Chinese regulators have imposed a six-month business suspension on PricewaterhouseCoopers' (PwC) mainland China unit and levied a record fine of 441 million yuan ($62 million) over the firm's audit of the troubled property developer China Evergrande Group. The penalties mark the toughest action taken against a Big Four accounting firm in China to date.
The China Securities Regulatory Commission (CSRC) announced Friday that its investigation found PwC Zhong Tian LLP "turned a blind eye" and "even condoned" Evergrande's fraudulent activities while auditing the annual results of Hengda Real Estate, Evergrande's primary onshore subsidiary, in 2019 and 2020.
"PwC has seriously eroded the basis of law and good faith, and damaged investors' interests," the CSRC said in a statement. The regulator's probe revealed that 88% of PwC's observation records on Evergrande's real estate projects during those years were inauthentic or untrue, rendering its audit working papers "severely unreliable."
The Ministry of Finance (MOF) also imposed a fine of 116 million yuan ($16.35 million) on PwC Zhong Tian for its auditing failures in 2018 and ordered the closure of the firm's Guangzhou branch, which sources say led the audit work on Evergrande. The combined actions from the CSRC and MOF amount to a significant blow to PwC's operations in China.
"The cost is enormous in reputation, affecting the ability to get new business in China beyond the fine," said Gary Ng, Asia-Pacific senior economist at Natixis. "In the short run, PwC's market share will decline in China, benefiting the other big three auditing firms."
As part of the penalties, PwC Zhong Tian is barred from signing off on key documents for clients in mainland China, including financial results and IPO applications, for the next six months. Additionally, the firm will be restricted from taking on new state-owned or domestically listed clients over the next three years, in line with Chinese regulations.
PwC had audited Evergrande for nearly 14 years until early 2023, consistently giving the developer a clean bill of health. The firm's relationship with Evergrande came under intense scrutiny after the property giant collapsed earlier this year, becoming a symbol of China's deepening property crisis.
"We are disappointed by PwC Zhong Tian's audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network," the PwC network said in a statement. As part of its "accountability and remedial actions," PwC China's territory senior partner Daniel Li has stepped down, and Hemione Hudson, the firm's global risk and regulatory leader, has taken over his responsibilities.
"The work performed by PwC Zhong Tian's Hengda audit team fell well below our high expectations and was completely unacceptable," said Mohamed Kande, global chair of PwC, in a statement on the firm's website. "It is not representative of what we stand for as a network, and there is no room for this at PwC."
The CSRC's investigation highlighted significant lapses in PwC's auditing practices. The regulator pointed out that PwC's on-site inspections failed to flag problems-some properties considered ready for delivery remained "vacant land" upon later inspection. PwC also deliberately excluded properties that Evergrande marked as "not allowed to visit" from audit samples.
"PwC has, to a certain extent, covered up and even condoned Evergrande's financial fraud and fraudulent issuance of corporate bonds," the CSRC stated. "It has to be severely punished according to law."
Following the regulatory investigation, more than 50 Chinese firms have either dropped PwC as their auditor or canceled plans to hire it, based on filings reviewed by Reuters. PwC Zhong Tian was the top-earning auditor in China in 2022, generating nearly 8 billion yuan ($1.1 billion) in revenues, according to the Chinese Institute of Certified Public Accountants.
PwC's challenges come amid Beijing's broader efforts to tighten oversight of excessive borrowing and financial practices in the real estate sector. China's property market slump has impacted various parts of the economy, including construction and home appliances. Evergrande, once China's largest property developer, has become emblematic of the crisis, with authorities fining the company $577 million in May.
"The penalties against PwC signal a heightened regulatory focus on the role of auditors in corporate governance and financial transparency," said Mr. Ng of Natixis. "International firms operating in China need to adhere strictly to local regulations and professional standards."
PwC had about 400 Chinese clients, including tech giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd., listed domestically and in offshore markets such as Hong Kong and New York. The firm's ability to retain and attract clients may now be hindered, especially given regulatory advisories cautioning state-owned enterprises and listed companies to be "extremely cautious" about hiring auditors that have faced penalties in the past three years.
As PwC navigates the fallout, the firm stated it has fully cooperated with regulators and will comply with all administrative penalties. PwC China has fired six partners and five staff directly involved in the Hengda audit and is issuing financial penalties to current and former leaders responsible for the business.
"We've gone through a period of introspection and have taken decisive actions to ensure such failures do not happen again," the PwC network said. "Our commitment to upholding the highest standards of integrity and professionalism remains unwavering."
