EY and KPMG benefit the most from PwC China’s regulatory woes

Ernst & Young (EY) and KPMG have attracted more than half of PwC’s corporate clients in China, which have fled the market’s top accountancy firm as it faces a regulatory probe, filings show.

Chinese authorities have been investigating PwC’s role in auditing China Evergrande Group after the securities regulator charged the troubled real estate developer in March with a $78 billion fraud. PwC audited Evergrande for nearly 14 years until early 2023.

Regulators have also asked several of PwC’s large state clients to drop the auditor since at least April.

“Compared with previous years, what we are seeing this year is definitely an unusual exodus of clients from PwC,” said Fan Zhongwen, an accounting professor at City University of Hong Kong.

China is asking major state-owned financial institutions to drop auditor PwC, sources say

A Reuters tally based on filings showed that more than 40 Chinese firms, many of which are state-owned enterprises or financial institutions, have either dropped PwC as auditors or canceled plans to hire the firm in recent months.

They include some of PwC’s biggest clients, including Bank of China (BOC), China Life Insurance and PetroChina, which last year paid accounting fees of nearly 200 million yuan ($28 million), 64 million yuan and 46 million yuan respectively, the filings showed.

PwC declined to comment for this story. EY and KPMG did not respond to requests for comment.

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

Those recommendations and potentially large penalties for PwC have worried some existing clients, prompting them to consider alternatives, the sources said.

“PwC’s client losses are likely to continue in the short term as Evergrande’s audit has caused great damage to its reputation,” Fan said. “PwC will need time to rebuild its reputation.”

PwC’s main onshore arm, PwC Zhong Tian LLP, posted revenue of 7.92 billion yuan in 2022, making it the highest-earning auditor in China that year, followed by EY, Deloitte and KPMG, according to official figures .

Big Four firms audited 12 percent of companies listed on the Shanghai Stock Exchange and 5 percent of companies on the Shenzhen Stock Exchange in March, according to a PwC calculation posted on its website.

EY and KPMG Gain

A Reuters tally found that EY won at least 12 clients from PwC, including major state-backed financial institutions China Life, PICC and China Cinda Asset Management.

The total combined audit fees of the 12 companies were more than 230 million yuan last year.

Among non-state companies, Hong Kong-listed Fuyao Glass and Shenzhen-listed Mindray Bio-Medical Electronics scrapped plans to re-appoint PwC as auditor and hired EY instead in early August and May respectively, according to the files.

With companies flocking to EY, it has been able to reduce spending on attracting new business and offers a 10%-20% discount on audit fees to former PwC clients, two sources said.

It also plans to raise pay rates by 10 percent for new employees hired through campus recruiting this fall because the firm needs more staff to handle the sudden increase in workload, one of the people said.

KPMG has taken over at least 12 companies from PwC that paid total audit fees of about 160 million yuan in 2023.

They include state-owned China Telecom and China Taiping Insurance, as well as eight subsidiaries of state-owned conglomerate China Merchants Group, which dropped plans to go to PwC and went to KPMG, according to the filings.

PwC’s biggest client, Bank of China, said in June it had shortened a services agreement. It has not yet mandated a new auditor.

Other accounting firms that have taken on PwC’s audit clients include BDO’s onshore arm Lixin and national firm Pan-China, the filings show.

Before the spotlight fell on PwC’s work for Evergrande, Deloitte’s Beijing subsidiary was last March fined 211.9 million yuan by Chinese authorities and its operations were suspended for three months after it was discovered serious deficiencies in its audit of China Huarong Asset Management.

The sanctions, despite being imposed on Deloitte’s Beijing branch rather than Deloitte China, have left the auditor at a disadvantage in taking on new clients, particularly large state-backed ones, two separate sources said .

A Deloitte spokesman referred to an earlier statement, which said: “To be clear, there is no suggestion from the MOF (Ministry of Finance) that either Deloitte Hua Yong, its Beijing subsidiary, or any of its people they did something unethical.” adding that the firm is committed to “the highest standards of audit quality”.

The sources declined to be named because they were not authorized to speak to the media.

(1 USD = 7.1476 Chinese Yuan Renminbi)

($1 = 7.7883 Hong Kong dollars)

(Reporting by Julie Zhu and Xie Yu; Additional reporting by Engen Tham; Editing by Sonali Paul)

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