Chinese authorities have banned PwC China for six months and fined it 441 million renminbi (€56 million) for auditing failures related to the collapsed property developer Evergrande, in Beijing’s toughest action yet against a big-four firm.
The move follows a March announcement by China’s securities regulator that PwC China had approved Evergrande’s accounts even though the developer had inflated mainland revenues by nearly $80 billion in the two years before its default in 2021.
China’s finance ministry said on Friday that PwC Zhongtian, commonly known as PwC China, and its Guangzhou branch were aware of “major mistakes” in the audit of Evergrande from 2018 to 2020 but failed to point them out. The Guangzhou branch of PwC China has been ordered to shut down, according to the ministry.
PwC China had “severe flaws” in its auditing process of Hengda Real Estate, the name of Evergrande’s mainland unit, which led to “many false conclusions”, said the ministry. The firm “lost its independence” and “inflated its profits” through the audit, added the authorities.
“PwC’s behaviour goes beyond mere auditing failure, they concealed or even condoned the financial fraud and fraudulent issuance of corporate bonds of Hengda Real Estate,” said China’s securities regulator in a separate statement.
The PwC China penalties include 116 million renminbi levied by the finance ministry and 325 million renminbi from the China Securities Regulatory Commission.
[ PwC UK fined €17.6m over costly audit failuresOpens in new window ]
In a statement, PwC said: “We are disappointed by PwC Zhong Tian’s (or ‘PwC ZT’) audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network.”
It said it had terminated the employment of six partners and “exited” five staff directly involved in the audit.
Daniel Li, who only took over as senior partner of PwC China in July and was expected to serve a four-year term, has agreed to step down from the role “given his former responsibilities” as the firm’s head of assurance, PwC said. He will remain at the business as chief accountant.
Hemione Hudson, a senior UK partner, would be parachuted in to take charge of the China business on an interim basis, said PwC.
The move underlines the level of concern within the big-four group about the China crisis. Unlike other multinationals, PwC typically operates as a network of independent, locally owned partnerships, so the appointment of an outsider represents a highly unusual step.
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Mohamed Kande, PwC global chairman, said: “The work performed by PwC Zhong Tian’s Hengda audit team fell well below our high expectations and was completely unacceptable. It is not representative of what we stand for as a network and there is no room for this at PwC.”
The penalty surpasses the €28 million fine and three-month partial business ban imposed on Deloitte last year for “serious audit deficiencies” related to its work with China Huarong Asset Management, one of China’s largest bad-debt managers.
The finance ministry also said it would investigate “relevant violations” of PwC’s Hong Kong unit, which audited the accounts of the Evergrande parent group.
The ministry revoked the accounting licences of four PwC staff who signed off on Hengda’s financial statements from 2018 to 2020. It fined seven other individuals who were involved in preparing Hengda’s accounting materials.
[ PwC under pressure to name global partners linked to Australian tax leaks scandalOpens in new window ]
PwC has already lost about two-thirds of its accounting revenues from mainland-listed clients, mostly China state-owned enterprises, which switched auditors from PwC this year as the controversy surrounding Evergrande grew. The Bank of China, one of its biggest clients, changed to rival EY in August.
PwC has been working to keep its clients by assuring them in recent weeks it can complete 2024 audits even with the ban. Its biggest internationally listed clients include Chinese internet giants Alibaba and Tencent, as well as insurer AIA, which are still working with PwC.
Chinese state-owned enterprises cannot use a sanctions-hit auditor along with many mainland clients, according to the law in China. – Copyright The Financial Times Limited 2024
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