PwC’s China unit has lost about two-thirds of its accounting revenue from listed mainland clients this year, highlighting the impact of its audit of bankrupt property giant Evergrande.
Mainland China firm PwC Zhong Tian, better known as PwC China, has lost at least RMB561 million ($77 million) of the RMB869 million it expected to receive in 2023 audit revenue from Chinese companies listed on mainland exchanges in the past six months, according to Chinese database Wind Info.
As PwC braces for fines related to the Evergrande audit, more than 20 mainland listed companies that are major clients have changed accounting firms, including state-run China Life Insurance Co., which paid RMB 65 million in accounting fees in 2023, and China Railway Group Co., which paid RMB 33 million last year.
The exodus shows that even the threat of fines is changing the audit environment in China: Client losses are so great they are forcing job cuts and triggering cost-cutting measures in China.
The 107 companies listed in mainland China will account for a portion of PwC China’s total revenue for 2023. According to the China Institute of Certified Public Accountants, the unit earned RMB7.9 billion in 2022, of which RMB6.8 billion was booked as accounting income from clients in mainland China, Hong Kong, the United States and other markets.
Fan Zhongwen, an accounting professor at City University of Hong Kong who has conducted an independent analysis of PwC’s China client defections, said the firm had experienced an “unprecedented exodus” of mainland Chinese clients this year.
“This is not typical for PwC, nor is it common among its major rivals such as KPMG, EY or Deloitte,” he said. “The changes appear to be coming in the wake of the Evergrande scandal, although the reasons were vague in the company’s filings.”
PwC China declined to comment on the client losses, but internal documents seen by the Financial Times showed executives trying to contain the impact, telling partners in a recent email to “remain calm” and “prepare to embrace the coming disruptions.”
Chinese regulations require state-owned enterprises and mainland-listed companies to retire and replace auditors every eight and 10 years, respectively. But PwC has come under intense pressure following Evergrande’s collapse in 2021 and subsequent regulatory scrutiny of the real estate industry.
PwC China, which audited Evergrande for 14 years until 2023 and found the company clean, is expected to be punished after China’s securities regulator accused its mainland business of inflating revenue by about $80 billion in 2019 and 2020, and fined the company $577 million in May.
PwC is China’s largest accounting firm in terms of revenue and will be the preferred auditor for central government-owned enterprises in 2022, followed by EY, according to data from the China Institute of Certified Public Accountants (CICPA).
According to data from Wind, the Big Four auditing firms receive 32 percent of the total audit fees of mainland China-listed companies, but audit only 7 percent of the companies.
Mainland China-listed companies refer to companies that hold A shares, which are traded in renminbi on mainland China exchanges, but do not include companies that hold H or B shares, which are traded in foreign currencies, listed in Hong Kong.
According to PwC China, losses for A-share listed companies in the past six months accounted for 7% of their total accounting income for 2022.
The expected fine comes after PwC China made its first Asia-Pacific leadership changes in nine years in July, replacing Daniel Li with Raymond Chao as chairman of PwC Asia-Pacific and China. Li also oversees separate legal entities in Hong Kong and Macau.
PwC China recently laid off staff in Guangzhou, Shenyang and Shanghai, according to two people familiar with the matter. PwC Zhongtian has 23 branches and 1,693 certified public accountants as of 2022.
In Shanghai, most employees at PwC China’s financial services division were told earlier this month to take a salary cut of about 80% and go on leave through July and August, a person familiar with the decision said.
Staff in Hong Kong have also been asked to take several days of unpaid leave over the past year, according to two people familiar with the matter.
Given the changes in the external environment, PwC China said it is “making adjustments to optimize its organisational structure in line with market demand”.
Other big four law firms and large professional services firms such as Lixin, which is part of the BDO network, and the China division of RSM are benefiting from PwC’s turmoil by hiring former PwC staff and taking over their clients.
A China-based senior partner at a rival firm of PwC said many PwC employees, including partners in Hong Kong and mainland China, have been actively looking for other opportunities and planning to leave the firm in recent weeks.
“Another big [firms] “There will be benefits in the short to medium term,” the partner said.
Additional reporting by Ding Wenjie in Beijing
This article has been updated to reflect that mainland China-listed companies refer to companies with A shares.
