Accounting, like many professions in China, has revolving doors: Audit firms and corporations fight for talent in a nascent market that is struggling to produce qualified accountants fast enough to meet demand. By comparison, Stephen Yiu is an old-timer, having been with KPMG since 1983. He has worked on initial public offerings in China and Hong Kong, served as audit partner-in-charge for China, and became chairman of KPMG China on April 1 of this year. Yiu spoke to China Economic Review about the opportunities and challenges he expects to encounter during his tenure.
Q: Whenever the China chairman of a Big Four accounting firm is asked about his plans, he often says he wants to hire 1,000-1,500 graduates per year. Is it the same for you?
A: The number is more or less right because in China there is a huge potential. In our profession, you have to get the graduates in – we need to keep fresh blood moving on. It’s a question of how quickly can you build teams. We have been recruiting heavily since 2000, moving from 3,000-4,000 people to 9,000 now. It’s not easy.
Q: How do you see the balance of your business changing between audit, tax and advisory?
A: Our business in China has mainly been on the audit side, probably 60% or more, and we want to diversify, pushing it down to 50%. This doesn’t mean audit isn’t growing, just that the pace of growth of other functions is much faster. In the US, audit is below 50% – that’s the trend of more mature practices. For advisory, we have done a lot of good projects in China on Basel II and Basel III, working with banks. We do a lot of IT projects and outsourcing as well, because China has a lot of shared services and a lot of multinationals are moving in to set up their service centers. We have also advised a lot of clients on M&A.
Q: It is often said that there is a shortage of qualified accountants in China. Is this true?
A: It really depends how you define an accountant. In the past, accountants were more like bookkeepers and the accounting function was mainly presenting numbers. They didn’t see how accounting could help business development. Now accounting departments are becoming stronger and they are moving toward more value-added activities, such as strategy, planning, M&A and fund management. At this point it isn’t just accounting, it is merchant banking. A lot of big companies are working at bringing all these activities together.
Q: So do you lose many people to corporate accounting?
A: A huge number get poached by the private sector. I understand why. This is a tough profession – there is a lot of overtime, a lot of stress, and a lot of traveling. Our attrition rate is no different from any of the other big accounting firms; we are probably talking about 50% for managers and above. We find that a lot of people move after about five years with the firm.
Q: Is the education system doing enough to close the gap between demand and supply?
A: The gap won’t disappear completely, but there are about six million university graduates in China and a fair chunk of them are accounting and business-related. We recruit about 1,500 graduates each year and we easily receive 30,000 applications. It’s more a case of how to train them. From an education perspective, it’s fine. But when people move from universities into business, how do companies help them develop? In many cases, the bosses haven’t been trained in the same way, so it takes time for processes to cascade down.
Q: Are Chinese small- to mid-cap companies placing enough value on good accounting or just looking for cut-price auditors?
A: For these private companies, when they get started it’s the owner who runs everything. As the business develops they have to put structures in place and get the professionals in, and that’s how they start spending money. They know it is important to have a good, conservative, trustworthy, reliable accountant and most are putting money into this area – but it really depends on what part of the evolution process they are in.
Q: A number of smaller Chinese firms listed in the US have run into regulatory trouble – and most of them seem to employ lower-tier audit firms…
A: In the US, the timeliness, quality and quantity of information required are far more demanding than in China. And who are those auditors? We have spent a lot of time building our practice in China and training our people. How could a US audit firm that isn’t established in China, and only comes here once in a while, know how to audit a Chinese company? Accounting is a reflection of what has happened. If these auditors don’t understand the issues and challenges Chinese firms face, how can they see what the numbers mean?
Q: How significant is the convergence between Chinese and international accounting standards in terms of bridging these gaps?
A: If China doesn’t participate in the international arena in terms of regulations and accounting, people will not understand it. China has to converge with international standards but also influence them. If someone decides on a standard and for some reason it can’t be applied in China, the world’s second-largest economy, then it’s not international.
Q: The Hong Kong Stock Exchange recently decided to allow H-share companies to use mainland auditors and follow mainland accounting standards. Do you think that this change weakens regulation in Hong Kong?
A: It’s something you can’t stop. A lot of Chinese entities are listed in the US and the reporting is handled by Hong Kong and China firms. In this context, why can’t a Chinese firm audit a Chinese entity listed in Hong Kong? No matter how many checks and balances you put in place, there will still be questions. I understand why people have doubts, but you have to wait until things happen before judging. Most of the firms approved to conduct H-share audits have operations in Hong Kong anyway.
Q: The Chinese government says it wants to consolidate the accounting industry and create 10 firms capable of competing internationally. How much of a threat do you think this poses to the Big Four?
A: They could merge 20 firms together and create entities of 5,000-10,000 people, but the challenge is developing common processes, common values and a common culture. It’s not investment in machines, it’s investment in people and that takes a long time.