PwC Probe Spotlight moves to Hong Kong after record fine in China

The focus of a long-running investigation into PricewaterhouseCoopers LLP’s China business is now shifting to Hong Kong after the accounting firm was hit with a record mainland fine for its audit of failed developer China Evergrande Group.

Hong Kong’s Accounting and Financial Reporting Board said the review of PwC’s local practice, which is separate from the China investigation, was still “ongoing”, according to a statement on Friday. An AFRC spokesman said the watchdog had no further comment.

Analysis shows PwC’s problems in Greater China are far from over after the firm was fined 441 million yuan ($62 million) and suspended for six months by regulators. Chinese authorities said Evergrande inflated its revenue by 564 billion yuan over two years in one of the nation’s biggest accounting frauds.

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

Hong Kong’s accounting regulator can issue fines of up to HK$10 million ($1.3 million) if it disciplines PwC. Although based in China, Evergrande is regulated in Hong Kong as its shares are traded in the financial centre.

“The severe punishment coming from the mainland will add pressure on Hong Kong regulators,” said Pingyang Gao, a professor of accounting and law at HKU Business School. “The Chinese regulator’s characterization of this matter is not only a serious audit error, but also to some extent, collusion with Evergrande.”

PwC China, which covers Hong Kong, audited Evergrande, while its mainland partnership, known as PwC Zhong Tian, ​​worked with Hengda Real Estate Group, Evergrande’s mainland unit.

PwC said it was taking steps to address the issues, acknowledging that work at Hengda “fell below our own high standards and below the standards our stakeholders rightly expect of us,” according to a statement. “We deeply regret and apologize for the impact this has had on our customers and our people.”

The firm also faces a lawsuit in Hong Kong from Evergrande’s liquidators as they try to recoup lenders’ investments in the failed developer, which defaulted in 2021 as China’s housing crisis began grow up The liquidators cited the accounting firm’s “negligence” and “misrepresentation” in the audit work.

Probes and legal proceedings threaten to hamper business for PwC, which had more revenue in China than any of the Big Four accountancy firms, until 2022. Several listed companies have already parted ways with the firm, while China also trained the largest company. companies to phase out the Big Four auditors because of data risks, Bloomberg News reported earlier.

“It is very likely that there will be a mass exodus,” Gao said. “It will probably spell disaster for PwC’s China business.”

PwC said staff who worked on the audit are no longer with PwC. In other moves, Daniel Li has stepped down as lead territory partner for China but will continue to support the business as chief accountant of the local unit. Hemione Hudson will temporarily take over and move into the region.

Hudson is PwC’s global risk and regulatory director and executive chairman, leading Europe, the Middle East and Africa from London, according to the firm’s website.

In addition to the executive moves, PwC Hong Kong has told clients it is considering another partnership to conduct future business and separate new revenue from potential fines and lawsuits, people familiar with the matter said. The idea remained preliminary, the people said.

Some clients have consulted other Big Four firms and regulators to see if they can ditch PwC after using them in the first half of the financial year, according to people familiar with the matter who asked not to be identified because the discussions were private. Non-publication of financial reports due to a change in auditors may result in a suspension of trading.

When asked if the bourse would grant the extension to these companies, an HKEX spokesman said the bourse expected the listed firms to “fully comply with the requirements of our listing rules”.

Meanwhile, several senior PwC partners in the region who advise industries other than developers are considering early retirement to protect themselves from having to share the burden of possible fines or compensation, people familiar with the matter said. The Evergrande case could trigger similar actions by other troubled real estate development clients and their lenders, the people said.

Audit firms usually pay regulatory fines out of their own reserves because professional indemnity insurance generally does not cover these penalties, said Clement Chan, president of the Hong Kong Registered Public Interest Auditors Association.

Partners may be asked to contribute the rest, based on each firm’s policies, he said. These costs may be higher in Hong Kong because PwC’s partnership there was registered with unlimited liability, while China’s was limited.

PwC China had revenue of 7.9 billion yuan in 2022 from about 400 clients from Shanghai to Hong Kong and New York, according to the China Institute of Certified Public Accountants. Asia-Pacific accounted for nearly a fifth of global revenue in 2023.

Photo: PricewaterhouseCoopers Center in Shanghai, China. Photo credit: Qilai Shen/Bloomberg

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