The China division of PwC, also referred to as PwC Zhong Tian, has seen a significant reduction in its accounting revenues from clients listed in the mainland, roughly two-thirds, shedding light on the implications of its audit of the collapsed property tycoon, Evergrande. According to Wind Info, a Chinese data resource, PwC China has experienced a financial loss of at least 561 million RMB ($77 million) from a total of 869 million RMB in audit profits from companies listed in China, over the last six months.
Prominent clients like China Life Insurance, a state-owned firm which contributed an accounting fee of 65 million RMB in 2023, and China Railway group, paying 33 million RMB previous year have been part of more than 20 companies listed in the mainland that have moved to other firms as PwC is likely to face fine linked to its audit of Evergrande. This client departure indicates how penalties can reshape the auditing milieu in China and how this has significantly influenced the company to implement job cuts and cost-reduction tactics.
The 107 companies listed in mainland that are part of PwC China’s total revenues in 2023 had a significant impact on the unit’s income which was 7.9 billion RMB in 2022, 6.8 billion of which was recorded as accounting income obtained from mainland, US, Hong Kong and other market clients, as per the data from Chinese Institute of Certified Public Accountants.
“There has been an unusual departure of clients from the mainland this year,” remarked Fan Zhongwen, an accounting professor at the City University of Hong Kong who has reviewed PwC China’s client departures independently. He added, “It’s not something ordinary for PwC, neither is it seen amongst its main competitors such as KPMG, EY or Deloitte. Company reports were not explicit about the reasons, but noticeable changes are being made in the aftermath of the Evergrande debacle.”
Despite remaining tight-lipped about the loss of their clients, internal correspondences from PwC China, seen by the Financial Times, reveal the executive team struggling to minimise the damage. In a recent partners’ communication, the firm advised that they should remain composed and brace for the coming disruption.
The laws of China dictate that auditors of state-own corporations as well as mainland-listed corporations be rotated and retired every ten and eight years, respectively. However, the 2021 downfall of Evergrande and the resultant close inspection of the real estate sector by regulatory bodies have put PwC in hot water.
PwC China, Evergrande’s auditor for 14 years until 2023, which declared the developer’s financial status as sound, is likely to face a penalty. This is following the accusations levelled by China’s securities regulator that Evergrande’s inland business overstated their revenues by nearly $80 billion across the years 2019 and 2020. The company was slapped with a $577 million fine in May.
In 2022, PwC was the top revenue-earning auditing firm in China and was favoured for audits by corporations owned by the central government. It was followed by EY in popularity, as indicated by CICPA data.
The Big Four accounting firms collected 32 per cent of the total audit fees from corporations listed in the mainland, even though they only audited one in every 14 corporations as per Wind information.
Firms with A-shares are considered mainland-listed corporations in China; these shares are renminbi-denominated and trade on exchanges in the mainland. However, corporations with Hong Kong-listed B-shares or H-shares, traded in foreign currencies, are not included.
PwC China reported that profits from A-share listed corporations in the past half year accounted for 7 per cent of the total accounting income of 2022.
Following an anticipated fine, PwC China restructured its leadership in the Asia Pacific region in July for the first time in nearly a decade, appointing Daniel Li as a replacement for Raymund Chao, the chair of PwC Asia Pacific and China. Li now manages separate legal divisions in Hong Kong and Macau.
Recently, PwC China has let go of employees in its Guangzhou, Shenyang, and Shanghai offices, as verified by two sources in the know. As of 2022, PwC Zhong Tian was operating with 23 local branches and 1,693 certified accountants.
Earlier in the month, most employees in PwC China’s financial services division, based out of Shanghai, were directed to undertake a career hiatus during the months of July and August, which would entail an approximate 80% salary reduction, according to an individual privy to this decision.
Additionally, over the last year, employees in Hong Kong have been required to take a few days of unpaid leave, as indicated by two people acquainted with the situation.
In the face of shifts in the external environment, PwC China asserted that it’s implementing a few modifications to enhance the optimization of its organisational layout to coincide with market demand.
Other top-tier firms, such as Lixin (a part of BDO’s network) and RSM’s China division, as well as other market-leading professional service businesses, are capitalising on the tumult at PwC. They are hiring ex-employees of PwC and taking on the firm’s clients.
A high-ranking China-based associate linked to one of PwC’s competitors indicated that numerous PwC staff, covering partners both in Hong Kong and mainland China, have aggressively sought alternative career paths and strategised their departure from the company in recent times. The partner commented that in the short to medium span, the remaining big corporations stand to gain.
Copyright The Financial Times Limited 2024.