responded to Bloomberg’s report as of yet. However, a Guangdong-based writer told the business news outlet that by reducing its reliance on the Big Four, Beijing was signalling intent to push forward a Chinese-style development – one with more economic independence and less foreign influence.

Meanwhile, in China’s Big Four scene, EY is set to sever its ties with the global EY organisation after the local Chinese member firm announced its decision not to participate in the split plan currently being worked on globally.