Chinese regulators have imposed a six-month business suspension and a record fine of 441 million yuan ($62 million) on PwC’s auditing unit in mainland China due to its role in auditing the troubled property developer China Evergrande Group.
In a strong rebuke, the China Securities Regulatory Commission (CSRC) announced on Friday that its investigation revealed PwC Zhong Tian LLP had not only overlooked but also potentially enabled Evergrande’s fraudulent activities while auditing the annual results of its flagship unit, Hengda Real Estate, for 2019 and 2020.
The CSRC stated, “PwC has seriously eroded the basis of law and good faith, and damaged investors’ interests.”
Chinese authorities have been scrutinizing PwC’s involvement in the accounting practices of Hengda Real Estate since the China Securities Regulatory Commission (CSRC) accused the developer of a $78 billion fraud spanning two years, up to 2020.
The recent business suspension and record fines represent the most severe penalties ever imposed on a Big Four accounting firm in China. This development comes amid a wave of client departures and layoffs at PwC in recent months, raising concerns about the firm’s future in the world’s second-largest economy.
PwC Zhong Tian, the primary onshore arm of PwC in China and the registered accounting entity, was the top-earning auditor in the country in 2022, according to official reports. The penalties are likely to hinder PwC’s prospects in an increasingly challenging environment.
“We are disappointed by PwC Zhong Tian’s audit of Hengda, which fell unacceptably below the standards we expect from our member firms,” stated the PwC network, the global alliance of PwC’s member firms.
In light of this situation and as part of their “accountability and remedial actions,” Daniel Li, PwC China’s territory senior partner, has stepped down, with Hemione Hudson, the firm’s global risk and regulatory leader, taking over his responsibilities.
The six-month business suspension was imposed by China’s Ministry of Finance, which also levied a fine of 116 million yuan ($16 million) on PwC Zhong Tian for its auditing shortcomings related to Hengda in 2018, as noted in an MOF statement.
The China Securities Regulatory Commission (CSRC) announced that it has confiscated 27.7 million yuan of PwC Zhong Tian’s revenue related to the Evergrande case and imposed an additional fine of 297 million yuan.
The CSRC stated, “PwC has, to a certain extent, covered up and even condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds,” emphasizing the need for severe legal penalties.
In recent months, an increasing number of Chinese clients, particularly state-owned enterprises and financial institutions, have been distancing themselves from PwC amid the ongoing regulatory investigation. In March, the firm had approximately 400 Chinese clients, including major tech companies like Alibaba and Tencent, listed in China and overseas markets such as Hong Kong and New York.
According to a Reuters analysis of filings, over 50 Chinese companies, including PwC’s largest mainland client, Bank of China, have either terminated their contracts with PwC or canceled plans to engage its services.
