China’s Ministry of Finance has reportedly asked state-owned enterprises to stop using the four biggest accounting firms due to data security concerns.
Offshore subsidiaries will still be allowed to use the Big Four auditors but their parent companies will have to hire local Chinese or Hong Kong accountants when their current contracts expire, Bloomberg reported on Wednesday, citing people familiar with the situation.
The finance ministry and the Big Four – Deloitte, PwC, Ernst & Young and KPMG – have not yet responded to the report.
Over the past many years, China has been reluctant to permit US-listed firms to disclose their books to offshore authorities, citing national security concerns. In September 2021, it launched a Data Security Law, which requires Chinese companies to categorize data based on its relevance to national security and the economy.
A Guangdong-based writer said by reducing its reliance on the Big Four, Beijing is sending a signal to the world that it wants to push forward a Chinese-style development with more economic autonomy and less foreign influence.
International capital, managed by foreign accounting and law firms and investment banks, has had a rising influence on the Chinese economy, he said, and its fluctuation could hurt China’s financial stability.
In March last year, the US Securities and Exchange Commission (SEC) announced that five Chinese technology companies could be delisted if they could not meet US accounting standards. It did the same to 17 Chinese firms in April and 80 more in May.
The move, together with China’s tightening measures in the technology sector, created huge pressure on Chinese technology stocks. Last March, shares of Tencent and Alibaba halved from a year earlier.
On August 26, the US Public Company Accounting Oversight Board (PCAOB), the China Securities Regulatory Commission (CSRC) and China’s Ministry of Finance signed a statement of protocol that would allow PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong consistent with US law.
On December 25, the PCAOB said it had secured complete access to inspect and investigate these companies’ audit work papers in mainland China and Hong Kong. It means more than 200 US-listed Chinese companies can avoid being delisted in the short term.
“This is the beginning of our work to inspect and investigate firms in China, not the end,” said PCAOB Chair Erica Williams. “The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward.”
She said if the PCAOB could not have access to the audit papers in the future, it would issue a new determination for the matter.
Since the PCAOB started to look into the audit papers of US-listed Chinese firms last September, about 60 Hong Kong-listed Chinese companies have changed auditors. Some smaller Chinese and Hong Kong accounting firms reportedly gained new jobs at the expense of the Big Four.
Besides, more than 80 listed companies in Shanghai and Shenzhen also have changed auditors since December.
A Jiangsu-based columnist said it is a good idea to kick the Big Four out of China to ensure the country’s data security, much as the US and Europe have done by excluding China’s 5G equipment from their telecommunication networks.
He said as data security is an increasingly important issue in China, it is necessary for government departments or state-owned units to replace foreign services and products with local ones. Such a move will help China reduce constraints caused by western sanctions, the columnist said.
In fact, China has started requiring the Big Four to localize their mainland businesses a decade ago.
In 2012, the finance ministry launched a five-year plan that required the global accounting firms to form partnerships with local ones. In 2014, it said that all the Big Four’s mainland branches had finished their restructurings and would be directly monitored by Chinese regulators.
In 2016, the ministry unveiled a document to encourage accountants in Hong Kong and Macau to enter the Chinese markets but directed that they could own no more than 49% of their mainland branches.
In 2019, it set up an expert group to try to create a Chinese accounting standard. On February 15 this year, the finance ministry appointed 54 experts for this group, only two of whom come from the Big Four while others are Chinese officials, academics and state-owned enterprises’ financial officers.
Read: US-China audit agreement not yet a done deal
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