PwC to be fined over Evergrande auditing work

PricewaterhouseCoopers (PwC), one of the four largest global accounting firms, is expected to face a fine of at least 1 billion yuan (US$138 million) in China as it stands accused of overlooking misconduct by the collapsed China Evergrande Group for more than a decade.

The auditor will also have some of its local operations in China suspended, Bloomberg reported on Thursday, citing people familiar with the situation.

China’s Ministry of Finance may announce the penalties on PwC as soon as this week, according to the report. 

The main responsibility of auditors is to check whether the financial statements of their clients contain false and inaccurate statements, in order to protect their clients’ stock and bond investors.

Since auditors receive audit fees from their clients, they may tempted to skip following the standard code of rules and turn a blind eye to their client’s misstatements. This is why the accounting sector has set up rules for auditors to follow.

If a financial statement provides accurate figures, an auditor can give a standard unqualified opinion, or “clean opinion,” so investors can trust it. If a financial statement contains material misstatements or omissions, an auditor should give a qualified opinion and alert the investors. In an extreme case, an auditor should quit auditing a problematic financial statement.

‘Clean opinions’

PwC had served as Evergrande’s auditor for 14 years between 2009 and 2023. Throughout the years, it had given standard unqualified opinions to Evergrande’s financial statements, meaning that it was stating its belief that each statement gave a true and fair view and complied in all material respects with the relevant financial reporting framework, including applicable law.

Before Evergrande’s defaults were reported by the media in August 2021, PwC still gave “clean opinions” to the company’s 2020 financial report.

PwC received an audit fee of 54 million yuan from Evergrande in 2020, according to a Guangdong-based columnist using the pen name “Red-blue-white Tulips,” who published an article on February 22.

He says that PwC had received audit fees of about 400 million yuan from Evergrande and its subsidiaries between 2009 and 2023. 

PwC failed to do the auditing work for Evergrande’s 2021 and 2022 financial statements. It blamed the property developing for not providing it with the information needed.

It resigned from its position as Evergrande’s auditor in January 2023.

Last July, Evergrande published its delayed annual results for 2021 and 2022, which were audited by Prism Hong Kong and Shanghai Limited. 

Evergrande said it lost a combined 803 billion yuan in 2021 and 2022. At the end of 2022, it had net current liabilities of 687.7 billion yuan and total liabilities of 2.44 trillion yuan.

Evergrande’s fraud

On March 18, the China Securities Regulatory Commission (CSRC) slapped fines worth 4.18 billion yuan and 47 million yuan on Evergrande and its founder Hui Ka-yan, respectively.

It said the company’s annual reports in 2019 and 2020 contained false information. It said it’s a fraud that Evergrande used these annual reports to issue bonds and raise fund.

Since then, many Chinese commentators have predicted that PwC would be probed and fined for having failed to identify the problems in Evergrande’s financial statements. 

In early April, an open letter written by “some PwC partners” with the title “Who brought PwC into the fire pit of Evergrande?” was widely circulated on social media. 

The letter said Raymund Chao, Asia Pacific and China Chairman, PwC China, and his team should be held responsible for overlooking the problems in Evergrande’s financial statements. 

It said some senior PwC executives had suggested that the auditing firm stop serving Evergrande in 2014 but Chao insisted on keeping it as client.

On April 16, PwC said in a statement that the open letter made false allegations and hurt the accounting firm’s reputation. It said it had reported the case to the law enforcement department and would reserve the right to pursue legal liability against those who fabricate, spread and disseminate false information.

On April 19, Hong Kong’s Accounting and Financial Reporting Council (AFRC) said it had initiated an investigation after the open letter, or so-called whistle-blower report, expressed significant concerns regarding potential alleged deficiencies in PwC’s systems of quality management and the quality of the audits of Evergrande.

In October 2021, the AFRC launched investigations into Evergrande’s financial statements for 2020 and the first half of 2021, and also PwC’s audit report for Evergrande’s 2020 annual results. 

AFRC will determine whether PwC has violated any professional rules.

Impact on PwC

Meanwhile, China has decided to penalize PwC for having given “clean opinions” to Evergrande’s inaccurate financial statements.

The impact of the penalties on PwC may be long-lasting as dozens of the accounting firm’s Chinese customers have decided to use other auditors. 

The Hong Kong-listed Kunlun Energy, formerly CNPC Limited, said Wednesday in a stock exchange filing that PwC would retire as its auditor after the company’s annual general meeting on Thursday. It said the decision was made after discussion with PwC in view of “the recent regulatory matters relating to the auditing industry.”

Prior to this, China Taiping Insurance Holdings said it would replace PwC with KPMG as its auditor. China Merchants Bank Co said it replaced PwC with Ernst & Young. Other companies that changed auditors include China Railway Group, China Electronics Huada Technology Co and People’s Insurance Co. 

Read: Hong Kong court orders Evergrande to liquidate

Follow Jeff Pao on Twitter at @jeffpao3

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