A recent enforcement action against Deloitte is “more of a symptom than a cause” behind a simultaneous policy by China's Ministry of Finance to localize its accounting and auditing profession, says the general counsel of a U.S.-based audit firm.

The Ministry of Finance web site announces a new policy that China's audit firms must increase their staffing of Chinese-trained and certified auditors so that no more than 20 percent of its partners are non-Chinese-certified accountants or auditors by 2017. That gives the firms a few years to gear up their training and certification, says Scott Univer, general counsel of accounting firm WeiserMazars, which has no offices in China.

Firms must reduce their non-Chinese partnership to a concentration of no more than 40 percent in the first year, says Univer. “I don't think meeting that in the first year is that much of a problem,” he says. “I believe most firms are below that now.” But the firms will need to develop younger staff members and bring more Chinese accountants into the firms in the coming years to achieve the levels mandated by 2017, he says. “The Chinese accountancy profession is relatively young, so they've got to grow up a Chinese cohort of auditors.”

The Securities and Exchange Commission is pursuing action against Deloitte Touche Tohmatsu in China for failing to produce audit work papers to facilitate an SEC investigation into possible accounting fraud at Longtop Financial. Deloitte has resisted the SEC subpoena on the grounds that it would force its partners in China to violate Chinese law around privacy, possibly landing them in prison. The Public Company Accounting Oversight Board also has been pressing China for access to audit firms that are located in China but registered with the PCAOB to audit U.S. registrants. Chairman James Doty recently said he expects U.S. inspectors to begin observing inspections performed by authorities in China.

“China views the issue of control over accounting firms by foreigners as a matter of national sovereignty and national security, which is why they object to the PCAOB inspecting those firms and why they object to the demands that audit firms turn over their work papers with information about their audit clients,” says Univer, who views the policy as a natural progression for a country with a growing economy and a growing accounting profession to serve it. “They think the time has come to take more control over that aspect of their economy. It happens to be Deloitte that got caught up in this demand for information on a China-based company. It could have been any of the firms.”

Ernst & Young said in a statement it welcomes the new policy to localize China's audit firms. “The new measures are in line with E&Y's existing strategy to accelerate localization of our business in China,” the firm said in a statement. “Our business is well-positioned for this transition.” Deloitte did not comment on the policy, but PwC and KPMG both provided written statements from their affiliates in China applauding the policy as well.