Rankings report: China
China’s accountants put their house in order as economy enters a slump
As China opens up its economy to global markets, local accountancy firms must find a way to meet growing investor demand and ESG requirements, Che Golden reports.
As investors poise to do business in a China that is becoming more open to international trade, the Chinese government has made overhauls to accountancy regulations to strengthen the local market’s reputation and present China as a good place to do business for foreign companies. PwC’s Global Asset and Wealth Management Survey and 2027 projections, released in July 2023, predicts that Asia-Pacific, along with frontier and emerging markets in Africa and the Middle East, will set the pace of growth in Assets Under Management (AuM). According to PwC’s base-case scenario, growth rates in Asia-Pacific will be roughly 50% higher than in North America by 2027. While it might seem that a boom in business is on the way for local accountancy firms, the reality is that they are struggling with increased regulation, a stagnating economy, and huge pressure on fees.
Investment and capital market are the key pillars for Chinese economy growth. Over the last 12 months, Chinese government bodies, including the Ministry of Finance (MoF), and China Securities Regulatory Commission (CSRC) have issued a number of policies to shore up confidence in the capital market. To improve the quality of audit service, the Chinese Institute of Certified Public Accountants (CICPA) has revised Auditing Standards of No.1211- Identification and evaluation of risks of material misstatement, and No.1321- Auditing on accounting estimates and related disclosures.
On July 30, 2021, the General Office of the State Council of the PRC issued the Opinions on Further Regulating the Order of Financial Auditing and Promoting the Healthy Development of the CPA. In accordance with the spirit of the Opinions, the relevant regulatory authorities have introduced a series of initiatives. In October 2021, the Ministry of Finance of the PRC published the Draft Revision of the Law of the People’s Republic of China on Certified Public Accountants (Solicitation of Opinions) to solicit opinions on the revision from the whole society.
“The current Law of the People’s Republic of China on Certified Public Accountants came into effect in October 1993 and was revised in August 2014, but at that time there were fewer revised provisions and no significant changes to the main contents,” said Kaylee Yang, CEO of Crowe China Group. “This time, the proposed revision covers a wide range of areas and provisions and adds many contents that are in line with the actual audit practice nowadays. The draft revision version provides for a more detailed audit quality supervision mechanism, improves the accountability mechanism, standardises the management of cross-border practice and regulatory cooperation matters, and strives to better serve China’s opening-up. We believe that the future introduction of the revised CPA Law will continue to promote the healthy development of China’s accounting profession.”
Kaylee Yang, CEO, Crowe China Group
In June 2022, the Ministry of Finance of the PRC launched the Unified Supervision Platform of the Chinese CPA Profession. The platform is optimised and upgraded on the basis of the former Financial and Accounting Profession Management System and is an all-around and whole-process supervision platform which covers the establishment, operation and cancellation of accounting firms, registration and filing of partners and CPAs, practice and withdrawal, as well as the filing of audit report information. On the basis of the original audit report filing function, the platform adds the new functions of assigned QR code, verification, and encrypted storage of audit report, which allows regulatory authorities, report users and the public to check the authenticity of the audit report by scanning the code by WeChat app or other means. It meets the goals set in the Opinions of the State Council, which calls for the establishment of a single-source system for audit report data and the promotion of the realisation of a Nationwide one-code pass to tackle the problems of false audit reports and tampering with audit reports at the source.
In February 2023, the Ministry of Finance of the PRC, the State-owned Assets Supervision and Administration Commission of the State Council, and China Securities Regulatory Commission issued a circular on the Administrative Measures for the Selection and Engagement of Accounting Firms by State-owned Enterprises and Listed Companies, which clearly stipulates the evaluation criteria for the selection and engagement of CPA firms, the weighting of the indicators, the auditing fees, the number of years for the rotation, the replacement procedures and relevant disclosure by state-owned enterprises and listed companies. The issuance of the Administrative Measures has strengthened the responsibility of relevant enterprises’ audit committees, emphasised the quality-oriented selection and engagement mechanism, effectively curbed malicious and low-priced competition, and optimised the practice environment in the accounting industry.
While any measures that improve the reputation of local accountants and brings them into line with their international counterparts is welcomed, the local industry has far more pressing financial problems. “China’s economy and accounting industries have been negatively impacted as a result of the three-year-long pandemic lockdown,” said Kevin Tang YiShu, partner at ZhongXingHua CPA LLP, a PrimeGlobal member firm. “From the slow start of the national economy in 2013, the services sector and customer demand for the accounting industry, however, remain relatively strong, particularly statutory auditing services, but the gross margin is deteriorating, and collection services fees are challenging. The recovery ratio is now a prior year’s average double digits growth.”
Kevin Tang YiShu, partner, ZhongXingHua CPA LLP, a PrimeGlobal member firm
Staff recruitment and retention of entry to mid-level employees is a challenge, as fewer and fewer college graduates are interested in pursuing accounting careers. Such a trend has forced firms to change the traditional recruitment channel and adopt a more flexible pay model or competitive compensation.
According to Yishu, SMEs across all sectors are struggling. “There are more and more mid to small enterprises that go bankrupt,” he said. “Demand for liquidation and insolvency services has grown over the past year. State-Owned Enterprises (SoE) and the companies listed in Hong Kong have been required to disclose ESG reporting from the year 2024. Legal firms have actively taken on these opportunities, but the accounting industry is slow to respond in general. ESG reporting is a potentially significant development in the business pipeline for the next 12 months.”
After lagging behind its international counterparts for years, China is finally focusing on ESG. A recent Fidelity International survey found that 93% of surveyed Chinese firms expect to have published an annual ESG report by 2026. The survey (ESG priorities in China: How companies in China are approaching ESG) also found that over half of the surveyed Chinese companies plan to invest in building technological and data capabilities to improve the efficiency in ESG data collection over the next 12 months.
Another significant market development, in response to public sentiment, is that the Chinese authority have recently stepped-up penalties on misconduct in the financial service industry. However, the controversial issues remain as to how to accurately split the liability among the auditee, actual controllers and their management, underwriters, insurance companies, accounting firms, engagement partners and other parties. “The Chinese accounting industry is also facing a legal issue, as accounting firms have been required to adopt partnerships, which often misleads the public into thinking that the watchdogs and partners should be held to an unlimited liability for an audit failure,” said YiShu. “As listed companies’ liquidity issues increase, accounting firms are always required to undertake joint liability for their partnership debts. There are more and more partners from tier two firms moving to better managed firms, resulting in more industry consolidations.”
There has been very little churn amongst local accountancy firms. “There have been no mergers or acquisitions of large firms in the last 12 months,” said Yang. “This is mainly due to the accounting profession’s orientation towards stronger, better specialisation, rather than bigger, but also due to the pandemic.”
One rumour that YiShu would like to put to bed is one that claimed the Chinese government encouraged businesses to move away from the Big 4 due to growing concern for national data security – that was never the case. “In general, the authority continues to push for a more levelled playing field, and healthier accounting industry growth for the long run,” he said.
Yang is confident that China’s economy is recovering steadily and the market potential of the accounting industry is also picking up gradually. However, China’s economy lost momentum in the second quarter, with gross domestic product expanding 0.8 per cent against the previous three months as falling exports, weak retail sales and a moribund property sector weighed on growth. China's economy is headed for a major slump, according to Nobel laureate Paul Krugman. The top economist compared China's disappointing economic performance so far this year to Japan's economic woes in the 90s, when the nation's economic power began to decline.
In an op-ed for the New York Times, published in July, Krugman claims that China’s economy will slump for the same reason Japan’s did but predicts the economic effects will be harsher. Japan's economy floundered due in large part to key demographic issues, similar to the ones China now faces, Krugman said. Low fertility and low immigration rates led Japan's working population to decline rapidly into the 2000s. That led to weak investment in Japan's economy, which fuelled higher debt balances. China's working population is also falling as its population ages and younger workers struggle to secure jobs. The nation posted a 21% youth unemployment rate in the past quarter, according to data from the Chinese government. On top of that, China is also suffering from an unbalanced economy with demand struggling to rebound after the pandemic. Krugman claims China could fall into the "middle income trap," a phenomenon among emerging economies where the economy grows rapidly to a point, and then stagnates.
While the global business community may be eager to see what opportunities there will be in a more open China, the future is far from rosy for local businesses.