PwC Zhong Tian, known as PwC China, has lost about two-thirds of its accounting revenue from companies listed on mainland Chinese stock exchanges this year, underscoring the impact of its audit of the failed real estate giant Evergrande.
According to the Wind Info database, PwC China has lost at least 561 million RMB (77 million USD) of the 869 million RMB in audit revenue from Chinese companies listed on mainland exchanges in 2023 over the past six months.
The significant clients that have left PwC include the state-owned insurer China Life Insurance, which paid audit fees of 65 million RMB in 2023, and China Railway Group, which paid 33 million RMB last year. These are among more than 20 listed mainland companies that have changed their audit firms as PwC expects a penalty related to its Evergrande audit.
The migration shows that even the threat of penalties is changing the examination landscape in China. The loss of customers was so significant that it has led to layoffs and cost-cutting measures in the country.
The 107 listed mainland companies represent a part of PwC China's total revenues in 2023. The entity generated revenues of 7.9 billion RMB in 2022, of which 6.8 billion RMB were recorded as accounting revenue from clients in mainland China, Hong Kong, the USA, and other markets, according to the Chinese Institute of Certified Public Accountants.
PwC China has experienced an unusual exodus of mainland clients this year," said Fan Zhongwen, an accounting professor at the City University of Hong Kong who has independently analyzed PwC China's client departures.
It is neither typical for PwC nor common among its main competitors such as KPMG, EY, or Deloitte," he added. "The corporate records were vague in specifying the reasons, but the changes are apparently taking place in the wake of the Evergrande scandal.
PwC China declined to comment on client losses, but internal communications obtained by the Financial Times show that executives are trying to contain the fallout. In a recently sent email, the firm urged its partners to "remain calm" and prepare to "weather the upcoming turbulence.
Chinese regulations require state-owned enterprises and publicly listed mainland companies to change their auditors every eight to ten years. However, PwC is under heavy pressure following the collapse of Evergrande in 2021 and the subsequent scrutiny of the real estate sector by authorities.
PwC China, which audited Evergrande for 14 years until 2023 and issued the developer a clean bill of health, is expected to be penalized after the Chinese Securities Regulatory Commission accused the developer's mainland business of inflating revenues by almost 80 billion USD in 2019 and 2020, and imposed a fine of 577 million USD in May.
PwC was the largest auditing firm in China in terms of revenue in 2022 and a preferred auditor for centrally-owned enterprises, followed by EY, according to data from the CICPA.
The Big Four firms accounted for 32 percent of the total auditing fees from publicly listed mainland companies, while auditing only 7 percent of the companies, according to Wind data.
Losses of A-share listed companies in the past six months account for 7 percent of the total accounting revenues in 2022, said PwC China.
The expected penalty comes after PwC China changed its leadership in the Asia-Pacific region for the first time in nine years in July, with Daniel Li replacing Raymund Chao, Chairman of PwC Asia-Pacific and China. Li also oversees separate legal entities in Hong Kong and Macau.
PwC China has laid off staff in Guangzhou, Shenyang, and Shanghai in recent months, according to two people familiar with the matter. PwC Zhong Tian had 23 offices and 1,693 certified auditors in 2022.
Here is the translation of the heading to English:
"Most employees of the financial services division at PwC China in Shanghai were instructed to take a professional break between July and August with a salary cut of about 80 percent earlier this month, said a person familiar with the decision.
Employees in Hong Kong were also asked to take several days of unpaid leave last year, according to two people familiar with the situation.
PwC China stated that it is "making some adjustments to better optimize our organizational structure and adapt to market demands" in light of changes in the external environment.
Other Big Four firms and leading professional services companies – such as Lixin, which is part of the BDO network, and RSM's China unit – are benefiting from the turbulence at PwC by hiring former employees and taking over their clients.
Many PwC employees, including partners in Hong Kong and on the Chinese mainland, have actively sought other opportunities and planned their exit from the firm in recent weeks, said a senior China-based partner of a PwC rival.
I believe that the other major companies will benefit from this in the short to medium term," said the partner.
