China Imposes Six Months Ban, $62m Fine on PwC for Not Disclosing Evergrande Financial Misreporting

Chinese authorities have handed down an unprecedented six-month suspension and imposed a hefty Rmb441 million ($62 million) fine on PwC China, marking the most significant punitive action to date against a Big Four firm in the country, per The FT.

This decisive move comes in the wake of revelations that PwC China’s auditors allegedly turned a blind eye to widespread financial misreporting at the embattled property developer Evergrande, one of China’s most high-profile corporate collapses.

The Ministry of Finance’s statement on Friday detailed a litany of failings by PwC China and its Guangzhou branch, which oversaw Evergrande’s mainland subsidiary, Hengda Real Estate. According to the ministry, the firm not only failed to flag “major mistakes” in the audit between 2018 and 2020 but also participated in distorting financial records, which significantly inflated Evergrande’s profits and obscured the company’s spiraling debt.

The regulator highlighted that nearly 88% of PwC’s audit records did not match the reality of Evergrande’s projects, underscoring a systematic failure to conduct proper due diligence.

China’s crackdown on PwC China is part of a broader tightening of regulatory oversight, reflecting the government’s increasing focus on ensuring financial transparency amid the property sector’s deepening crisis.

Evergrande’s collapse in 2021 was the culmination of years of unchecked debt accumulation, with the developer defaulting on over $300 billion in liabilities, triggering ripple effects throughout the Chinese and global financial markets. The situation worsened after the Chinese securities regulator revealed in March that Evergrande had inflated its revenues by almost $80 billion over the course of two years, a period during which PwC approved its accounts.

Auditor Independence in Question

At the heart of the scandal is the question of auditor independence and integrity. China’s Ministry of Finance stated that PwC’s audit team “lost its independence” and failed to exercise due professional skepticism, essentially enabling Evergrande’s fraudulent activities. Rather than uncovering the discrepancies, PwC auditors allegedly concealed or condoned the financial irregularities, leading to what the authorities described as “many false conclusions” about Evergrande’s financial health.

“PwC’s behavior 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.

PwC’s Guangzhou office, specifically tasked with auditing Hengda Real Estate, has been ordered to shut down entirely, while the broader PwC China network faces the ban on new audit business for six months. In addition to the fines, several auditors who signed off on Evergrande’s statements have had their accounting licenses revoked, and others involved in the audit process have been penalized.

PwC Responds With Internal Shake-Up

In response to the crisis, PwC China has initiated a sweeping internal overhaul. The firm expressed deep regret for the failures identified by the regulators, acknowledging that its audit of Evergrande “fell unacceptably below” the expected standards.

“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,” PwC said in a statement.

As a consequence, PwC terminated six partners and five additional employees who were directly involved in the audit, signaling a commitment to accountability. Daniel Li, who assumed the role of senior partner for PwC China in July, has also stepped down from his leadership position, though he will remain with the firm as chief accountant.

To manage the fallout, PwC has taken the unusual step of appointing Hemione Hudson, a senior UK partner, to lead PwC China on an interim basis. Hudson’s appointment, which brings in an external perspective, highlights the level of concern within the PwC network about the crisis engulfing its China operations.

A Chilling Effect on the Big Four

PwC’s troubles in China mirror broader concerns about the role of foreign auditing firms in the country, especially as Chinese regulators intensify scrutiny of financial disclosures in the wake of Evergrande’s collapse. While China has long relied on the expertise of international firms like PwC, Deloitte, EY, and KPMG, the regulatory environment has shifted dramatically in recent years.

In 2022, Deloitte was fined $31 million and suspended for three months for audit deficiencies related to China Huarong Asset Management, one of the country’s largest bad debt managers. However, PwC’s penalties far exceed those imposed on Deloitte, marking a turning point in how China approaches audit oversight.

The Evergrande debacle has had far-reaching consequences for PwC China. Over the course of this year, PwC has lost approximately two-thirds of its accounting revenues from mainland-listed clients, primarily state-owned enterprises that have chosen to distance themselves from the firm amid the mounting scandal.

The Bank of China, one of PwC’s largest clients, switched auditors to rival firm EY in August, underscoring the damage done to PwC’s reputation in China. Other state-owned enterprises are expected to follow suit, as Chinese law prohibits them from engaging with sanctions-hit auditors.

Implications for Global Clients

Following the heavy sanctions, PwC has been working to assure its international clients that it remains capable of fulfilling its commitments for the 2024 audit cycle. Among the firm’s high-profile clients are Chinese tech giants Alibaba and Tencent, as well as insurer AIA. PwC has reassured these companies that it will continue to provide audit services, despite the temporary ban in mainland China.

However, the fallout from PwC’s audit failure has sparked fresh concern over the role of the Big Four in China, particularly in light of the government’s increasing emphasis on promoting local auditors. While foreign firms have long dominated the audit market for major Chinese companies, the Evergrande scandal may signal a shift towards greater reliance on domestic firms, especially as Chinese regulators tighten their grip on the financial system.

The crisis has also raised concerns about the future of the auditing profession in China, where the demands for accountability are growing, and the tolerance for corporate mismanagement is rapidly diminishing. As Beijing continues to grapple with the challenges of managing the property sector’s debt overhang, the penalties imposed on PwC China may well be a harbinger of even tougher regulatory actions to come.

The finance ministry also said “relevant violations” of PwC’s Hong Kong unit, which audited the accounts of the Evergrande parent group, would be investigated.

For now, PwC China is facing a critical juncture, one where it must not only rebuild trust with regulators and clients but also navigate the shifting landscape of China’s audit and financial oversight. Whether it can emerge from this crisis with its reputation intact remains to be seen, but the case of Evergrande has undoubtedly cast a long shadow over the future of the firm’s operations in the country.