Rankings report – CHINA
Covid-19 disrupts China's accounting industry
Major changes have taken place in China's accounting industry. The regulatory environment has been shaken up and Covid-19 has led to an uneven playing field. Increased demand has put a strain on staff recruitment, while fees are being driven down in some cases by clients who do not appreciate the service. While the industry is changing for the better and the future looks bright, in the short term companies are having to transform rapidly to keep up. Che Golden reports
n terms of the implementation of accounting standards, the revised new accounting standards on financial instruments, revenue and leases, which are continuously converging with the IFRS, have been extended to non-listed enterprises since 1 January 2021.
“Previously, these new standards have been gradually implemented in the scope of listed companies,” says Xiaozi Pan, technical partner at Ecovis member firm Zhonghui CPAs. “In terms of capital markets, the IPO registration-based system was first piloted on the Sci-tech Innovation Board (STAR Board) in 2019 and then successfully copied to the Growth Enterprises Board in 2020, which is regarded as a crucial measure for China to further deepen the reform of capital markets.”
She adds that under the background of gradually promoting the IPO registration-based system, the CSRC, the exchanges, and other regulatory institutions have strengthened the supervision of accounting information quality for to-be-listed enterprises and listed companies.
Xiaozi Pan, technical partner, Ecovis member firm Zhonghui CPAs
Further reform is on the way. The government released Opinions on Further Deepening the Reform of Tax Collection Administration in March 2021. A smart tax system with high integration, security and application efficiency was described in the document, with electronic invoice reform serving as the breakthrough and tax big data serving as a driving force. By 2025, the whole field of invoicing will be largely digital, and tax big data will play its full role in preventing tax-related crimes.
“This paper also emphasised the need of strengthening international tax cooperation and actively participating in the development of international tax laws and standards in the sphere of the digital economy,” says Dandan Guo, CEO at Nexia member firm ChungRui Tax.
“To provide high-quality services to the market, the government will extend and enhance our network of tax treaties, increase the negotiation of cross-border tax dispute cases, and execute bilateral agreements on the avoidance of double taxation on income.”
In terms of customer demand and market competition, large accounting firms and small or medium-sized accounting firms are facing different situations, according to Pan. For the former, the development of the capital market and the promotion of the IPO registration-based system in China means the accounting service market has maintained stable growth.
“However, due to the serious homogenisation of audit services, business competition among large accounting firms is quite fierce,” says Pan. “At the same time, these firms have paid more attention to risk control and invested more resources in quality maintenance under strict supervision by the capital market and related governmental bodies.”
On the other hand, small and medium-sized accounting firms are facing the pressure of business reduction caused by the cancellation of mandatory audit requirements for most non-listed enterprises. These firms need to maintain their survival and seek development by tapping the needs of customers in accounting, special-purpose audit, consulting and taxation.
“Due to the impact of the above factors, the whole accounting industry has been facing great challenges in terms of fee pressure, staff recruitment and retention,” adds Pan.
Pingwen Hu, tax consultant and auditor, Ecovis Ruide Certified Public Accountants
The growth rate and fee pressure of the accounting industry have not changed much, but staff recruitment and retention has become a potential concern,” says Pingwen Hu, tax consultant and auditor at Ecovis Ruide Certified Public Accountants.
“At the internal meeting organised by the local CICPA, all members reported that it was hard to find suitable job seekers in recent years, and the flow of personnel had also accelerated,” he adds “This is partly due to the rise of the internet and the education and training industry.”
China continues to face a shortage of senior professional accountants and this continues to challenge recruitment as well as driving up the cost of replacements. “During the pandemic period, clients became even more sensitive on fees and services delivery,” says Teck Chuan Yeo, partner at SBA Stone Forest, an Allinial Global firm. “Accounting firms moved to investment in robotic process automation (RPA) to address these rising labour costs.”
As China’s economy grows rapidly, the accounting industry serves clients in an increasingly wider range of industries with more diversified needs. However, the current proportion of revenues generated from assurance services is still high (over 70% of the total) according to Crowe China chair Jiantao Yang.
“Accounting firms highly rely on a single area of business and non-assurance services account for a low proportion,” he says. “In contrast, domestic demand for non-assurance services has surged. The accounting industry in China is now facing a big challenge in transformation and upgrading, which also brings huge potential for its future development.”
Looking to the future, Yang reckons the proportion of non-assurance services such as consulting and tax will increase year by year, and the business structure of accounting firms will be gradually improved.
This trend has already affected PrimeGlobal firm ZhongXinHua CPA. “We have always heavily relied on assurance services,” says Kevin Tang, international lead partner. “But we provided more and more consulting services over the last 12 months, which would be the areas of future development and competition in the accounting industry.”
Nexia HDDY partner Joanna Gong expects to see demand in tax consulting and compliance assurance services grow as a result of the launch of the Golden Tax System 4.0 – the tax software the tax bureau defined that each enterprise must employ – which requires more transparency and strict control.
However, Yang points out that despite the increasing and varied demand for accountancy services, unfair low price competition and significant audit fee reduction by clients continue to exist. “Certain clients cannot see the value of audit service and consulting service,” he says. “Clients tend to focus more on the price when they choose an auditor.”
Jiantao Yang, chair, Crowe China
Fee pressure affects the remuneration of staff in accounting firms as well according to Crowe China chair Jiantao Yang. The slow salary increase and high work intensity creates challenges for the whole industry in terms of staff recruitment and retention, impacting the long-term development of the accounting profession.
SMEs in particular are struggling to recruit. “It is difficult for small and medium-sized businesses to find and hire outstanding graduates,” says Hiltung Fang, managing partner at Nexia member firm Guangzhou Xin Zhong Nan CPAs.
“Instead of hiring top-tier graduates, we now hire young people who work hard to become talents through a variety of channels, and maintain employee stability through relatively loose management systems – such as cancelling KPI assessments, reducing working hours and providing flexible work schedules – as well as regular cultural and sports activities. Employees in our team have an average tenure of more than five years.”
While a cycle of boom and bust has created a lot of short-term demand within the industry, Covid travel restrictions are going to hamper the ambitions of smaller domestic firms.
Over the last 12 months there has been a boom in IPOs in China leading to a significant increase in related revenue to CPA firms observes Yeo. “In the CPA industry, the top 15 firms have cemented their position, increasing their size difference from the 16th firm and below. The top 15 firms will see significant growth in their revenue and size as China’s market continues to grow and we currently do not expect any significant mergers, especially amongst the top firms.”
As well as a boom in IPOs, there has also been a boom in bankruptcies. “As a result of the global economic downturn and Covid-19, bankruptcies surged,” says Guo. “It has become more profitable for our firm to provide liquidation, turnaround and insolvency services. Numerous clients outsourced some of their most important operations as a result of growing business pressure, personnel reductions and efficiency expectations. Because of this, our firm obtained additional outsourcing work.”
The effects of Covid-19 are still lingering and there are many obstacles to travelling freely. Dickson Leung, partner at LehmanBrown, member of MGI worldwide, expects more foreign accounting firms to use local firms to perform fieldwork for audits or reviews.
“On the another hand, we have recently noted that Chinese concept shares in the US stock market, especially those relating to the education industries, have dramatically decreased due to news released by Chinese authorities,” he says. “As a result, the performance of all Chinese companies in the US stock market is not good. In the next 12 months, most potential investors or companies that intend to go to IPO in an overseas stock market will be on the fence to see the trend or any further matters that can impact the market.”
This, combined with the limitation on travel, is likely to limit smaller accountancy firms to the domestic market.
“Under the background of the economy's internal circulation, domestic conventional business rivalry will intensify over the next 12 months, and the challenge of growing high end business will increase,” says Ying Zhang, director of marketing and client relationship at Xin Lian Yi CPAs, a Nexia member firm.
Dickson Leung, partner, MGI Worldwide member firm LehmanBrown
While the merger and acquisition market has been quiet, Gary Xie, director of international Business at Yongtuo Group, a Nexia member, says this could change.
“The Chinese Government has announced policies on industry upgrade, regional economy development and resources integration to encourage domestic consumption, technology innovation and capital market development,” he adds.
“Containing Covid-19 has become a major factor for investment decisions. The number of cases of merger and acquisition in China has slightly increased since a sharp decline from 2016. With a change in government focus, M&A activities have shifted from traditional popular markets to finance, mechanical manufacturing, energy and mining.”