China imposes 6-month ban and $62 million fine on PwC over failed Evergrande audit – Kenyan Wall Street

China’s Securities Regulatory Commission and the Ministry of Finance have suspended accounting firm PricewaterhouseCoopers International (PwC) for six months and fined it 441 million yuan ($62 million) over the firm’s audit of bankrupt real estate developer China Evergrande Group.

• Evergrande is one of the largest real estate developers in China and is a member of the Global 500, one of the largest companies in the world by revenue.
• In March, China’s securities regulator ruled that Evergrande had inflated its mainland revenues by nearly $80 billion in the two years before the property developer defaulted on its overseas debts in 2021, despite PwC’s positive assessment of its financial statements.
• On September 13, PwC announced that Senior Partner Daniel Li had stepped down as part of its accountability and remediation efforts. Global Risk and Regulation Leader Hemione Hudson took 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 main onshore unit – Hengda Real Estate and assisting with bond issuance – in 2019 and 2020.

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

Audit of the accountant

In January 2024, a Hong Kong court ordered the liquidation of Evergrande Group, the world’s most indebted property developer, undermining investor confidence. while China’s ailing real estate sector continues to weigh on the economy. Evergrande Group filed for bankruptcy in New York in 2023. In 2021, Evergrande defaulted on its debts, leading to a real estate crisis in China with total liabilities of US$333 billion.

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

“PwC ZT has fully cooperated with its regulators, respects their decisions and will fully comply with the administrative sanctions,” added the accounting firm, part of the Big 4 global accounting firms. The firm has also reportedly dismissed six partners and stood down five staff involved in the audit of its subsidiary Evergrande.

According to Reuters, PwC has lost more than 50 Chinese clients, reportedly costing it about two-thirds of its accounting revenues, after the Evergrande controversy sparked concerns. High-profile clients, including state-owned and listed companies, have dropped PwC as their auditor or canceled plans to hire the firm. The Bank of China, one of its largest clients, dropped its auditor and chose EY in August.

According to Reuters, China’s market regulator said PwC’s actions went beyond the audit failure. “It has to some extent covered up and even condoned the financial fraud and fraudulent issuance of corporate bonds by Hengda Real Estate,” the regulator said.