China Changes Auditing Rules: Here’s How the Big Four Responded by Focusing on Local Talent
For over thirty years, major international audit firms operated in China under special conditions. Deloitte, EY, KPMG, and PwC (known in the industry as the “Big Four”) were able to assign top-level responsibilities to partners holding foreign professional qualifications—a practice that had helped bolster their prestige and influence in one of the world’s most important financial markets.
In 2012, however, the Chinese Ministry of Finance introduced a regulation on the “localization” of the Big Four. By the end of 2017, at least 80% of their partners were required to hold a qualification issued by the Chinese Institute of Certified Public Accountants (CICPA). The requirement applied only to the Big Four, not to local audit firms.
The stated goal was to develop Chinese professional expertise, reduce dependence on foreign qualifications, and create a more balanced competitive environment in the auditing market. In other words, to use regulation not only to oversee firms but also to reshape the very composition of the profession.
A study by Pietro A. Bianchi Fedrigoni of Bocconi’s Department of Accounting, along with Lin Liao of Nanjing Audit University, Miguel Minutti-Meza of the University of Miami, and Yini Wang of Loyola Marymount University—recently published in The Accounting Review—examines the effects of this transformation.
The paper studies a 14-year period, from 2005 to 2018, comparing the evolution of the Big Four with that of the major Chinese audit firms. It poses three questions: How did the large international networks adapt? Did audit quality suffer as a result? And what happened to competition and fees?
Don’t Replace, but Promote
On paper, the Big Four had several options. They could have helped existing partners obtain Chinese licenses, replaced professionals with foreign qualifications, or expanded their partnership by bringing in new, locally certified partners. The prevailing response was the third option: the firms increased the number of partners and primarily promoted professionals already on staff. Many of the new leaders had previously held more junior roles, while the hiring of partners from competing firms proved to be rare.
The authors summarize this strategy with the phrase “addition rather than subtraction.”
This phrase describes a significant organizational change. The Big Four did not simply remove foreign partners to replace them with Chinese colleagues. They built a new cohort of local leadership by accelerating promotions and redistributing responsibilities. This dynamic is particularly significant in the Chinese system, where audit reports are signed by two professionals. The first signatory is generally the most senior partner and oversees the work; the second plays a role more closely tied to field operations. Both share legal responsibility and may face sanctions in the event of irregularities.
Following the reform, many local professionals initially joined as second signatories—often on new clients—and then advanced to more senior positions. Localization has therefore not only changed the names at the top; it has altered career paths and the way firms distribute responsibilities.
The Big Four are growing, but local firms are growing faster
Between the period before and after the reform, the number of Big Four clients examined in the study increased from 153 to 263—a 72% increase. During the same period, however, the major local competitors saw their client base grow from 1,011 to 2,405, a 138% increase.
This comparison helps shed light on one of the study’s key findings. The Big Four have continued to expand in absolute terms, but have lost ground to the major Chinese players. Their market share has declined, while that of the large local firms has increased. The reform therefore appears to have helped achieve, at least in part, the regulator’s intention: to “level the playing field.”
It is not necessarily the case that this occurred solely because of the new professional qualifications. Decisions by the authorities, the preferences of state-owned enterprises, and China’s broader strategy to support domestic expertise are all part of the same picture. But the data indicate that, during the localization period, the Big Four’s competitive advantage has eroded.
It was not just market share that declined. The fee premium—the higher fees the Big Four traditionally charged compared to local competitors—also decreased. This trend appears to be particularly linked to state-controlled enterprises.
This outcome is far from a foregone conclusion: rapidly promoting new partners, reorganizing assignments, and investing in local certification could have driven up costs and, consequently, fees. Instead, competitive pressure on the major international networks has increased.
Has the quality of audits deteriorated?
This was the most widely discussed risk. On average, the new local partners had less international exposure. Some observers feared that an accelerated transition might weaken the quality of audits. On the other hand, Chinese professionals might have a deeper understanding of local companies, institutions, and economic relationships. International experience and knowledge of the national context could therefore produce opposing effects.
To assess the outcome, the authors consider several indicators: adjustments to previously published financial statements, modified audit opinions, discretionary accruals, and penalties imposed by authorities for improper financial reporting. One of these indicators raises a red flag. For clients of the Big Four, the probability of a subsequent financial statement restatement increases, at certain stages, from 1.3% to about 4.5%. However, the effect is not constant: it is concentrated in specific years and varies depending on the group of companies used for comparison.
The other indicators do not show a similarly systematic deterioration. In some cases, for example, penalties or modified audit opinions decrease. The picture is therefore mixed and variable over time.
“The triangulated evidence does not support strong or widespread conclusions about a deterioration in audit quality”
For this reason, the paper urges against turning a single data point into a general verdict: “The triangulated evidence does not support strong or widespread conclusions about a deterioration in audit quality.” The concept of “triangulation” is crucial. Audit quality cannot be observed directly, and no single indicator, taken on its own, fully measures it. A correction may signal a previous error, but it may also reflect a change in controls or in the intensity of regulatory action. A modified opinion may indicate the auditor’s caution, but it does not automatically constitute evidence of a better audit.
The most accurate conclusion, therefore, is not that the relocation had no consequences. Rather, the consequences on quality were mixed: visible in certain metrics and in certain years, but not consistent enough to suggest a widespread deterioration.
A policy on human capital
The Chinese case demonstrates how a regulation on professional qualifications can go beyond simply verifying a formal requirement. By forcing the Big Four to change the composition of their partnerships, the regulator influenced promotions, client assignments, leadership development, and the competitive landscape. It accelerated the rise of a generation of Chinese auditors and narrowed, at least in part, the gap between international networks and local firms.
The study also suggests another possible conclusion. In professional services firms, human capital is not a resource that can be replaced instantly. When a law changes who can assume leadership roles, firms respond by creating internal career paths, redefining roles, and redistributing work. In China, the new wave of local talent has not simply filled vacant positions. It has changed the way the Big Four grow, compete, and organize their leadership.
