BEIJING – Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signalling continued concerns about data security even after Beijing reached a landmark deal to allow United States audit inspections on hundreds of Chinese firms listed in New York.

China’s Ministry of Finance is among government entities that gave window guidance to some state-owned enterprises as recently as January, urging them to let contracts with the Big Four auditing firms – PricewaterhouseCoopers (PwC), Ernst & Young, KPMG and Deloitte & Touche – expire, according to people familiar with the matter.

While offshore subsidiaries can still use US auditors, the parent firms were urged to hire local Chinese or Hong Kong accountants when contracts come up, one of the sources said, asking not to be identified discussing private information.

China is seeking to rein in the influence of the US-linked global audit firms and ensure the nation’s data security, as well as to bolster the local accounting industry, according to sources.

Beijing has been giving the same suggestion to state-backed firms for years, but recently re-emphasised that companies should use other auditors than the Big Four, the people added. No deadline has been set for the changes and replacements may happen gradually as contracts expire.

While the China-US audit deal in 2022 was hailed as a sign that the competitive superpowers can still work together on some issues, Beijing’s audit guidance is a reminder that decoupling is still proceeding in sensitive areas like state-owned enterprises and advanced technology.

One risk for China is that shifting to lesser-known auditors will make it harder for state-owned enterprises to attract capital from international investors.

China’s finance ministry and representatives of the Chinese offices of PwC, Ernst & Young, KPMG and Deloitte & Touche did not respond to requests seeking comment. 

The frosty relationship between China and the US shows no signs of abating, with the episode over an alleged Chinese spy balloon adding further tension. But the audit breakthrough in 2022 was seen as a positive sign, ending a decades-long spat that threatened to kick more than 200 Chinese firms off the American exchanges.

The US Public Company Accounting Oversight Board (PCAOB) in December completed its first-ever on-site work paper inspection of some of the largest Chinese companies.

It said it was able to sufficiently review audit documents during the trip to Hong Kong, which was hosted by PwC and KPMG. The board is planning further reviews in 2023. 

However, several big state firms including China Eastern Airlines, China Life Insurance and Petrochina have voluntarily applied to delist from the American exchanges.

Getting shut out of Chinese state-owned business would be a blow to the accounting firms. The Big Four earned combined revenue of 20.6 billion yuan (S$4 billion) from all Chinese clients in 2021, according to the finance ministry. 

Some 60 Hong Kong-listed companies with Chinese headquarters – state-owned and private – have changed auditors since September 2022, when the PCAOB started its historic review.

Smaller Chinese and Hong Kong firms gained almost 20 jobs from the Big Four, according to Hong Kong exchange filings. 

Those changing to smaller audit firms in recent months include property developer Sino-Ocean Group Holding and its subsidiary Sino-Ocean Service Holding, which dropped PwC, citing good governance practices to rotate auditors after long years of service.

Furniture maker Red Star Macalline Group proposed to end a contract with Ernst & Young because they “failed to reach consensus on the work schedule and expenses”.

While the Big Four dominate China at the moment, smaller rivals are edging up. Potential winners of new business could include close rivals such as Pan-China Certified Public Accountants, BDO China Shu Lun Pan CPAs, Moore Global and RSM China. 

More than 80 listed companies in Shanghai and Shenzhen also changed auditors since December, Chinese news outlet Jiemian reported.

Chinese regulators have expressed concerns over some smaller firms’ quality of work and ability to handle troubled listed clients. BLOOMBERG