Reform puts beleaguered Chinese firms under pressure

The Chinese market has gone through a lot of reform in a very short space of time. Industry observers have said it is the most profound systemic restructuring the local accounting profession has seen in three decades.

Over the past 12 months, the regulatory framework has moved from ministerial rules to primary legislation. In November 2025, the Ministry of Finance issued “Opinions on Further Consolidating Accounting Responsibilities and Strengthening the Implementation of Accounting Laws, Regulations and the Unified National Accounting System”, establishing a full-chain responsibility framework covering enterprises, accounting firms, stakeholders, and regulators. In June 2026, the Standing Committee of the National People's Congress passed the revised “Law on Certified Public Accountants”, effective January 1, 2027. This is the first comprehensive revision of the law since its enactment in 1993.

The revised law reshapes audit operations across three dimensions. First, penalties have been significantly escalated: the fine ceiling for issuing false audit reports has increased from five times to ten times the illegal gains, with a separate maximum penalty of RMB 2 million for individual CPAs.  They also face a life-time ban from accounting. Second, accountability coverage has been fully expanded: the old law that only penalised intermediaries (rather than instructing clients) is abolished. Explicit sanctions apply to audited entities that collude with or instigate auditors to produce misleading reports, extending liable parties to four groups: clients, audit firms, individual CPAs and relevant third parties. Third, professional skepticism is elevated from a practice standard to a statutory obligation: failure to uphold skepticism or complete mandatory audit procedures constitutes a direct legal violation.

​​​​​​​Tougher enforcement is pushing substandard firms out of the market, according to Kaylee Yang, president of Crowe China Group. “As of May 2026, only 102 firms remain registered for securities audit services,” she said, “Ten voluntarily deregistered in the past year, and one was banned. Among the roughly 11,000 accounting firms nationwide, many low-cost, low-quality operators face existential threats.”

According to Yang, the industry is undergoing a fundamental shift: from scale-led expansion to quality-driven growth, and from self-governance to regulator-centric oversight. “Firms that upgrade capabilities, internal governance and tech infrastructure ahead of the revised law’s rollout will secure clear competitive advantages amid the ongoing market shakeout,” she said.

However, while many welcome the reforms, there has been some criticism that they are placing an onerous burden on SMEs. “While driving up compliance service demands, these changes also raise operational costs and regulatory risks for accounting firms,” said Cathy Zhang, founding partner of Cathy Accounting Firm, an MGI Worldwide member firm.

These burdens come at a time when the industry is currently in a downturn, facing widespread challenges across all three areas. “Traditional audit and basic accounting service demand has weakened as clients cut operational budgets,” said Zhang. “Intense market competition creates heavy fee pressure, squeezing profit margins across firms.”

Staff retention has become a major headache. A large number of audit and accounting professionals are leaving the sector, with turnover even higher among staff at the Big Four. Many local accounting firms have scaled back operations or closed down amid tough market conditions.

“The industry also sees an obvious mismatch between operational risks and returns, plus relatively low professional recognition,” said Zhang. “Nowadays, employers tend to recruit talents with both finance and IT expertise to advance digital and intelligent transformation.”

Technology has been a big disruptor for employees. “There is a significant oversupply of junior audit associates, whose compensation has remained stagnant for years,” said Yang. “AI has drastically boosted junior-level productivity, triggering structural downsizing in entry-level hiring demand across audit firms.”

Yet further up the food chain, many auditors in their thirties face mid-career bottlenecks. “Length of service alone no longer guarantees career advancement,” said Yang. “Only practitioners who continuously build AI tool proficiency, deepen sector-specific industry knowledge and refine professional judgement can advance into senior roles. Meanwhile, competition for multi-disciplinary talent is fierce, with candidates holding digital literacy, integrated finance-operation capabilities, risk management expertise and strategic advisory skills commanding steep salary premiums.”

Yang said international talent familiar with IFRS and local tax regimes, essential for the overseas business practice, is particularly scarce, with a long lead time to develop and limited market supply, making this a primary bottleneck for firms seeking to expand their cross-border service offerings. The sector’s talent structure is shifting from a traditional pyramid model to a diamond-shaped workforce: the middle tier is being squeezed, demand at the base is shrinking, and competition for the top tier is intensifying.

“Overall, China’s accounting profession is at a critical juncture of structural optimisation and transformational upgrading,” said Zhang Xiao Rong, managing partner, Shanghai CPA, LLP, a PrimeGlobal member firm. “Customer demand shows structural growth. As the Chinese economy transitions towards high‑quality development, enterprises are demanding greater depth and breadth of professional services. While the number of foreign‑invested enterprises has seen some adjustments, demand from domestic enterprises has grown notably.”

Fee environment is transitioning from price‑based competition to value‑based competition, according to Rong. While some segments do face downward fee pressure, a growing number of quality clients are increasingly recognising the value of service excellence and professional expertise.

According to Yang, it is the low-end service segments where price wars are most intense, and profit margins are under constant pressure. “Even for high-complexity engagements such as IPO audits and annual audits for listed companies, fee levels have not risen materially despite expanded compliance procedures and deeper audit scrutiny,” she said. “To compound challenges, accounts receivable collection has become more difficult. Payment cycles are lengthening, budget approvals are tightening, and requests for discounts or deferred payment on various grounds are noticeably more frequent. While compliance costs and professional liability risks keep rising, audit firms have limited ability to pass these additional costs on to clients.”

Customer demand remains mixed. According to Dr Julie Laulusa, managing partner, Forvis Mazars China, foreign direct investment into China has declined for three consecutive years (2023: -8.0%; 2024: -27.1%; 2025: -9.5%), while many multinational groups are reassessing their strategies for China. “This has had a direct impact on traditional advisory work linked to market entry and expansion,” she said.

In previous years, another key driver for growth that pushed many firms into the services and consulting space, was IPO criteria to promote financing for unprofitable tech firms. On 18 June 2025, the China Securities Regulatory Commission (CSRC) released the ‘Guidelines on Establishing the Growth Tier on the Science and Technology Innovation Growth Board (STAR Market) to Enhance Institutional Inclusiveness and Adaptability’. These guidelines reopened listings for unprofitable companies while expanding eligibility to frontier sectors such as AI, commercial aerospace and low-altitude economy, allowing them to use the STAR Market’s Listing Standard V.

But reform giveth and reform taketh away. China’s IPO volumes have not increased dramatically, as stricter regulatory scrutiny has prompted many IPO applicants to withdraw their filings or face rejection. However, successful listings require far more audit hours and compliance procedures than before. A handful of large firms now dominate the IPO audit space, while mid-tier and smaller firms are finding less and less room to participate. There is also structural upward pressure on audit fees: expanded confirmation work, the introduction of IT auditing, deeper internal control testing, and other compliance requirements have pushed up project costs, and leading firms are seeing some improvement in pricing power.

Once again, the smaller firms are losing out. Changes to the CPA law mentioned earlier, means that limited liability accounting firms will be barred from securities audit work, further concentrating IPO audit market share among large top-tier firms. Small and mid-sized firms are quickly losing opportunities to serve IPO clients.

However, there are signs the IPO market is picking up. “Both the Chinese Mainland IPO market and the HK IPO market have increased,” said Dr James Ngai, managing director of Russell Bedford Hong Kong. “A-share IPO market posted steady gains in 2025, with 130 IPOs raising RMB163.7 billion (increased 23% from 2024). For the first half of 2026, there were 79 IPOs raising RMB100.5 billion (increased 87% from 1H 2025.”

“The continued increase in compliance requirements translates to a steady demand for regulatory compliance services, especially in view of the rebound of the IPO markets,” Dr Ngai continued. “Demand is expected to be strong from listed or listing companies, those seeking to expand overseas, technology and advanced-manufacturing groups, companies restructuring debt or operations, and businesses affected by new tax, data, sustainability or internal control requirements.”

An increasing growth market for local accountants is Chinese corporates’ global expansion. “As Chinese companies continue to expand their manufacturing, sales and supply chains into Southeast Asia, the Middle East, Europe and Latin America, that would likely drive the demand for international tax structuring, transfer pricing, overseas accounting and payroll, acquisition due diligence and multi-jurisdiction consolidation,” said Dr Ngai.

Rong has also seen robust demand growth in emerging areas such as due diligence, IT auditing, data compliance consulting, ESG services, and REITs‑related advisory. “The high growth in these segments reflects the strong pull exerted by China’s digital transformation, green and low‑carbon development, and capital‑market innovation on professional service needs,” he said.

Demand has surged for intelligent finance and audit services, including digital transformation, automated compliance, and data analytics solutions, as firms and clients prioritise tech-driven efficiency.

“In the coming 12 months, supported by big data-powered smart supervision, fiscal and tax regulation will become stricter and more comprehensive, driving continuous industrial upgrading,” said Pingwen Hu, tax consultant for Ecovis China. “Cross-border compliance and global financial & tax risk management will serve as core growth areas.”

Industry experts expect market conditions to remain challenging, with ongoing industry reshuffling, although China does not seem to have caught M&A fever - the overall market structure remains generally stable. However, in terms of talent mobility, there has been a noticeable trend of more professional teams moving from the Big Four international firms to high‑quality local Chinese firms—a shift that underscores the rising competitiveness of domestic players.

Chinese firms face an expensive year of reform inside and out, while bracing themselves for more changes to come.