Showing posts with label accounting. Show all posts
Showing posts with label accounting. Show all posts

Wednesday, July 31, 2019

Big four accounting firms: winning again in China - Paul Gillis

Paul Gillis
The Chinese government has tried to promote local CPA's on the expense of the Big Four, but - says  Beida accounting professor Paul Gillis - the 2018 top-10 CPA ranking shows the Big Four are back winning market shares, with PwC, Deloitte and E&Y in the top three, he writes at his Chinaaccountingblog.

Paul Gillis:
China had a policy to promote the development of local CPA firms, but it no longer seems to be on that path. The first indication was mandatory audit rotation on companies with state ownership. The first large scale rotation was in 2012 and somewhat surprisingly nearly all of these companies simply moved from one Big Four firm to another, albeit with significant fee reductions. The government strongly encouraged companies to select a non-Big Four auditor, but they were largely ignored. The next round of audit rotation takes place in 2020, and if local firms do not win some of the large state-owned enterprises I think the Big Four will be cemented into these slots. 2020 is shaping up to be one of the most significant years in the development of the CPA profession in China.  If the Big Four can retain the large state controlled enterprises in the 2020 audit rotations they are likely to retain a strong market position for the foreseable future. 
The Big Four have over 27,000 employees in China, led by PwC at 9,460 out of 250,000 PwC employeees worldwide. Overall, there are 120,604 people working for accounting firms in China. 
Big Four firms do not release information on profitability.  But since payroll is the largest expense for accounting firms, a good measure is revenue per employee. As expected, the Big Four have significantly higher revenue per employee than local firms, with a notable exception of PwC. PwC has revenue per employee of RMB 540,635 compared to an average of RMB 652,390 for the other Big Four.  This suggests PwC is likely less profitable than the other firms and is potentially overstaffed.
More (including the 2018 ranking) in the Chinaaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts on the China Speakers Bureau? Do check out this list.  

Wednesday, December 12, 2018

US accounting regulators join trade war - Paul Gillis

Two financial regulators in the US, the SEC and the PCAOB, have joined the trade war of their country against China's accounting practices, writes Beida accounting professor Paul Gillis at his weblog. While the complaints are not new or surprising, he wonders about the timing, Gillis adds.

Paul Gillis:
For those have not been following the issue, the PCAOB is mandated by Sarbanes-Oxley to inspect accounting firms that audit U.S. listed companies, including foreign accounting firms. When the PCAOB attempted to come to China to inspect firms (mainly local affiliates of the Big Four) auditing U.S. listed companies China blocked them on the basis of national sovereignty. Attempts to find alternatives also foundered on arguments that the working papers might contain state secrets.  The PCAOB was also blocked from inspecting Hong Kong firms to the extent the work related to the mainland.   
After the wave of frauds by U.S. listed Chinese companies in the past ten years, the SEC finally got fed up with the intransigence of the Big Four firms about producing their working papers and brought charges against the firms. The firms argued to a SEC administrative trial judge that they were caught between a rock and hard place, having to decide whether to break Chinese or American law, and the judge appropriately observed that if that were the case, it was only because the firms put themselves in that position when they decided to do U.S. audits for Chinese companies. The judge threw the book at the Big Four, and BDO. 
The firms appealed and settled with the SEC paying a $500,000 penalty each and promising not to sin again. 
The PCAOB has succeeded in agreeing on enforcement cooperation with Chinese regulators, but has been unable to reach agreement on inspections, arguably a more important issue for investors than enforcement. Inspection are used to make certain that audits of U.S. listed companies comply with U.S. auditing standards, which is especially important in a market like China, where accounting practices are often “flexible”. 
The primary champion of getting PCAOB inspections in China was former PCAOB chairman James Doty, who together with the rest of the PCAOB board and much of its management was forced out in a purge after the Trump election. This is the first comment on the issue that I am aware of by Doty’s replacement, Republican loyalist William Duhke III. 
The remedy to China’s refusal to allow inspections has been what is referred to as the nuclear option. The PCAOB could deregister accounting firms that it cannot inspect. The consequence of that would be that most U.S. listed Chinese companies (and some multinational firms) would be unable to file audited financial statements with the SEC and without being granted an exception would be delisted from U.S. exchanges. This has been viewed as a step too far for the PCAOB, since it would likely hurt investors in the Chinese companies. Most of these investors are Americans, since it is difficult for Chinese to buy shares of companies listed in the U.S. because of currency restrictions.  The result of a mass delisting would likely be a surge of IPOs on the Hong Kong exchange. 
I suspect the SEC and PCAOB are raising this issue at this time because of the trade war. Allowing inspections would not seem to be a huge concession for China to make in a settlement of the trade war. Threatening to cut off access to U.S. capital markets for Chinese companies is yet another way for the U.S. to escalate the trade war.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts on the ongoing trade war between the US and China? Do check out this list.  

Monday, December 10, 2018

What makes Chinese accounting different from Western standards? - Paul Gillis

Paul Gillis
Accountants have to figure out what is happening in a company, and the difference between Western and Chinese practices makes that often hard, says Paul Gillis, accounting professor at Peking University, and author of the leading website ChinaAccountingBlog to Young China Watchers.

Young China Watchers:
YCW: You have a wealth of experience as a certified public accountant (CPA) across many countries. At a high level, is there anything specific that analysts and observers should take into account when trying to understand financial statements and general business practices in China? 
PG: One of the biggest challenges has been adapting Western accounting and auditing practices to Chinese business practices, where personal relationships can overshadow contracts and laws. In the West, internal controls often rely on the separation of duties on the premise that it is hard to get two employees to agree to commit a fraud. What we found in China is that the existence of 关系(guanxi) relationships between actors often overrode controls. There was a big problem with bank confirmations. A standard audit practice is for the auditor to ask the bank to confirm the bank account balances of clients. In China, it proved not very difficult for many companies to lean on the bank branch manager to confirm a false balance. Auditors needed to find other ways to audit to overcome these problems, but there were many frauds in the meantime.    
YCW: A lot has been said about Beijing’s intention to open up China’s financial sector. How do you see this impacting the audit industry? Have you observed any broad trends recently as a result of the latest round of market reforms? 
PG: Accounting is not directly affected by the opening up of the financial sector. Foreign accounting firms in China are structured like the firms elsewhere in the world: Local partners own the local firm. There has always been a lot of talk about allowing foreigners to own interests in local accounting firms—they already can, but the biggest obstacle is passing China’s CPA exam, which is the toughest in the world! It actually makes sense for local partners to own and operate the firms in China. They have local expertise and since most of them are now local Chinese, they better understand the cultural aspects of doing business.    
YCW: A lack of transparency has always concerned investors and lenders in China, perhaps unjustifiably so. While the perception is changing, can you identify any obvious steps to be taken at the state and firm levels to speed up this process, or has all the low-hanging fruit been picked? 
PG: Disclosures of public companies in China, particularly those listed abroad are pretty extensive. The greatest difficulty often lies in opaque ownership structures where it is hard to figure out who is ultimately in control. One thing I have observed is that Chinese companies often do not do things in the most straightforward manner. For example, it is not uncommon to put the ownership of companies in the names of friends or relatives. I guess that gives people plausible deniability if problems come up, but it often scares investors and business partners who think they are trying to hide something. I think a lot of this is a legacy of earlier times when being a “capitalist roader” (走资派, zou zi pai) was a bad thing.
More at the Young China Watchers.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts on managing your China risk at the China Speakers Bureau? Do check out this list.  

Monday, April 09, 2018

Can a trade war hit the Big Four? - Paul Gillis

Paul Gillis
Import duties - increased during a trade war - focus on goods, not services. Nevertheless, the Big Four accounting firms can still suffer from a trade war, writes Beida accounting professor Paul Gillis on his weblog. But those subtleties might not be spent on China when they are drawn into a full-scale trade war.

Paul Gillis:
Services are not subject to import duties, but China has shown no qualms about punishing foreign business for the sins of their government. The Big Four are technically not American companies. The operations in China are not subsidiaries, but more like franchises owned and operated mostly by local Chinese. But they are generally viewed as American and may face regulatory crackdowns and may see an acceleration of the process of transferring major accounts to local CPA firms. Some smaller US CPA firms operate in China in ways that are technically illegal under Chinese law and would be easy to crack down on. 
It would be easy for the Chinese to crack down on the Big Four. They simply need to strictly enforce their own rules. Few audits can survive a critical examination by regulators, evidenced by the high rate of audit deficiencies identified during inspections by the Public Accounting Oversight Board (PCAOB) of domestic firms. Earlier this year China temporarily banned several local firms for audit deficiencies. 
The Big Four had best watch their back. The Big Four will likely also suffer from a decline in business serving US multinationals. All multinationals must carefully reexamine their global supply chains and some of the China business is going elsewhere even if this spat is settled. Even if this dispute is settled, it has highlighted the risk of overreliance on the Chinese market.
More at the Chinaaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form. 

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.

Monday, April 02, 2018

How KPMG Hong Kong got itself into serious problems - Paul Gillis

Paul Gillis
Beida accounting professor Paul Gillis describes on his weblog how auditor KPMG Hong Kong got itself into trouble for signing off papers on China Medical, a company convicted in 2012 for looting US$400 million from its investors. Problem: KPMG Hong Kong was not really in charge and now the Hong Kong legal system caught up with this omission.

Paul Gillis:
Matt Miller of Reuters has an interesting update on the troubles KPMG is having in Hong Kong with a failed US listed Chinese company. In my view the problems are of its own making. 
KPMG Hong Kong was the auditor of China Medical Technologies Inc., which failed after management was charged by the US Securities and Exchange Commission with looting over $400 million from the company. The company was put into liquidation in 2012 in the Cayman Islands, where it was incorporated. 
Actually, KPMG Hong Kong was not the auditor, and that is the problem. Several years ago I wrote about KPMG’s labeling problem where they had a practice of using Hong Kong letterhead to sign audit opinions on audits done by KPMG Huazhen, KPMG’s China affiliate. To me, this was like a Wenzhou shirt maker sewing a made in Italy tag on a shirt made in China.   ... 
KPMG Hong Kong is in a terrible place. They signed off on an audit without doing one. The Hong Kong Institute of CPAS (HKICPAs), regulator of Hong Kong accountants, should investigate this violation of auditing standards, but I think it is unlikely they will.  The HKICPAs is a feckless regulator and is unlikely to pursue a case against a Big Four firm, especially a case that relates to a company not listed in Hong Kong. There are legislative proposals to strengthen audit regulation in Hong Kong, but the proposals will likely have no effect on this case. 
KPMG was the most egregious at mislabeling their audit work, but all of the Big Four in Hong Kong have had this problem, which I believe came about because the firms failed to recognize the importance of respecting their legal structure. While the China member firms of the Big Four have generally been managed from Hong Kong since the early 2000s, they have always been separate legal entities.
More at the Chinaccountingblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

Wednesday, November 29, 2017

US regulator bans HK accounting firm - Paul Gillis

Paul Gillis
The efforts by the Public Company Accounting Oversight Board (PCAOB)  to get access to Chinese data from US-listed Chinese firms went into a new phase as it banned a Hong Kong accounting firm, reports Beida accounting professor Paul Gillis on his weblog. It could be a new item on Trump's China agenda, he suggests.

Paul Gillis:
The Public Company Accounting Oversight Board (PCAOB) has published disciplinary actions against a small Hong Kong CPA firm, Anthony Kam & Associates and Anthony Kam himself (Kam). Kam and his firm have been fined, censured, and banned from doing audits of US listed companies for at least five years because of shoddy work on Sino Agro Food, Inc (SIAF), a Chinese reverse merger. 
Kam was found to have signed off on the 2012 audit of SAIF without actually conducting an audit. Kam had taken over the audit from another firm and reissued the financial statements without doing any work other than obtaining a representation letter from the client and getting a copy of the prior auditors working papers. Serious deficiencies were found in the 2013 and 2014 audits. 
The PCAOB lamented that it should have inspected KAM at least twice since 2009, but was unable to do so because China blocks access. Somehow the PCAOB was able to pursue this action; possibly it was done under the 2013 Enforcement Cooperation Agreement. If Trump wants to get tough on China, he might start by demanding the Chinese comply with US laws or else delist their companies from US markets.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau. Do check out this list.  

Friday, July 07, 2017

Foreign auditors get more legal space - Paul Gillis

Paul Gillis
China has diminished limits on foreign businesses with its new negative list for 11 free trade zones. That includes accounting, writes Beida accounting professor Paul Gillis at his weblog, although most foreign accounting firms had already workarounds for most legal limitations of the past, he adds.

Paul Gillis:
Accounting was initially off limits to foreign investment. The international accounting firms entered in the early 1980s through representative offices that were not allowed to practice. In the early 1990s they were permitted to enter joint ventures with state-controlled CPA firms. In the late 1990s the state-controlled CPA firms were separated from the state. In the early 2010s the Big Four restructured into special general partnerships (SGP) that allowed up to 20% ownership by unlicensed foreign partners (started at 40% and phased down). 
Allowing any ownership by unlicensed foreign partners was a concession to the Big Four that is unique to China. I believe China is the only country that allows any unlicensed partners in CPA firms. The Big Four were built in China using foreign partners (mainly Hong Kong) although local partners are now in the majority. 
Included in the deal to allow foreign partners was a restriction that said the senior partner of the SGP must be a local Chinese. This restriction likely violated China’s WTO commitments to not have nationality based restrictions, but the Big Four figured out a workaround. They would nominate a local partner to be senior partner of the SGP, but all power was vested in the senior partner of the firm, who typically was a Hong Kong citizen based in Hong Kong. I do not believe any of the Big Four currently have a local Chinese senior partner, but I expect the next generation of senior partners will all be local Chinese. China has removed the nationality restriction on the senior partner of the SGP in the latest iteration of the negative list. I think this will have little effect since the Big Four effectively ignored the rule, although there may be a few Big Four partners with foreign passports whose career prospects have improved.
More at Paul Gillis' weblog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request list.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

Thursday, November 10, 2016

Big Four face rough market in China - Paul Gillis

Paul Gillis
Paul Gillis
Accounting professor Paul Gillis published on his weblog the annual top-10 accounting firms in China for 2015, based on audit revenue. PwC is still leading the pack, but might lose its no.1 position soon, and drop, like the other three foreign audit firms, losing ground to domestic competition, he predicts.

Paul Gillis:
There was a shakeup in the Top 10 firms. PwC remains #1, but is likely to fall to #2 Ruihua in 2016. Ruihua is a member firm of both RSM and Crowe Horwath. Deloitte slipped from #2 to #4, falling behind both Ruihua and BDO. Grant Thornton replaced UHY Vocation in the #10 slot with remarkable growth of 32.5%. 
The accounting market in China remains highly competitive. The Herfindahl Hirschman index of market concentration fell slightly from 446 to 444, well below the level of concentration in Western economies which tends to be above 1500. 
The Big Four face a challenging market in China. Overseas IPOs of Chinese companies have slowed, and that was a market that the Big Four owned. The Big Four has not found the key to unlock the A share market, which is dominated by local firms. The biggest challenge for the Big Four comes in 2020, when the next big round of mandatory audit rotation for large state owned enterprises occurs.  I think it is likely we will see some of the rapidly growing local firms winning audits of some of China's flagship companies. 
Screen Shot 2016-11-10 at 8.28.59 AM
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form. 

Are you looking for more experts to manage your China risk at the China Speakers Bureau? Do check out this list.  

Monday, July 11, 2016

New rules take failing auditors off the hook - Paul Gillis

Paul Gillis
Paul Gillis
The Public Company Accounting Oversight Board (PCAOB) will demand companies to identify senior partners of auditors who perform audits from January 31, 2017. But that means also that auditors responsible for hundreds of dodgy Chinese IPO´s in the US will never be identified, writes Beida accounting professor Paul Gillis on this weblog.

Paul Gillis:
The rule is effective for audits completed after January 31, 2017. That means it will not be possible to identify the engagement partner on the many notorious audit failures that have happened in recent years among US-listed Chinese companies, since the information will be prospective only. Nevertheless, this is a good step forward, and will help to protect investors in the future. 
The information is not required to be included in the company’s annual filings. Instead, the audit firm makes a separate filing with the PCAOB that will be available in a searchable database. I think companies should voluntarily disclose the name of their audit partner in their annual report to make this process easier for investors. 
While auditor rotation is not required in the US (it is required for state owned enterprises in China), the audit partner on US listed companies must be rotated every five years. Audit committees should carefully vet proposed audit partners and ask direct questions about prior engagements the partner has been associated with. I know some large US-listed Chinese companies have rejected proposed audit partners because they were associated with frauds in the past.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more experts on China´s outbound investments? Do check out this list.  

Wednesday, April 13, 2016

New audit standards for Chinese companies listed in the US - Paul Gillis

Paul Gillis
Paul Gillis
The tug of war between China and the US on auditing Chinese companies listed in the US, got a strong pull from the US side, as the Public Company Accounting Oversight Board proposed new standards. Potentially a huge improvement writes accounting professor Paul Gillis at his weblog.

Paul Gillis:
The Public Company Accounting Oversight Board has proposed new auditing standards that will significantly affect audits of US listed Chinese companies. The proposed standards address two of the problems with audits of US listed Chinese companies. 
The first problem relates to the Big Four in Hong Kong signing off on audits that are mostly or completely done by the China member firm. I have called that practice consumer fraud – no different than a Wenzhou shirt maker sewing a made in Italy label on a garment. This practice has caused problems – most notably the case of Standard Water where EY Hong Kong signed off on accounts yet was unable to turn over working papers to SFC when demanded because it actually did not do the work. There is also the problem of some firms having their Hong Kong affiliate sign off US listings even where the work is done by the mainland firm. 
The proposed standard makes it clear that, to act as lead auditor, an audit firm must itself audit a meaningful portion of the financial statements... 
The second problem is the China offices set up by many smaller US CPA firmsthat enabled them to serve smaller US listed Chinese companies. Many of these firms have set up consulting wholly foreign owned enterprises (WFOEs) in order to employ local accountants and open offices. Auditing is outside the permitted business scope of these companies and none to my knowledge are licensed as CPA firms in China. The proposed standard may shut down this practice. It requires that the auditor obtain a representation from each other auditor that the other auditor is duly licensed to practice under the applicable laws of the relevant country or jurisdiction. Since the WFOEs are not licensed to practice auditing in China, I don’t see how they can make this representation. 
These are good proposed standards that will improve auditing practices in China and help protect investors.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you interested in other stories by Paul Gillis? Do check out this list.  

Wednesday, March 16, 2016

Lagging government oversight helps Chinese cowboys in the US - Paul Gillis

Paul Gillis
Paul Gillis
Bounty hunters help Wall Street investors to hunt fraudulent Chinese crooks, reports the New York Times. The Wild-west equivalent emerged because both US and Chinese government did not do their jobs in going after them, says Beida professor Paul Gillis.

The New York Times:
Many of the Chinese companies were soon engulfed in accounting irregularities or allegations of outright fraud. Others simply stopped submitting quarterly financial statements in the United States, leaving investors in the dark about what was happening with their operations in China.
Critics say regulators have been slow to act. 
“The U.S. regulators have been unwilling to go to the mat on this,” said Paul Gillis, an accounting professor at Guanghua School of Management, Peking University in Beijing.
At the same time, there has been little political will to do anything about in China. “The responsibility for this stuff is spread out too widely, there are so many different Chinese bureaucracies involved,” Professor Gillis said.
More in the New York Times.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.    

Thursday, January 14, 2016

US auditing regulator censors first China firm - Paul Gillis

Paul Gillis
Paul Gillis
The Public Company Accounting Oversight Board (PCAOB) has censured PKF Hong Kong and revoked its registration, banning it from auditing US firms, writes accounting professor Paul Gillis on his website. This is a next step in efforts to get Chinese accounting firms into line with US regulations, and forcing to give insight in the books of US-listed Chinese firms.

Paul Gillis:
On January 9, 2014 the PCAOB issued an order of formal investigation of PKF’s audits of an unnamed client (PKF had resigned that account a year earlier).  In early April 2015 the PCAOB, pursuant to an Accounting Board Demand, insisted that PKF make available people to testify about the audits. PKF refused, saying Chinese law forbid them from doing so, and insisted that the PCAOB go through the enforcement cooperation MOU with the CSRC. The PCAOB argued that it is not bound to go through the MOU but must follow US law. 
I believe this action sends a strong signal to Chinese authorities that the PCAOB is willing to deregister accounting firms that do not cooperate with it. I have heard that the PCAOB has issued an Accounting Board Demand, or something similar to it, to the China Big Four firms in December.  I do not expect the firms will comply with the demand, setting up a scenario similar to PKF.  If the PCAOB follows a timetable similar to the PKF case, it suggests that a disciplinary action might take place this coming summer, assuming that the PCAOB and Chinese regulators are unable to reach an agreement on inspections. 
Sarbanes Oxley legislation precludes the PCAOB from disclosing pending disciplinary actions until they are final, and likely Big Four appeals of any PCAOB action may delay this information from becoming public for some time.
More in the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more stories by Paul Gillis? Do check out this list.  

Tuesday, September 08, 2015

Can US regulator inspect US-listed Chinese firms soon? - Paul Gillis

Paul Gillis
Paul Gillis
For decades Chinese companies listed in the US could not be inspected in China, because the US regulator, the Public Company Accounting Oversight Board (PCAOB), did not get permission to work in China. Accounting professor Paul Gillis expects this might be changing fast, he writes on his weblog.

Paul Gillis:
There are signs that a breakthrough may be near. This summer the PCAOB was allowed to inspect Deloitte in Hong Kong. Word on the street is that the inspection did not go well – Deloitte had few working papers in Hong Kong related to China engagements since those jobs are usually done by the mainland affiliate. That should have had the PCAOB raising questions about who is the principal auditor who should be signing the reports. 
Everyone I talk to at the accounting firms expects the PCAOB will be back next year to do inspections on the mainland. I expect an announcement of an inspection deal will be made during the state visit of Xi Jingping to Washington in the middle of this month. Many Chinese companies have announced their intention to delist from US markets in order to seek a listing in China. 
The recent turmoil in the markets raises some questions about whether that will happen. I have also heard that Chinese regulators are aware of the moral hazard present in these companies delisting at low values and relisting at much higher values in China. I am told that they are considering allowing US listed Chinese companies to seek a dual listing in China. That could be a major win for investors, and the continued efforts of the SEC and the PCAOB to police this sector may provide the most important protection for shareholders, since I am skeptical that Chinese regulators will be up to the task of effectively rooting out fraud in these companies.
More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.
Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.    

Wednesday, May 06, 2015

Reforms on auditing stalled - Paul Gillis

Paul Gillis
Paul Gillis
A range of pending reforms in auditing issues have been stalled, writes Beida professor Paul Gillis at his weblog, creating potential risks for investors. Here two of those stalled reforms: the VIE´s and the auditing regulations in Hong Kong.

Paul Gillis:
The most significant change was proposed in Hong Kong, where the regulation of listed company auditors would be taken away from the Hong Kong Institute of CPAs (HKICPAs) and given to the Financial Regulatory Commission. Hong Kong had faced the embarrassment of having its regulatory equivalency with the European Union revoked because of the lack of an independent audit regulator. The HKICPA has proven to be an ineffective regulator. Public consultations were held in Autumn 2014 and then everyone went silent. In March, HK Secretary for Financial Services and the Treasury, Professor KC Chan, reported that the government had completed the public consultation and found majority support for the direction of the reforms. The consultation conclusions are to be published in the middle of this year. ... 
In a related matter, VIE reforms are now working their way through China’s legislative process. The proposed new foreign investment law makes it clear that foreign controlled VIEs are banned, but opens the door to VIEs (and perhaps alternative structures) so long as the foreign company remains under Chinese control. Many of China’s larger internet companies have structures in place to keep control in Chinese hands.  Others may need to restructure to continue to operate, or else seek special permission. Multinational corporations that use the VIE structure may have greater difficulties. The US Chamber of Commerce, the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai jointly asked China to provide grandfathering for existing VIEs or a 25-year grace period, likely a fool’s errand.
More at the China Accounting Blog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you interested in more stories by Paul Gillis. Check out this regularly updated list. 

Thursday, November 13, 2014

Limited reforms on auditing firms - Paul Gillis

Paul Gillis
+Paul Gillis 
China is officially loosening its rigid regulations, also for auditing companies, who might now be wholly foreign owned firms (WFOE´s) too. But accounting professor Paul Gillis believes the effects of this reform might be rather limited, to smaller CPA firms, he writes on his weblog.

Paul Gillis:
Noteworthy is the inclusion of accounting and auditing as an encouraged in-dustry. Auditors will now be allowed to conduct these services using wholly foreign owned enterprises (WFOEs). 
The Big Four currently conduct their auditing practices using limited liability partnerships that originally had 60% locally licensed partners and 40% un-licensed partners. The 40% reduces to 20% over the next few years, and I think it is at 35% for most of the firms right now. 
The Big Four conduct their consulting practices (including tax) in wholly foreign owned enterprises that are typically owned by their Hong Kong member firm. 
So, will this change result in the Big Four moving their auditing practices to WFOEs? I don’t think so. Under present Chinese rules, a partner in a CPA firm must be licensed as a CPA in China and I expect these rules will also apply to the shareholders of a WFOE. If ownership by unlicensed persons is allowed, then China has just opened the door wider than any other country on earth. Licensing requires the partner to pass the notoriously difficult Chinese CPA examination and meet other not so difficult requirements. The present rules, allowing a per-centage of owners to not have local licenses, is better for the Big Four than al-lowing them to have a WFOE. Additionally, an increasing number of Big Four partners are PRC citizens, and the WFOE alternative does not work for them. 
About the only situation where I see this being used is for a small foreign CPA firm made up of partners who have foreign citizenship and have passed the Chinese CPA examination. They could establish a WFOE and legitimately practice in China. I am not aware of any firm that meets those conditions.
More a ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check our latest list.  

Monday, May 26, 2014

Hong Kong accountancy gets another blow - Paul Gillis

Paul Gillis
+Paul Gillis 
In yet another blow for the Hong Kong accounting industry, Hong Kong EY lost a case against the regulator SFC concerning mainland company Standard Water. Accounting expert Paul Gillis is amazed no negotiated deal proved to be possible.

Paul Gillis at his weblog:
In a carbon copy of the SEC’s case against the Big Four, a Hong Kong High Court judge has ruled that EY cannot withhold working papers on Standard Water, a mainland company that pursued a listing in Hong Kong. The ruling is a major blow to the accounting profession in Hong Kong.
The Securities and Futures Commission (SFC) brought the case against EY. While EY Hong Kong was the accountant of record, they apparently outsourced the audit to EY Hua Ming, EY’s mainland affiliate. When SFC asked to see the working papers, EY Hong Kong demurred, saying they did not have them and that EY Hua Ming had refused to provide them because Chinese laws prohibited doing so.
And in a comment at Reuters:
"The ruling creates a really messy situation and it gets worse with the regulatory changes that were composed by the mainland last week," said Paul Gillis, an accounting professor at Peking University's Guanghua School of Management.
"I am surprised that mainland regulators and Hong Kong regulators haven't found a way to negotiate a solution to this. I think it's probably tied up in the fight with the SEC (U.S. Securities and Exchange Commission) and China doesn't want to set any precedents with respect to Hong Kong that it might have to follow through on with the SEC."
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Thursday, May 22, 2014

Big Four China trouble needs diplomatic steps - Paul Gillis

Paul Gillis
+Paul Gillis 
The ongoing dispute where the China units of the Big Four accounting firms are banned from auditing US-listed companies, might drag into next year, fears accounting expert Paul Gillis, missing the fillings for April 2015. He pleads for a negotiated solution, but is not hopeful China and the US can work out a deal.

Paul Gillis:
Relationships between the U.S. and China have been cooling, partly because of issues related to China’s neighbors. But the U.S. action to charge five Chinese soldiers with hacking into U.S. computers this week is certainly not going to warm things up. But perhaps both sides will be looking for an issue to cooperate on, and maybe that will be accounting regulation.
But how much room does the United States have to negotiate? China wants the U.S. to accept a concept known as regulatory equivalence. China has that deal on accounting regulation with the European Union. If a Chinese regulator like the MOF or CSRC regulates a Chinese accounting firm, EU accounting regulators are to accept that work as if it were their own work. U.S. laws generally do not provide for U.S. regulators outsourcing their responsibilities to foreign regulators. Amendments to Sarbanes Oxley allow greater exchange of information with foreign regulators, but do not go so far as to allow U.S. regulators to outsource their responsibilities to foreign governments.  Conservatives who already panic when a American judge reads a foreign legal opinion for ideas to solving a U.S. case are unlikely to agree to change the rules to accommodate regulatory equivalency. There is also the question of focus and expertise. Would a Chinese regulator have the skills to determine whether accounts were prepared under U.S. GAAP and audited under PCAOB auditing standards? Would they even have any interest in looking into U.S. listed Chinese companies? History indicates they will not. No Chinese company or executive has been charged with a Chinese crime related to the many heists that have taken place in U.S. listed Chinese companies, even when Chinese laws have clearly been broken.
I am becoming increasingly pessimistic about a positive outcome.
More at Paul Gillis´ ChinaAccountingBlog.

Beida professor Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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