Big Four Loses Ground in China; Second Tier Firms Move Up

PwC and Deloitte remain the two biggest accounting firms in China in terms of audit revenues in 2013, but EY has now fallen out of the top four, while KPMG dropped one slot to No. 6.

Ruihua, a shared affiliate of Crowe Horwath and RSM, and Lixin, a member firm of BDO, are in third and fourth position, respectively, according to the annual list of the Chinese Institute of Certified Public Accountants (CICPA).

“It is bad news for the Big Four,” says Paul Gillis, a CPA and professor of practice at Peking University’s Guanghua School of Management. Writing in his influential China Accounting Blog, Gillis notes that PwC, Deloitte, EY and KPMG grew their collective topline by just 2.8% in 2013, while local firms expanded billings by 14.5%.

Top Ten in China: Rise of the Second Liners

Sources: CICPA, China Accounting Blog, CFO Innovation

“The future does not look bright for the Big Four in China,” Gillis reckons. “I expect capital markets to continue to migrate to the Chinese stock exchanges, meaning fewer US and Hong Kong IPOs that the Big Four historically dominate.” The Big Four’s share of domestic listings is “nearly insignificant,” he says.

“Multinationals, which the Big Four dominate, are also taking a beating in China, likely making it harder for the Big Four to make up the difference from their core international clients,” Gillis adds. And recent mandatory audit rotation rules could mean a switch from Big Four firms by the large state-owned enterprises.

That has not happened yet. But while the Big Four did not lose many large clients from the rotation, “the fees were significantly reduced,” says Gillis.

Favoritism

Commenting on Gillis’s blog post, Dezan Shira & Associates Managing Partner Chris Devonshire-Ellis, an occasional contributor to CFO Innovation, warns that the government “wishes to see the development of Chinese firms as dominating,” and it will do this “through pricing competitiveness and government favoritism.”

As a China-based consultancy, Dezan Shira had foreseen the trend and adopted a two-fold strategy: set up as many local offices across China as possible and expand to India and ASEAN.

“If we haven’t done that, I think the future now would be bleak,” says Devonshire-Ellis. “We would have remained in China to be gradually worn down.” The Big Four, he believes, are “no longer ‘favored’ businesses in China” and will need to adapt to a new environment like everyone else.

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