Chinese regulators impose record fine on PwC over Evergrande audit

The Chinese regulatory authorities imposed a six-month suspension and a record fine of 441 million yuan (USD 62 million) on PwC’s mainland unit in China on Friday. The reason for this is the audit of the failed real estate developer China Evergrande Group. The China Securities Regulatory Commission (CSRC) accused PwC Zhong Tian LLP of having 'overlooked' and 'even tolerated' Evergrande’s financial frauds. This occurred during the audit of the annual results of the onshore flagship unit Hengda Real Estate and the support for bond issuance in 2019 and 2020. PwC Zhong Tian acknowledged in a statement that the auditing work at Hengda did not meet its own high standards. The firm is determined to address the deficiencies and improve its working procedures. The sanctions are the harshest ever imposed on any of the 'Big Four' accounting firms in China and come against a backdrop of client exodus and layoffs at PwC in recent months. Last year, Deloitte’s Beijing office was also subjected to a heavy fine and a three-month operation suspension. Gary Ng, Senior Economist for Asia-Pacific at Natixis, emphasized that besides the monetary fine, the biggest burden for PwC is the loss of reputation, which will impact its ability to acquire new clients. The business interruption will prevent PwC Zhong Tian from signing certain key documents for clients in mainland China over the next six months, such as results and IPO applications. Additionally, the unit is barred from accepting new state-owned or publicly listed clients for the next three years. Furthermore, Daniel Li, Territory Senior Partner of PwC China, resigned after only two months in office. Hemione Hudson took over from Li, who will remain with the firm as Chief Accountant. China’s Ministry of Finance (MOF) also ordered the closure of the PwC branch in Guangzhou, which led the audit work at Hengda. It was found that PwC Zhong Tian and the Guangzhou branch knew of 'material misrepresentations' in the audit of the developer between 2018 and 2020 but did not disclose them and even issued false audit reports. A statement from the CSRC noted that 88% of PwC’s observation records on Evergrande’s real estate projects in 2019 and 2020 were 'inauthentic' or 'untrue,' rendering the audit records 'severely unreliable.' More than 50 Chinese companies have either dropped PwC as auditors or abandoned plans to engage them in recent months after the regulatory investigation was initiated.