Explainer-How big are the Big Four accounting firms in China?

By Xie Yu

HONG KONG (Reuters) - Chinese regulators on Friday hit PwC's auditing unit in mainland China with a six-month business suspension and a record fine of 441 million yuan ($62 million) over the firm's audit of troubled property developer China Evergrande Group.

The business suspension and fines are the toughest ever penalty received by a Big Four accounting firm in China. The regulators' action puts the spotlight the Big Four's activities in the country and on how big a role they play in auditing major Chinese companies.

Chinese authorities have been examining PwC's role in the accounting of Hengda Real Estate, the name of Evergrande's mainland unit, since the China Securities Regulatory Commission accused the developer in March of a $78 billion fraud over a period of two years through 2020.

"We are disappointed by PwC Zhong Tian's audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network," PwC network, the alliance of PwC's global member units, said in a statement.

Here are some details on the Big Four's activities in China

* THE BIG FOUR AUDITING FIRMS IN CHINA

The Big Four accounting firms - PwC, EY, Deloitte, and KPMG - were the top four auditors, ranked by revenue in China in 2022, based on a report by the Chinese Institute of Certified Public Accountants, an industry association.

The four firms audit 18 of China's 20 biggest state-owned companies by assets, or 95.1% of the total assets as of 2023, research published in July showed. The research was led by professor Chen Hanwen from University of International Business and Economics and professor Han Hongling from Zhejiang University.

Their research also found the Big Four audited the majority of China's biggest banks, insurers and brokerages in 2023, with their audited assets making up 63.2% of the total 461 trillion yuan worth of total assets of China's financial institutions.

In total, the Big Four audited 12% of the companies listed on Shanghai Stock Exchange and 5% of companies on Shenzhen bourse by this March, PwC said on its official website.

* HOW HAVE THE BIG FOUR ATTRACTED CHINA BUSINESS?

The Big Four firm's strong market position in China is similar to the level they enjoy in the U.S., Jackson Johnson, president and founder of Johnson Global Advisory said. Johnson Global Advisory is an audit quality advisory firm based in Washington, D.C., with clients globally, including in Greater China.

Johnson said this market position was built on the Big Four's workforce, experience, and global resources, which "the next tier" of local Chinese firms could hardly compete with.

The Big Four are also able to attract high quality staff, he said.

If major Chinese companies hire the Big Four as their auditors for financial statements this can bring down financing costs, the research by Chen and Han showed.

Their research also showed that the Big Four accounting firms handled 23 of the 25 biggest initial public offering deals on China's A-share market by the end of 2023.

* PREVIOUS REGULATORY ACTION AGAINST BIG FOUR IN CHINA

China fined auditing firm Deloitte 211.9 million yuan ($30 million) in March 2023 for failing to perform its duty in assessing the asset quality of China Huarong Asset Management Co Ltd.

The finance ministry at that time said Deloitte had failed to discover the real situation of the underlying assets in its audit and ignored the approval compliance for Huarong's major investment matters.

Deloitte said at the time it respected and accepted the ministry's decision.

($1 = 7.0940 Chinese yuan renminbi)

(Reporting by Xie Yu; Editing by Sumeet Chatterjee and Jane Merriman)