China rules dampen Big Four’s appetite for law firm links

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Despite the retreat of the “Big Four” international accountants from the legal sector last year in China almost all Chinese affiliated law firms have closed, mainly due to regulatory compliance, said a lawyer close to the issue.

The Ministry of Justice in China issued a notice last year, demanding law firms across the country review their problems with their set-up and management with the Big Four, and rectify the situation, said a lawyer, who did not wish to be named.

The National Lawyer Credit Information Publicity System shows that Qin Li Law Firm, Chen & Co Law Firm, Shanghai SF Lawyers and Xin Bai Law Firm – which were members of the legal network under the Big Four, namely Deloitte, EY, KPMG and PwC, respectively – all have been dissolved. Only Rui Bai Law Firm, PwC’s affiliated law firm in Beijing, has applied for deregistration, which has yet to be finalised.

According to different local authorities’ filings, Beijing, Zhejiang and Fujian issued public judicial announcements last October on the self-censorship of domestic and foreign capital into the legal industry.

The action aimed at “Chinese law firms under the control of foreign accounting firms”, namely “accounting firms requiring law firms’ leading partners to relinquish management rights through secret merger agreements, resulting in close managerial control, a high level of integration and close links in terms of the business of the law firm”, one of the filing documents shows.

“At first it was rectification, but then a few of the Big Four firms doubted that rectification wasn’t enough, so why not just dissolve it and be done with it,” said the lawyer. “[Rectification] can’t clarify [one’s position], you’re better off with dissolution to be able to say most clearly that you’re out of the Big Four.”

The Big Four began aligning themselves with domestic law firms in 2018 as a way of providing a more complete legal service for transactions in China. At the end of last year, these law firms withdrew from the Big Four network in line with the mainland government’s requirements, however, their fates were still sealed.

The Ministry of Justice notice also imposed rectification orders on overly commercialised operations and lawyers’ unions. The partner believed that “it [the rectification] should be in a general context where many [legal] organisations have a variety of problems and is not directed at the Big Four.”

The partner said co-operation between accountants and lawyers was inevitable, but whether they could work under the same company varies between countries or regions.

In 2001, Arthur Andersen, formerly one of the world’s largest accounting firms, collapsed after its questionable practices were revealed during energy giant Enron’s bankruptcy, which also affected its affiliated law firm Andersen Legal.

The incident led to the launch of the Sarbanes-Oxley Act in the US to tighten regulations on accounting firms, which led to the Big Four withdrawing most of their legal services. However, nearly two decades later, accounting firms have gradually re-entered the legal profession.

Managing partner Rossana Chu of LC Lawyers, the Hong Kong law firm member of the EY global network, said the collaboration between accounting firms and law firms may not be in conflict. Her experience with EY has informed her views.

“The matters covered by our law firm and EY are different in nature although they are often inter-related,” said Chu. She gave an example of a corporate restructure: “When a structure is legally possible but not tax efficient, we together may come up with another proposal.”

Accounting firms generally provide services such as tax planning, financial due diligence, transactional advice and technology transformation, not least among them legal challenges. “We do advise EY clients,” said Chu.

“This is a more concerted way to offer total solutions that are cost-efficient,” she added. “In some cases, that also saves clients’ energy in co-ordinating different professionals.”

Nowadays, the Big Four have granted alternative business structure (ABS) licences in places, such as England and Wales, to reintegrate their legal sections into the main business.

Nevertheless, in other jurisdictions such as Hong Kong, where lawyers are required to work at an independent law firm, the Big Four have developed a global network across disciplines to ensure compliance with local legal requirements.