China’s Securities Regulatory Commission and the Ministry of Finance have suspended accounting giant PricewaterhouseCoopers International (PwC) for six months and fined it 441mn Yuan (US$62 million) over the firm’s audit of collapsed property developer China Evergrande Group.
- •Evergrande is one of China’s largest real estate developers forming part of the Global 500 — one of the world’s biggest businesses by revenue.
- •In March, China’s securities regulator ruled that Evergrande had inflated its mainland revenues by almost US$80bn in the two years before the developer defaulted on its offshore debts in 2021 despite PwC giving the accounts a clean bill of health.
- •On 13th September, PwC said its Senior partner Daniel Li had stepped down as part of its accountability and remedial actions, with Hemione Hudson, the global risk and regulatory leader taking over.
The moves follow an investigation by China’s securities regulator launched earlier this year which found that PwC Zhong Tian LLP “turned a blind eye” to and “even condoned” Evergrande’s fraud while auditing the annual results of the developer’s onshore flagship unit – Hengda Real Estate and assisting its bond issuance – in 2019 and 2020.
“PwC has seriously eroded the basis of law and good faith, and damaged investors’ interest,” said the China Securities Regulatory Commission (CSRC) in a statement.
Auditing the Auditor
In January 2024, a Hong Kong court ordered the winding up of Evergrande Group the world’s most indebted property developer, slumping investor confidence as China’s ailing real estate sector continues to weigh on its economy. Evergrande Group, in 2023, had filed for bankruptcy in New York. In 2021, Evergrande defaulted on its debt, spurring a property crisis in China with total liabilities amounting to US$333 billion.
“We are disappointed by PwC Zhong Tian’s audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network,” PwC network, the alliance of PwC’s global member units, said in a statement.
“PwC ZT cooperated fully with its regulators, respects their decisions, and will fully comply with the administrative penalties,” the auditing firm, part of the Big 4 global accounting firms, added. The company has also reportedly fired six partners and withdrawn five staff members involved in auditing the Evergrande subsidiary.
According to Reuters, PwC has lost more than 50 Chinese clients, reportedly costing them about two-thirds of their accounting revenues following the Evergrande controversy that sparked concerns. High profile clients including state-owned enterprises and listed firms have either dropped PwC as their auditor or canceled plans to hire the firm. The Bank of China – one of their biggest clients – dropped the auditor, opting for EY, in August.
According to Reuters, China’s market regulator said that PwC’s actions went beyond auditing failure. “It, to a certain extent, covered up and even condoned Hengda Real Estate’s financial fraud and fraudulent issuance of corporate bonds,” the regulator said.