China crackdown curbs Big Four appetite for law firm ties

Despite the withdrawal of the “big four” international accountants from the legal sector in China last year, almost all affiliated Chinese law firms have closed mainly due to regulatory compliance, says a former partner.

China’s Ministry of Justice issued a notice last year, demanding that law firms across the country review their problems with their organization and management with the Big Four, and rectify the situation, a former associate said. from one of the Big Four international accounting and auditing firms.

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 affiliate law firm in Beijing, has requested its delisting, which has not yet been finalized.

According to statements from various local authorities, Beijing, Zhejiang and Fujian issued public court announcements last October on the self-censorship of domestic and foreign capital in the legal industry.

The action targeted “Chinese law firms under the control of foreign accountancy firms”, namely “accounting firms forcing major law firm partners to relinquish their management rights through secret merger, resulting in tight managerial control, a high level of integration and close ties in terms of the law firm’s business,” one of the filing documents shows.

“At first it was a rectification, but then a couple of the big four companies doubted that rectification wasn’t enough, so why not just dissolve it and be done with it,” the associate said. “[Rectification] can’t clarify [one’s position]you better dissolve so you can say most clearly that you’re out of the Big Four.

The Big Four began aligning with domestic law firms in 2018 to provide a more comprehensive legal service for China transactions. Late last year, these law firms withdrew from the Big Four network in accordance with mainland government demands, but their fate was still doomed.

The Justice Department notice also imposed rectification orders on over-commercialized operations and attorney unions. The partner felt that “he [the rectification] should be in a general context where many [legal] organizations have a variety of issues and don’t cater to the Big Four.

The partner said cooperation between accountants and lawyers is inevitable, but whether they can work in the same firm varies by country or region.

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

The incident led to the launch of the Sarbanes-Oxley Act in the United States to tighten regulation of accounting firms, which led to the Big Four withdrawing most of their legal services. However, nearly two decades later, accounting firms have gradually reentered the legal profession.

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

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

Accounting firms typically provide services such as tax planning, financial due diligence, transactional advice, and technology transformation, including legal challenges. “We advise EY clients,” Chu said.

“This is a more concerted way of offering cost-effective total solutions,” she added. “In some cases, it also saves customers the energy needed to coordinate different professionals.”

Nowadays, the Big Four have granted Alternative Business Structure (ABS) licenses in places like England and Wales, to reintegrate their legal sections into the core business.

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