PwC is facing a crisis in China as partners brace for penalties over its audit of collapsed property developer Evergrande and some clients reconsider their relationship with the accounting firm.
China’s securities regulator ruled in March that Evergrande had inflated its mainland revenues by almost $80 billion (€74 billion) in the two years before the developer defaulted on its debts in 2021, despite PwC giving the accounts a clean bill of health.
Partners fear they could face one of the largest fines ever imposed on a Big Four accounting firm in China and other sanctions, prompting infighting among senior figures, according to insiders and retired partners still close to the firm.
PwC enjoyed success on the back of China’s property boom, but in the wake of Evergrande’s collapse and the property sector slowdown, the firm’s future business in the country has been clouded in uncertainty ahead of a leadership change.
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The situation is “high stakes” for PwC China partners, said Francine McKenna, accounting lecturer at the University of Miami Herbert Business School. “The Chinese firms of the Big Four are also part of global networks, and many multinational firms operating in China count on them for audit, tax and advisory services.”
Partners believe possible regulatory action could eclipse the punishment handed to rival Deloitte last year for a “deficient audit” of China Huarong Asset Management. Deloitte paid a $31 million fine and its operations in Beijing were suspended for three months.
“The current partners are braced for impact,” said one former PwC partner.
Evergrande was one of China’s largest developers, and its collapse has sent shock waves through the economy. Founder Hui Ka Yan faces a lifetime ban from public markets as a result of the March regulatory findings. PwC had audited the company since as early as 2009 before resigning in 2023.
Officials at Beijing’s finance ministry have discussed possible punishments for the firm’s failure to detect the accounting irregularities, including a large monetary penalty, the suspension or closure of some of PwC’s regional offices and curbs on auditing state-owned enterprises, according to a person briefed on the matter.
PwC China had eight central government-controlled SOE audit clients as of 2022, according to finance ministry data, accounting for about 6 per cent of revenue. Regulators reiterated last year that state-owned companies should not typically hire auditors that have received significant fines or other punishment within three years.
A director at a mainland-listed state-owned enterprise said its board in recent weeks discussed dropping PwC as its auditor if Beijing imposed heavy penalties. Last Friday, state-owned insurance group PICC said it had axed PwC as auditor after just three years, hiring EY instead.
The uncertainty has extended to PwC clients beyond SOEs. Shanghai-listed Eastroc Beverage cancelled a shareholder vote scheduled for last Friday that would have reappointed the firm as its auditor, saying it needed to “further verify related matters surrounding the accounting firm”.
“PwC China is co-operating with its regulators as it relates to any proceedings involving Evergrande,” the firm said, declining to comment further. China’s finance ministry did not respond to a request for comment.
Xue Yunkui, professor of accounting at the Cheung Kong Graduate School of Business in Beijing who sits on the boards of several listed companies, said officials were likely to weigh a severe punishment of PwC against the possibility of disrupting capital markets by taking action that destabilises the firm. “Everyone is waiting for guidance from the regulator,” he said.
PwC has the largest market share in China among the Big Four accounting firms, according to the finance ministry, with revenues of Rmb7.9 billion ($1.1 billion) in 2022. It has almost 800 partners and more than 20,000 staff in mainland China.
The business is one of the most important in PwC’s global network, which had revenues of $53 billion in its last fiscal year. Raymund Chao, chair of PwC China, is part of the five-person global network leadership team, where he has the title of Asia-Pacific chair.
Chao is also in charge of PwC’s business in Hong Kong, where regulators are investigating the audit of Evergrande’s Hong Kong-listed parent company. People close to Evergrande’s liquidators have said they are considering legal action against PwC.
The Big Four accounting firms operate as legally separate, locally owned partnerships under a global umbrella that co-ordinates marketing and oversees quality.
The fallout from the Evergrande audit threatens to compound a wider slowdown in the Chinese market that has affected all the Big Four accounting firms but has been especially difficult for PwC. At the beginning of this decade, it counted many of the largest developers among its audit clients, including Country Garden, Shimao and Sunac, and it has since resigned from many of the engagements.
The slowdown was already showing in PwC’s last fiscal year to June, 2023, when the Asia-Pacific region recorded the weakest revenue growth in the global network, just 7 per cent compared with more than 10 per cent in Europe and the Americas. The Asia-Pacific number was flattered by 24 per cent growth in India, indicating China was a significant laggard.
The crisis comes in the midst of a leadership transition at PwC China, marking a bitter end to Chao’s nine years in the top job. He is set to retire on June 30th, following the unopposed election of Shanghai audit partner Daniel Li, who will be the first mainland Chinese person to run the firm.
“Evergrande will continue to be the biggest challenge for Daniel when he takes over,” said a China-based partner at a rival Big Four firm who was expecting an opportunity to pick up business from SOEs. “Whether or not PwC can recover from this, it will be in the hands of the authorities.”
In April, PwC reported to Chinese authorities an open letter circulating on social media purportedly written by a group of PwC China partners that attacked Chao’s leadership and his handling of Evergrande.
The letter played on long-simmering tensions between internal factions that date back to the 2002 mergers between the Chinese and Hong Kong businesses of PwC and the Chinese arm of Arthur Andersen, which brought Chao and other senior figures to the firm.
The prospect of financial penalties over Evergrande has sharpened criticism of Chao’s record, and the provenance of the open letter has become a “whodunnit” mystery inside PwC and beyond.
The letter claimed that Chao, then head of the firm’s audit business, had fought off an effort to ditch Evergrande as a client in 2014, when allegations of aggressive accounting first circulated and then-chair Silas Yang and other partners raised questions.
PwC China has previously said the letter contains “inaccurate statements and false allegations”. Chao declined to comment.
Yang, who hails from the old PwC Hong Kong side of the firm and retired in 2015 to become steward of the prestigious Hong Kong Jockey Club, also declined to comment when contacted by the Financial Times. His LinkedIn profile, however, contains some of his post-retirement thoughts in a comment on a video about EY in China.
“The profession is indeed facing many challenges. I’m only glad that I’m out of it now,” he wrote, going on to use an abbreviation for “troublesome practice matters”, the euphemism used internally at PwC for business that gets the firm into regulatory trouble.
“Luckily during my years, there were no TPMs! 🙏🏻🙏🏻,” he wrote.
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