Look east for accounting’s next big thing

The Anglo-dominated accounting industry could soon have a Chinese flavour.

The emergence of Chinese banks is well documented but soon it will be the country’s accounting firms that rise to global prominence.

China’s accounting firms are being forced to localise in a move designed to end foreign control. This will largely affect what is known in the industry as the ‘Big Four’ – PwC, Deloitte, Ernst & Young and KPMG – who are led and largely controlled by expatriates and foreign partners.

The Ministry of Finance (MoF) has just released rules requiring all accounting firms to localise by August. This means they must be led by local citizens and ensure the proportion of foreign partners does not exceed 40 per cent. By 2017, this drops to 20 per cent.

The rules are designed to place control of the largest firms into the hands of Chinese and ensure voting rights are dominated by locally-qualified accountants.

The ‘localisation’ of the Big Four has been widely anticipated and the timeline provided is more generous than many experts predicted.

It’s an important step in the rise of China’s accounting industry because the Big Four are the last great bastion of foreign-managed firms, with market-leader PwC approximately 3.5 times the size of China’s largest domestic firm.

Number Two

This year, China will eclipse the UK as the second largest accounting industry by headcount. In 2007, the UK’s leading 40 firms had 30,000 more accountants than China but in 2011 the difference was only 5,400, according to the International Accounting Bulletin, a publication that analyses accounting markets.

And, China’s workforce has grown by 166 per cent in the past five years compared with 113 per cent in the UK.

The Big Four and Grant Thornton are still bigger in the UK but their Chinese counterparts are catching up quickly. BDO, RSM International, Baker Tilly International, PKF International and Nexia International already have larger Chinese workforces.

Chinese ‘super firms’

The government’s plan for its accounting industry is to produce Chinese ‘super firms’ that can compete head-on with the PwCs and Deloittes of this world. These firms are to become ‘homegrown’ global advisers to Chinese companies expanding abroad.

To do this, the MoF has ‘encouraged’ large Chinese firms to aggressively grow via M&A with like-minded firms, which has led to a flurry of consolidation in the past three years.

The MoF is encouraging Chinese firms to partner with global ‘mid-tier’ accounting networks outside of the Big Four, such as BDO, Grant Thornton and RSM. The aim is that these global networks will help Chinese firms develop audit methodologies and international skills in accounting and auditing. In return, the networks gain a strong Chinese firm for the referral of work in and out of one of the most important economies.

This has led to China becoming one of the least concentrated accounting markets. If you take the largest 40 firms in China, the Big Four earn 59 per cent of market revenue. In the US, the Big Four earns 81 per cent and globally their share is 70 per cent.

It is conceivable that the next 10-20 years, the global accounting industry could revert back to a Big Five or Big Six, with a couple of Chinese-backed players.

The traditionally Anglo-dominated accounting industry could soon have a Chinese flavour.

Arvind Hickman is the  editor of the International Accounting Bulletin.

Photograph: Getty Images

Arvind Hickman is the editor of the International Accounting Bulletin.

Photo: Getty
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.