China is urging state-owned enterprises to stop using “Big Four” accounting firms or to decouple from international investment

Last month, China’s Ministry of Finance and other government agencies issued window instructions to some state-owned enterprises urging them not to renew contracts with Deloitte, EY, KPMG and PwC when they expired, Bloomberg reported, citing people familiar with the matter.

It is understood that offshore subsidiaries can still use US auditors, but the parent company is required to hire accountants in mainland China or Hong Kong when the contract expires.

China is seeking to curb the influence of US-linked multinational auditors, secure Chinese data and promote its own accounting industry, the report said. Beijing has been making similar proposals to soes for years, but has recently renewed its emphasis on using accounting firms outside the Big Four. People familiar with the matter said no deadline had been set and the replacement would take place gradually as contracts naturally expired.

Analysts believe that the shift to lesser known auditors will make it harder for state-owned enterprises to attract international investors.

The Big Four are now dominant in China, where they recorded 20.6 billion yuan ($3 billion) in revenue in 2021, according to China’s Ministry of Finance.

About 60 state-owned and private Chinese companies listed in Hong Kong have changed accountants since September, when the Public Company Accounting Oversight Board began its review of Chinese companies, including property company Cosco and its subsidiary Cosco Services.

In its latest statement, Erica Williams, the board’s chairman, said it continued to require full inspection and investigation of the audit papers of all China-incorporated companies, stressed that ‘there are no exceptions or loopholes,’ and warned that the board would take immediate action if Chinese authorities blocked full access to the PCAOB.

This is because China and the US signed the Auditable Regulatory Cooperation Agreement on August 26, 2022, which allows US regulators to examine US-listed Chinese companies and accounting firms, including audit papers and other data, initially in Hong Kong.

China has long blocked foreign access to audit documents of Chinese companies listed in the U.S. without its approval, citing national security concerns.

The US Congress passed the Holding Foreign Companies Accountability Act in December 2020, which requires all US-listed companies to disclose audit records and be subject to PCAOB oversight, and can be delisted if they refuse to cooperate for three consecutive years. At the time, the law was widely seen as targeting Chinese companies.