China Moves to Repatriate Its Auditing Profession

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In China, management of entities subject to statutory audit requirements may choose the CPA firm to employ, but in order to audit listed companies' and foreign investment enterprises' financial statements CPA firms must first be approved by the Ministry of Finance (MOF). In this regard, there are some similarities to the situation in the U.S. post-Sarbanes-Oxley, where auditors of issuers must be registered with the PCAOB and be subject to periodic quality reviews. To date, the Chinese member firms of the major international associations of CPA firms (Big Four and others) have been heavily manned by expatriates, particularly at the higher, management levels. This is about to change.

In May 2012, China’s MOF announced that it would require more auditors practicing in China to take the Chinese CPA exam (which will only be administered in the Chinese language, however), and would impose new limits on the percentage of non-Chinese-certified audit partners at the firms. More specifically, China will require the Big Four firms to have no more than 40% of partners foreign-certified, as part of a phased-in rule that will reduce that figure to 20% by 2017.

Although Chinese auditing practices have been subject to criticism, particularly (but not exclusively) due to allegations of financial reporting misdeeds by the so-called Chinese RTO companies (those achieving listed status in the U.S. via reverse takeovers of dormant “shell” issuers), more rigorous requirements have been imposed over recent years, and further improvements were already in the offing. Furthermore, the Chinese affiliates of the major international associations of firms (Big Four, second tier, or smaller groups of essentially local firms) commonly utilize the same audit programs (the so-called “checklists”) that U.S. and other fellow member firms employ themselves. For that reason, differences in the quality of work performed are probably due more to training and supervision variances than to discrepancies in the audit programs themselves.

Some have speculated that this move by the MOF is, in part, in reaction to the well-publicized demands by the PCAOB to inspect working papers of Chinese firms or affiliates auditing U.S.-listed companies, or to forestall further changes to Chinese auditing practices. In the author’s view, Chinese history suggests this may be more a matter of national pride and concern about potential foreign domination. If true, this should not itself cause concern over China’s commitment to ongoing improvements to auditing practices, or the nation’s evolution as an economic power in the world having reliable financial reporting that provides comfort to capital-providing investors.

International accounting expert Dr. Barry Jay Epstein, CPA, CFF, is available to discuss financial reporting requirements under International Financial Reporting Standards (IFRS), Accounting Standards for Business Enterprise (ASBE), and PRC GAAP. He can be reached at 312-222-1400 or BEpstein@SSandG.com.

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Published In: International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Barry Epstein, Epstein + Nach LLC | Attorney Advertising

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