Home' A Plus Magazine : August 2013 Contents August 2013 19
MAINLAND EMERGES AS
China’s move to mandatory auditing firm rotation last year resulted
in few surprises: no second-tier accounting firms won a major
contract. While it was suspected in professional circles that Mainland
authorities hoped that the rotation would result in some of the big
companies moving to China's larger non-Big-Four firms, what resulted
was a swap of clients among the Big Four.
“I expect that [smaller accounting firms] will win some next time
around,” forecasts Paul Gillis, professor of accounting practice at the
Guanghua School of Management at Peking University in Beijing.
“The government insisted that second-tier firms be included in the
bidding process but one firm I talked to said they were not ready
for one of the big banks now, but they should be able to build the
necessary skills over the next five years.”
That might be too late for the next round of rotation. Several
large Mainland banks are now due to rotate auditors, with the Bank
of China (PricewaterhouseCoopers) and Agricultural Bank of China
(Deloitte) accounts expected to change this year. Industrial and
Commercial Bank of China (now audited by EY) will be looking for a
new auditor in 2014.
Non-Big Four firms are cautious when it comes to declaring that
they are ready to audit China’s largest institutions. “It all depends
on the competency to identify the right working partners in order to
strengthen our competitiveness,” says Meng Rongfang, senior partner
at BDO China in Beijing.
Albert Au, chairman of BDO in Hong Kong and a past president
of the Hong Kong Institute of CPAs, says the Mainland is an unusual
market in that the government is encouraging development of non-Big
Four firms. “The trickle-down effect is not driven by market forces
but by government policy.”
One area of concern that emerged from the rotation of auditing
firms was that those particular auditing contracts dropped in fees.
“New audits are harder to do than recurring audits, so the drop
in fees means that there will be a drop in audit quality, or partner
income, or both,” Gillis observes.
Accountants say the price drop is not an entirely unexpected
outcome. “Some companies see rotation as a strong bargaining tool
to negotiate down their audit fees,” says Raymund Chao, Asia-Pacific
assurance leader at PwC in Hong Kong and an Institute member.
Chao says continued pressure on fees is undesirable. “If
mandatory audit firm rotation results in continual downward
pressure on audit fees, this in turn will have significant long term
implications for the profession to attract and invest in talent, and to
develop the expertise necessary to achieve high quality audits.”
Whether higher competition or higher professional scepticism – or
both – was the ultimate goal is unclear, but some Mainland auditors
show little anxiety over mandatory firm rotation.
“In general, mandatory audit rotation can improve the audit
quality,” says Meng at BDO. “The rotation of personnel has a positive
effect on independence and could also improve audit quality.”
However, whether the perceived benefits are actually taking place
have yet to be proved.
“There is something
that just doesn’t feel
right when an audit
firm has served for
over 25 years and
some cases even
over 100 years.”
from both the Big Four and from their clients,”
says Gillis at Peking University.
Hong Kong, Gillis adds, should look to
other alternatives that can do a better job of
ensuring quality. “Instead of rotation, Hong
Kong should put in place a rigorous system
of independent audit inspections, similar to
those conducted in Canada by the Canadian
Public Accountability Board or in the United
States by the PCAOB,” he suggests.
Joy adds that the Institute, the Hong Kong
government and the Financial Reporting
Council are collaborating to develop a new
regulatory model that would meet interna-
tional expectations of independence.
In the meantime, Hong Kong stakeholders
w ill be watching the global debate on man-
datory rotation with keen interest. While op-
posing rotation, Big Four firms say they have
no issue with policies that widen the auditing
field, but warn that it will take time.
“ We welcome more competition as it helps
to improve standards,” says Liu at KPMG. “ The
challenge for the second-tier firms is develop-
ing common culture, values and processes.
This requires investment in people, which is
August 2013 19
Links Archive July 2013 September 2013 Navigation Previous Page Next Page