On July 1, 2015 news rules on CPA practices by the Ministry of Finance will get in place. While the Big Four won´t have a lot of problems, Beida accounting professor Paul Gillis expects that the smaller CPA firms from the US might lose their work on the China market, he writes on his weblog.
The new rules take effect on July 1, 2015. They will require foreign CPA firms that audit overseas listed Chinese companies to cooperate with a Chinese CPA firm that has at least 25 CPAs. An exception exists for companies with Hong Kong, Macau or Taiwan auditors that have more than 50% of the shares held be persons in those provinces that will be allowed to continue present arrangements. I think few public companies will qualify for the exception.
I believe these rules were directed at the small US CPA firms that audit Chinese firms that mostly came to market through reverse mergers. Most of these firms clients trade thinly, if at all, on the OTCBB or Pink Sheets. Chinese regulators have expressed frustration that Chinese auditors have been tarred with the poor performance by some of these firms in detecting fraud. Many of the companies that use small US CPA firms are likely to have difficulty getting audits done under the new regulations. The auditor will have to align with a Chinese CPA firm yet still do enough work to be considered the principal auditor. The PCAOB has punished firms that outsourced the entire audit to a local firm. In any event, the economics of the business have changed, since the CPA firms are now going to have to share fees with a local firm. This may be the final straw that leads some of these firms to abandon the market.
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