China’s financial regulators have imposed a six-month suspension and a penalty of 441 million renminbi (£49 million) on PwC China due to audit failures associated with the collapse of property giant Evergrande. This marks Beijing’s harshest measure taken against a major four corporation to date.
This development follows an earlier disclosure in March by China’s securities regulator, accusing PwC China of endorsing Evergrande’s accounts although the property firm had exaggerated mainland revenues by approximately $80 billion in the two years prior to its 2021 default.
Last Friday, China’s finance ministry relayed that PwC Zhongtian, also referred to as PwC China, together with its Guangzhou branch, were cognizant of significant errors in Evergrande’s audit from 2018 to 2020, yet overlooked them. Consequently, the ministry has commanded the Guangzhou branch of PwC China to cease operations.
In the finance ministry’s assessment, PwC China exhibited serious deficiencies during its audit of Hengda Real Estate, Evergrande’s mainland subsidiary. These shortcomings resulted in numerous erroneous conclusions, as the firm compromised its impartiality and overstated its profits during the audit, the authorities further disclosed.
China’s securities regulator added in a separate communique that PwC’s conduct extended beyond mere audit shortcomings, as it obscured or even condoned the financial dishonesty and false issuance of corporate bonds by Hengda Real Estate.
The penalties PwC China faces consist of 116 million renminbi from the finance ministry and 325 million renminbi from the China Securities Regulatory Commission.
PwC expressed disapproval over its subsidiary PwC Zhong Tian’s auditing of Hengda. The audit work exhibited a standard well below the levels PwC mandates of its global members. They have dismissed six partners and terminated five staff who were deeply involved in the audit.
Furthermore, Daniel Li, the newly appointed senior partner of PwC China set to serve a term of four years, has consented to forego his position given his previous role as the head of assurance for the firm. Li will, however, maintain his position as the firm’s chief accountant, PwC confirmed.
Senior UK partner, Hermione Hudson, has been appointed to temporarily oversee the China operations of PwC, highlighting the level of apprehension the big four firm has over the current dilemma in China. While the firm traditionally works as a network of independent, locally-owned partnerships, it is a change of course to have an external appointee.
PwC’s global chairman, Mohamed Kande, expressed his disappointment over the incident involving PwC Zhong Tian’s Hengda audit team. He iterated the standards of the company and their commitment to excellence, condemning the unacceptable level of work done by the audit team.
In a notable event, PwC faced a larger penalty than the €28 million fine and three-month partial operation ban laid on Deloitte last year for their critical audit deficiencies in their work with China Huarong Asset Management, a large bad-debt manager in China.
Moreover, allegations of violations by PwC’s Hong Kong unit are being looked into by the finance ministry, the same unit that audited Evergrande parent group’s accounts. The financial ministry stripped four PwC staff members who approved Hengda’s financial documents from 2018 to 2020 of their accounting licences. It also fined seven other individuals implicated in preparing Hengda’s accounting documents.
PwC has suffered a significant loss, forfeiting around two-thirds of its accounting revenues from mainland-listed clients, primarily state-owned enterprises of China that swapped auditors as Evergrande’s controversy escalated. The Bank of China, a significant client, transitioned to competitor EY in August.
Despite the adversities, PwC continues to reassure its clients of its ability to complete 2024 audits despite facing the ban. The firm’s major internationally listed clients such as Alibaba, Tencent and insurer AIA, continue their associations with PwC.
As per Chinese law, state-owned enterprises and many mainland clients are prohibited from engaging with an auditor subject to sanctions. – Copyright The Financial Times Limited 2024
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