Chinese regulators imposed a record fine of 441 million yuan ($62 million) and a six-month suspension of business on PwC’s auditing unit on the mainland on Friday for its controversial audits of troubled property developer China Evergrande Group.
The securities regulator rebuked the Big Four accounting firm, saying its investigation found that PwC Zhong Tian LLP helped cover up and “even condone” a huge fraud while auditing the annual results of Evergrande’s flagship unit – Hengda Real Estate – in 2019 and 2020.
“PwC has seriously eroded the basis of law and good faith, and damaged investors’ interest,” the China Securities Regulatory Commission (CSRC) said in a statement.
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Chinese authorities have examined PwC’s role in the accounting of Hengda Real Estate since the CSRC accused the developer in March of a $78-billion fraud over a period of two years through to 2020.
The business suspension and fines are the toughest ever penalty received by a Big Four accounting firm in China, and come against the backdrop of a mass exodus of clientele and layoffs at the firm in recent months.
Prospects dim after audit fiasco
The move is set to cloud PwC’s prospects in the world’s No-2 economy. PwC Zhong Tian, the registered accounting entity and the main onshore arm of PwC in China, was the country’s top-earning auditor in 2022, according to the latest official data.
But that has changed dramatically in recent months.
“We are disappointed by PwC Zhong Tian’s audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network,” PwC network, the alliance of PwC’s global member units, said in a statement.
The firm said as part of its “accountability and remedial actions”, PwC China’s territory senior partner Daniel Li had stepped down and Hemione Hudson, the firm’s global risk and regulatory leader, had taken over from him.
The six-month business suspension was imposed by China’s Ministry of Finance (MOF). The ministry also imposed a fine of 116 million yuan ($16 million) on PwC Zhong Tian for its auditing failure of Hengda in 2018, according to an MOF statement.
The CSRC said in a separate statement that it had confiscated PwC Zhong Tian’s revenue involved in the Evergrande case totalling 27.7 million yuan and fined the unit 297 million yuan.
“PwC has, to a certain extent, covered up and even condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds,” said the CSRC statement.
“It (PwC) has to be severely punished according to law.”
Over the past few months, a growing number of Chinese clients has been leaving PwC, mainly state-owned enterprises and financial institutions, following the launch of the regulatory investigation into the firm.
The firm had about 400 Chinese clients, listed at home or in offshore markets such as Hong Kong or New York, in March this year, including tech behemoths Alibaba and Tencent.
A Reuters calculation based on filings showed more than 50 Chinese firms including PwC’s largest mainland China-listed client Bank of China or have either dropped PwC as their auditor or cancelled their plans to hire it.
- Reuters with additional editing by Jim Pollard
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