PwC’s China unit suspended for 6 months, hit with record fine for Evergrande audit

Chinese regulators hit PwC’s mainland China audit unit on Friday with a six-month business suspension and a record 441 million yuan ($62 million) fine over the firm’s audit of troubled property developer China Evergrande Group.

Delivering a strong rebuke to the Big Four, China’s securities regulator said its investigation found that PwC Zhong Tian LLP “turned a blind eye” and “even tolerated” Evergrande’s fraud while auditing the unit’s annual results emblematic onshore of the developer – Hengda Real. Estate – in 2019 and 2020.

“PwC has seriously eroded the basis of law and good faith and affected the interest of investors,” the China Securities Regulatory Commission (CSRC) said in a statement.

Chinese authorities have been examining PwC’s role in Evergrande’s accounting practices since the CSRC accused the developer in March of a $78 billion fraud over a two-year period to 2020.

PwC audited Evergrande for nearly 14 years until early 2023.

The business suspension and fines are the harshest punishment ever for a Big Four accounting firm in China, and come amid an exodus of clients and layoffs at the firm in recent months.

The move is intended to cloud PwC’s outlook in the No. 1 economy. 2 in the world. PwC Zhong Tian, ​​the registered accounting entity and PwC’s main onshore arm in China, was the highest-earning auditor in the country in 2022, according to the latest official data.

“The cost is huge in reputation, affecting the ability to get new business in China beyond the fine. In the short term, PwC’s market share will decline in China, benefiting the other big three audit firms,” ​​said Gary Ng, senior Asia-Pacific economist at Natixis.

As part of the sanctions, PwC Zhong Tian will be banned from signing certain key documents for clients in mainland China, such as IPO results and applications for the next six months.

The business suspension will also affect the unit as a whole from taking on new state-owned or domestically listed clients over the next three years, according to Chinese regulations.

Last year, domestic regulators reiterated that state-owned firms and listed companies in mainland China should be “extremely cautious” about hiring auditors who have received regulatory fines or other penalties in the past three years.

“We are disappointed by PwC Zhong Tian’s audit work on Hengda, which fell unacceptably below the standards we expect from PwC network member firms,” ​​PwC network, the alliance of PwC’s global member units, said in a statement.

The firm said that as part of “accountability and remedial actions”, PwC China senior partner Daniel Li resigned and Hemione Hudson, the firm’s global regulatory and risk leader, took over from him.

“Accepted Fraud”

The suspension of business was imposed by China’s Ministry of Finance (MOF), which also ordered the closure of PwC’s Zhong Tian branch in Guangzhou – which, according to sources, led the audit work on Evergrande.

The ministry also fined the company 116 million yuan for failing Hengda’s audit in 2018, according to a statement from the Ministry of Finance.

The CSRC said in its statement that it had fined PwC Zhong Tian 325 million yuan, close to the total amount of sanctions imposed by the regulator on more than 50 auditors over the past three years.

The CSRC probe found that 88% of PwC’s records of observations on Evergrande’s real estate projects in 2019 and 2020 were unauthentic or untrue, making its audit working papers “severely unreliable”.

The regulator pointed out that PwC’s on-site inspection of the developer’s properties failed to flag problems – some residential properties the auditor deemed ready for home deliveries were still “vacant land” when the CSRC inspected subsequent.

PwC also deliberately excluded properties that Evergrande marked as “not allowed to visit” from the audit samples, it added.

“PwC, to a certain extent, covered up and even condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds,” the CSRC statement said. “It (PwC) must be severely punished according to law.”

A Reuters tally based on filings showed that more than 50 Chinese firms in recent months either dropped the firm as an auditor or canceled plans to hire it after the regulatory probe into the firm was launched.

PwC had about 400 Chinese clients, listed at home or in offshore markets such as Hong Kong or New York, as of March this year, including tech giants Alibaba 9988.HK and Tencent 0700.HK.

(1 USD = 7.0942 Chinese Yuan Renminbi)

(Reporting by Julie Zhu and Xie Yu in Hong Kong; Additional reporting by Ziyi Tang and the Beijing newsroom; Editing by Sumeet Chatterjee and Mark Potter)

Photo: The Evergrande Group headquarters logo is seen in Shenzhen, south China’s Guangdong province, Friday, Sept. 24, 2021. (AP Photo/Ng Han Guan, File)

Related:

TOPICS
China