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Chinese authorities have hit PwC China with a hefty fine of $62 million and a six-month ban following a major scandal involving the collapsed property developer Evergrande, according to the Financial Times. This is the strictest action Beijing has taken against a major accounting firm.
The trouble for PwC China started when it was revealed that the firm had approved Evergrande’s financial statements despite the company inflating its reported earnings by nearly $80 billion before it went bankrupt in 2021. The Chinese finance ministry announced on Friday that PwC China and its Guangzhou office had ignored “major mistakes” in Evergrande’s financial reports from 2018 to 2020, leading to the closure of the Guangzhou office.
Authorities say PwC China’s audit of Hengda Real Estate, Evergrande’s mainland arm, was seriously flawed and resulted in incorrect conclusions about the company’s financial health. They accuse PwC of not only failing to catch these issues but also of possibly covering up or tolerating financial fraud and the improper issuance of corporate bonds by Hengda.
The fine consists of $16 million from the finance ministry and $46 million from the China Securities Regulatory Commission (CSRC). PwC has expressed disappointment with the audit work conducted by its Chinese branch and acknowledged that it fell short of the company’s standards. In response, PwC has fired six partners and let go of five staff members involved in the audit. Daniel Li, who recently became the senior partner at PwC China, will step down from that role but stay with the company as chief accountant. Hemione Hudson, a senior partner from the UK, will temporarily run PwC’s China operations.
This move highlights the seriousness of the situation for PwC. Unlike other global companies, PwC operates as a network of independent, locally owned partnerships, making the appointment of an outsider to manage the China business a significant step.
This penalty is larger than the $31 million fine and three-month ban that Deloitte received last year for its audit failures related to another Chinese company, China Huarong Asset Management. The finance ministry is also investigating possible issues with PwC’s Hong Kong office, which audited Evergrande’s parent company. Additionally, the ministry has revoked the licenses of four PwC staff who approved Hengda’s financial reports and fined seven others involved in preparing the documents.
PwC has already lost about two-thirds of its revenue from mainland clients, including state-owned enterprises that switched to other auditors amid the Evergrande scandal. Despite the ban, PwC is working to retain its remaining clients, such as Alibaba, Tencent, and AIA, and has assured them that it can complete audits for 2024. However, Chinese law bars state-owned companies from using auditors who are under sanctions, affecting PwC’s operations in the region.
