PwC is facing a crisis in China. Partners are bracing for fines over their audit of failed real estate developer Evergrande, and some clients are reconsidering their relationships with accounting firms.
China’s securities regulator said in March that Evergrande inflated its mainland earnings by about $80 billion in the two years before defaulting on its debt in 2021, despite PwC’s certification that the accounts were sound. The court ruled that it was.
Insiders and retired partners still close to the firm say the partners are concerned that they could face the largest fine and other sanctions ever imposed on China’s Big Four accounting firms, and executives There is a possibility of internal conflict occurring between them.
PwC has achieved success on the back of China’s real estate boom, but Evergrande’s bankruptcy and the downturn in the real estate sector have left the company’s future operations in China uncertain as it faces a change in management.
Francine McKenna, an accounting lecturer at the University of Miami’s Herbert School of Business, said the situation is a “high-stakes gamble” for PwC’s China partners. “Big Four Chinese companies are also part of a global network, and many multinational companies operating in China rely on them for audit, tax and advisory services.”
Partners believe potential regulatory action could overturn a punishment handed down to rival Deloitte last year for “auditing deficiencies” at China Hualong Asset Management. Deloitte paid a $31 million fine and had its operations in Beijing suspended for three months.
“Current partners are bracing for shock,” said one former PwC partner.
Evergrande was one of China’s largest development companies, but its collapse sent shock waves throughout the economy. Founder Hui Kar Yang faces a permanent ban from the public markets following the findings of a regulatory investigation in March. PwC had been the company’s auditor since 2009 until stepping down in 2023.
According to people briefed on the matter, Beijing Finance Ministry officials warned that if the company fails to discover the accounting fraud, it could be subject to large fines, the closure or closure of some of PwC’s local offices, and audits of state-owned enterprises. They are reportedly discussing possible punishments such as restrictions on problem.
According to Ministry of Finance data, PwC China has eight central government-controlled state-owned enterprise audit clients as of 2022, accounting for about 6% of its revenue. Regulators reiterated last year that state-owned companies generally should not hire auditors who have received large fines or other penalties within three years.
A director at a mainland-listed state-owned company said the board had discussed removing PwC from its supervisory board in recent weeks if the Chinese government imposed heavy penalties. Last Friday, state-run insurance group PICC announced it had sacked PwC as its auditor after just three years and replaced it with EY.
Uncertainty extends beyond state-owned enterprises to PwC’s clients. Shanghai-listed EastRock Beverage has canceled a shareholder vote scheduled for last Friday that could have reappointed the company as its auditor, citing the need to “further examine related matters surrounding the accounting firm.” did.
“PwC China is cooperating with regulators on all procedures related to Evergrande,” the company said, declining to comment further. China’s Ministry of Finance did not respond to a request for comment.
Xue Yunyu, a professor of accounting at Beijing’s Cheung Kong School of Management and a director at several listed companies, said authorities will likely weigh tougher punishment for PwC against the risk of disrupting capital markets by taking actions that destabilize the company. “Everyone is waiting for instructions from regulators,” he said.
PwC has the largest market share in China among the Big Four accounting firms, with revenue of RMB 7.9 billion ($1.1 billion) in 2022, according to the Ministry of Finance. The company has approximately 800 partners and more than 20,000 staff in mainland China.
The business is one of the most important businesses in PwC’s global network, generating revenues of $53 billion in the last fiscal year. Mr. Raymundo Chao, Chairman of PwC China, is part of his leadership team of a global network of five people and holds the title of Chairman of the Asia Pacific Region.
Chao also runs PwC’s Hong Kong operations, where regulators are investigating the audit of Evergrande’s Hong Kong-listed parent company. A person close to Evergrande’s liquidators said they were considering legal action against PwC.
The Big Four accounting firms operate as legally independent, locally owned partnerships under a global umbrella that coordinates marketing and oversees quality.
The impact of the Evergrande audit threatens to exacerbate the broader slowdown in China’s market. The slowdown has affected all four major accounting firms, but it has been particularly difficult for PwC. At the beginning of this decade, PwC’s audit clients included many major real estate development companies such as Biguien, Shimao, and Rongso, but PwC has since withdrawn from many contracts.
The slowdown was already evident in PwC’s last financial year to June 2023, when Asia Pacific recorded the weakest revenue growth in the global network, at just over 10% in Europe and the Americas. It remained at 7%. Asia-Pacific figures show China lagging far behind, trailing India’s 24 per cent growth.
The crisis comes amid a leadership transition at PwC China, marking a bitter end to Mr Zhao’s nine years at the helm. He is due to step down on June 30 after Shanghai audit partner Daniel Li was elected unopposed as the firm’s first mainland Chinese boss.
“Evergrande will continue to be the biggest challenge with Daniel taking over,” said a China-based partner of a rival Big Four firm who was hoping for an opportunity to win business from the state-owned company. “Whether PwC can recover from this situation will be in the hands of the authorities.”
In April, PwC reported to Chinese authorities that an open letter attacking Mr. Chao’s leadership and Evergrande’s management, allegedly written by a group of PwC China partners, was being circulated on social media.
The letter stoked long-simmering tensions between internal factions that date back to the 2002 merger of PwC’s China and Hong Kong operations with Arthur Andersen’s China arm. The merger brought Chao and other executives to the company.
The prospect of a fine against Evergrande has further fuelled criticism of Zhao’s record, and the origins of the open letter have raised questions both inside and outside PwC.
The letter alleges that Mr. Chao, then head of the company’s audit business, said he had been with Evergrande since 2014, when allegations of aggressive accounting first became public and questions were raised by then-chairman Cyrus Yang and other partners. He claims that he has refused efforts to remove him from the organization.
PwC China previously said the letter contained “inaccuracies and false claims”. Chao declined to comment.
Mr Yang, a former member of the former PwC Hong Kong side who retired in 2015 to become a steward of the prestigious Hong Kong Jockey Club, also declined to comment when contacted by the Financial Times. But his LinkedIn profile includes some of his post-retirement thoughts in the comments on his video about EY in China.
“The profession certainly faces many challenges. I am really happy to be out of this now,” he wrote, going on to use the acronym for “troublesome practice matters,” a euphemism used within PwC for business matters that land the firm in regulatory trouble.
“Luckily there was no TPM in my time. 🙏🏻🙏🏻,” he wrote.
Additional reporting by Kay Wiggins in Hong Kong and Simon Foy in London
