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PwC China has informed its clients that it expects Chinese authorities to impose a six-month business ban starting as early as September, following its audit of the now-collapsed property developer Evergrande.
The anticipated action comes after China’s securities regulator accused Evergrande in March of inflating its mainland revenues by nearly $80 billion in the two years before the company defaulted on its debts in 2021. PwC’s China unit had signed off on Evergrande’s accounts during that period, giving them a clean bill of health.
If implemented, the business ban—likely accompanied by a significant fine—would mark the most severe action ever taken by Chinese regulators against a Big Four accounting firm. The move reflects Beijing’s growing scrutiny of auditors’ roles in financial scandals, particularly in the beleaguered property sector, which once accounted for about a quarter of China’s GDP.
Although the ban does not threaten the survival of PwC China, it is expected to cause significant disruption. PwC China was the country’s largest accounting firm by revenue in 2022, generating Rmb7.9 billion ($1.1 billion), according to government data.
The ban would prevent PwC China from signing off on financial results, initial public offerings, and other regulated activities, according to several clients who spoke to the Financial Times. PwC has assured clients that staff will continue working during the suspension and will be able to certify audit opinions for their 2024 annual reports once the ban is lifted in March.
The nationwide ban would surpass the penalties imposed on Deloitte last year for “serious audit deficiencies” in its work for China Huarong Asset Management. Deloitte paid a $31 million fine and saw its Beijing operations suspended for three months.
This crackdown has led many mainland-listed clients to switch auditors, as they are barred from working with firms that have been sanctioned within the past three years. PwC China has already lost at least two-thirds of its accounting revenue from mainland-listed clients this year due to the fallout from its Evergrande audit.
State-owned clients, like the Bank of China, are also moving quickly to minimize damage. The bank, which used PwC for its mid-year report but has since switched to EY for its annual audit, advanced its results release date to August 29 amid expectations that the penalty announcement would come by the end of August.
Mainland-listed and state-owned clients make up a minority of PwC China’s revenue. The firm is now focused on reassuring its major internationally listed clients, including Alibaba and Tencent, that it can still complete their 2024 audits. PwC has also encouraged clients to sign contracts for future services in 2025.
In response to the looming penalties, PwC has accelerated layoffs across its Chinese branches to cut costs. The firm declined to comment on the situation, stating that it would not be appropriate to discuss “an ongoing regulatory matter.”
[Information sourced from Financial Times]
