4th July 2011:

China and Big 4 only clauses

I have recently had an email exchange with Paul Gillis, Visiting Professor of Accounting at Guanghua School of Management, part of Beijing University about a thesis he is writing about the Big Four in China.  Professor Gillis is a former Big Four partner and, unsurprisingly, he has a very positive view on the role of the Big Four.
 
I am therefore very grateful to Professor Gillis for a recent posting on his blog http://www.chinaaccountingblog.com/weblog/big-four-clauses.html which draws attention to the use of Big Four only clauses in China, something that surely the Chinese Ministry of Finance will not approve.
 
As Professor Gillis states in his blog:
 
“I have been reviewing the SEC filings for Harbin Electric’s (NASDAQ: HRBN) going private proposal... HRBN’s CEO has proposed to take the company private with $400 million of funding provided by China Development Bank (CDB). CDB is a state owned bank directly under the supervision of the State Council. It has been described as the engine that powers the national government’s economic policies. Certainly CDB would follow State Council policies for the accounting profession and not use Big Four clauses?
 
Think again. In CDB's loan commitment to HRBN this general undertaking is required:
 
No Group Member may replace the Auditors, unless the new auditor to be appointed is any of Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG.
 
So, CDB is precluding HRBN from hiring any of China’s top local accounting firms, including the affiliates of BDO, RSM and Crowe Horwath who rank in the top 10 in China and globally.  But HRBN can keep its existing auditor – California based Frazer Frost. Frazer Frost is currently serving out a suspension from taking on new clients that the SEC imposed because of shoddy accounting work in China.  
 
I doubt that CDB made a conscious decision to insert the Big Four clause in HRBN’s loan commitment. I suspect it was boilerplate inserted by White & Case, CDB’s U.S. legal counsel, which itself is evidence that these Big Four clauses are more widespread than the Big Four would like you to think. (the fact that the firms are not in alphabetical order, but in the order of size in the U.S. market, not in China, lends further support to that argument). There is a lesson in here for CDB, however – it is important to read the agreements and when adopting western practices to make sure they actually are the best practices for China's development.”
 
The suggestion that Big Four only clauses are “boilerplate” has been denied by many but it seems the evidence that this is the case is increasingly apparent.  More worrying is the spread of these clauses, particularly to China.  The longer it takes Governments and Regulators to ban Big Four only clauses the more damage they will do.  
 

 Global Accounting  Role of the Auditor  Standards & Regulators  2 Comments July 4th, 2011