PwC probe spotlight shifts to Hong Kong after record China fine over Evergrande audit

Hong Kong – The focus of a lengthy probe into PricewaterhouseCoopers’ (PwC) China business now shifts to Hong Kong after the accounting firm was hit with a record fine in China over its audit of failed developer China Evergrande Group.

Hong Kong’s Accounting and Financial Reporting Council said its review of PwC’s local practice, which is separate from China’s probe, is still “in progress”, according to a statement on Sept 13.

The review shows that PwC’s troubles in Greater China are far from over after the firm was fined 441 million yuan (S$80.7 million) and

suspended for six months by regulators.

The Chinese authorities said Evergrande inflated its revenue by 564 billion yuan over two years, in one of the nation’s biggest accounting frauds.

Hong Kong’s accounting regulator can mete out as much as HK$10 million (S$1.7 million) in fines if it disciplines PwC.

Though it is based in China, Evergrande is regulated in Hong Kong because its stock is traded in the financial hub. 

“The severe penalty coming from (China) will add pressure on Hong Kong regulators,” said HKU Business School accounting and law professor Gao Pingyang.

The Chinese regulator’s characterisation of this matter is that it is “not only a serious auditing fault, but also to an extent a collusion with Evergrande”.

PwC China, which covers Hong Kong, audited Evergrande while its Chinese partnership, known as PwC Zhong Tian, worked with Hengda Real Estate Group, Evergrande’s China unit.

PwC said it is taking steps to address the problems, acknowledging that the work on Hengda “fell below our own high standards and the standards our stakeholders rightly expect of us”, according to a statement. “We deeply regret and apologise for the impact this has had on our clients and people.”

The firm also faces a lawsuit in Hong Kong filed by Evergrande’s liquidators as they try to recover creditors’ investments in the failed developer, which defaulted in 2021 as China’s housing crisis began to spiral. The liquidators cited the accounting firm’s “negligence” and “misrepresentation” in the auditing work.

The probes and legal proceedings threaten to hinder business for PwC, which had more revenue in China than any of the Big Four accounting firms as recently as 2022.

Several listed companies have already parted ways with the firm, while China has also been instructing its biggest companies to phase out the Big Four auditors over data risks, Bloomberg News reported earlier. 

“It is very likely that there will be a mass exodus,” said Prof Gao. “It will likely spell doom for PwC’s business in China.”

Meanwhile, several senior PwC partners in the region advising industries other than developers are considering early retirement to protect themselves from having to share the burden of any potential fines or compensation, people familiar with the matter said.

The Evergrande case could spark similar actions from other troubled property developer clients and their creditors, the people said.

Audit firms typically pay regulatory fines out of their own reserves because professional indemnity insurance generally does not cover these penalties, said Mr Clement Chan, chairman of the Hong Kong Association of Registered Public Interest Entity Auditors. 

Partners can be asked to contribute the rest, based on each firm’s policies, he said. These costs can be higher in Hong Kong since PwC’s partnership there was registered with unlimited liability, whereas China’s was limited.

PwC China had 7.9 billion yuan in revenue in 2022 from about 400 clients from Shanghai to Hong Kong and New York, according to the Chinese Institute of Certified Public Accountants. Asia-Pacific accounted for almost a fifth of global revenue in 2023. BLOOMBERG