Chinese Regulators 'Telling State Entities to Dump PwC as Auditor'

Chinese regulators have been advising large state-owned entities that used PricewaterhouseCoopers (PwC) as an auditor to drop the big multinational group, sources have told Reuters.

The news is no surprise, given dozens of companies have stopped using PwC’s services in recent weeks. It comes as the auditing giant braces for a large penalty following the discovery of a huge accounting fraud at troubled property developer China Evergrande.

The regulators, mainly at the Ministry of Finance (MOF), have offered so-called “window guidance”, or unofficial verbal instructions to big state-owned financial institutions since at least April, according to two sources who declined to be named as the information was confidential.

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Bank of China (BOC), China Life Insurance, PICC, China Taiping Insurance and China Cinda Asset Management, are now among the more than 30 listed Chinese companies that have axed PwC as auditor this year, according to a Reuters’ calculation based on corporate filings.

PwC declined to comment. The MOF did not respond to a faxed request for comment, while BOC, China Life, PICC, China Taiping and China Cinda did not immediately respond to requests for comment.

The MOF is the biggest shareholder in more than 20 large state financial institutions including the Big Five banks, four insurers and four bad debt managers, with stakes held directly or via other state entities such as Central Huijin. The ministry is also the primary regulator of auditors in China.

It is not immediately clear if all state firms had actually received the window assistance from the ministry or other government bodies.

The sources stated the assistance was among the primary reasons for the client exodus from PwC, putting more pressure on the company that has actually responded by cutting staff numbers and halving the pay of some senior partners.

BOC, China Life and PICC were among PwC’s greatest clients in regards to accounting fees, which last year paid nearly 200 million yuan ($28 million), 64 million yuan and 41 million yuan, respectively, the filings revealed.

Client exodus

Other state-owned companies including top energy producer PetroChina and leading railway and highway builder China Train Group have also recently ditched PwC.

China Telecom, another large client, said last week it was looking to appoint KPMG as its external auditor for 2024, replacing PwC in the middle of the financial year.

Non-state clients have also been affected. Shenzhen-listed Mindray Bio-Medical Electronics and Shanghai-listed Eastroc Beverage in May both cancelled plans to reappoint the firm as their auditor, according to their filings.

Last year, the MOF and other regulators said state-owned firms and listed companies should be “extremely cautious” about hiring auditors that have received regulatory fines or other penalties in the past three years.

PwC has been under a lot of pressure lately as a result of its work for China Evergrande Group, which was ordered to be liquidated in January after it defaulted on debt repayment obligations.

Chinese authorities have been probing PwC’s role in auditing Evergrande after the securities regulator accused the troubled property developer in March of a $78-billion fraud.

PwC had been Evergrande’s auditor for almost 14 years until it resigned in early 2023. It has strongly denied turning a blind eye to misconduct.

As auditor for about 110 domestically-listed companies as of March this year, per its website, PwC has built a substantial presence in China over the last couple of decades, with business interests ranging from auditing, consulting to tax services.

It was also the market leader among all accounting firms in the country, with main onshore arm PwC Zhong Tian LLP recording revenues of 7.92 billion yuan in 2022, making it China’s top-earning auditor that year, according to official figures.