China vows tougher scrutiny of auditors including Big Four firms

China has pledged to toughen oversight of international and local auditors as President Xi Jinping tries to stamp out risks to the country’s financial system after a series of massive corporate failures among property and banking groups.

Zhu Zhongming, vice-minister of finance, told Sharon Thorne, the global chair of Deloitte, that Beijing would “strictly enforce financial discipline” and step up scrutiny over accounting firms in China “including the Big Four”, according to a finance ministry statement.

The warning, issued when the two met in Beijing, signals the onset of tighter scrutiny of the sector and rising uncertainty in the accounting and consulting industry over the future of Deloitte, PwC, KPMG and EY in China. Decades spent building market-leading positions in the world’s second-biggest economy have been undermined by a wave of delayed financial results and defaults by the companies they audit.

This month, the finance ministry handed Deloitte a record $31mn fine and suspended its Beijing operations for three months after an investigation revealed “serious deficiencies” in its audit of China Huarong Asset Management, a state-owned bad-debt manager which required a $6.6bn government-backed bailout in 2021.

The pressure on Deloitte comes amid industry fears the Big Four firms will be phased out from auditing China’s state-owned enterprises, which make up about a quarter of the country’s gross domestic product.

PwC and KPMG have been investigated in Hong Kong for auditing work on two Chinese companies — indebted property group Evergrande and US-listed biotech China Medical Technologies, respectively.

Zhu said the government still supported international accounting firms, including Deloitte, operating in China as long as they followed local laws, but he also cautioned Thorne that the group needed to “learn a lesson” from the punishment over its Huarong audits.

According to the finance ministry’s statement, Thorne said Deloitte accepted the fine and promised to come up with a rectification proposal to improve its auditing standards.

She declined to answer further questions on the sidelines of the China Development Forum in Beijing. Thorne is among scores of western business leaders, including Apple’s Tim Cook and Maersk’s Vincent Clerc, attending the forum, as China reopens to the world after three years of isolation under Xi’s strict coronavirus controls.

Xi, who is embarking on a precedent-breaking third five-year term in power, is tightening supervision of China’s financial system as he centralises control to try to avoid economic shocks.

Last month, the country’s rubber-stamp parliament replaced the banking watchdog, the China Banking and Insurance Regulatory Commission, with a new agency to oversee all financial businesses, apart from the securities sector. China also set up a party-led commission to become the overarching financial sector planning and co-ordination body.

Local accounting firms and employees are also facing closer scrutiny. Zhu warned this month that the ministry would step up its campaign and set up a “high-tension wire” to eliminate accounting wrongdoing and fraud.