(Bloomberg) — China suspended the operations of PricewaterhouseCoopers LLP for six months and imposed a record fine over lapses in its auditing of China Evergrande Group.
Most Read from Bloomberg
The accounting firm was fined a total of 441 million yuan ($62 million), according to statements by the Ministry of Finance and the China Securities Regulatory Commission released Friday. The regulator also revoked the license of its Guangzhou branch, the main auditor of Evergrande’s inflated financial reports from 2018 to 2020.
PwC has been under the spotlight after China launched one of the biggest investigations of financial fraud in history. Authorities said developer Evergrande’s main onshore unit Hengda overstated its revenue by 564 billion yuan in the two years through 2020.
Separately, Hong Kong’s Accounting and Financial Reporting Council said its investigation into PwC’s audits of Evergrande in the city is in progress.
PricewaterhouseCoopers Zhong Tian LLP, a Shanghai-registered firm that is part of PwC’s global network, was Hengda’s auditor during the period in question. PwC was Evergrande’s auditor for more than a decade until it resigned in January 2023, due to what the developer said were audit-related disagreements.
Among the Big Four global accounting firms, PwC was one of the most commonly used by Chinese real estate companies listed in Hong Kong, according to data compiled by Bloomberg. It audited the books of some of the nation’s largest developers, including Country Garden Holdings Co. and Sunac China Holdings Ltd., before they also defaulted on their debt.
PwC’s onshore arm, with 291 partners and more than 1,700 certified accountants, reported revenue of 7.9 billion yuan in 2022, making it the top earner among more than 9,000 local rivals, according to official data. Still, that’s a fraction of its global revenue of $50.3 billion during the year. It audited roughly 400 companies whose shares are listed in Shanghai, Shenzhen, Hong Kong or New York.
PwC said its top executive in China will step down in the wake of the scandal. Daniel Li agreed to resign as PwC China’s Territory Senior Partner, but will continue to support the business in his role as chief accountant of the local unit.
Hemione Hudson, the firm’s global risk and regulatory leader, will serve as the interim TSP and relocate to the region. Head of Assurance Kevin Wang will have an elevated role leading the audit and assurance business for PwC China, it said.
Since March, more than 30 publicly listed companies based in mainland China have dropped PwC as their auditor, according to stock-exchange filings. State-owned giants Bank of China Ltd., China Life Insurance Co., China Telecom Corp. and PetroChina Co. were among them. The Chinese companies that recently dropped PwC paid more than 800 million yuan in total fees to their auditors last year, according to calculations by Bloomberg News based on disclosures in the companies’ annual reports.
The firm was also cutting at least 100 staff across its China operations in July, Bloomberg reported. More than half of one team was laid off, according to people familiar with the matter. Prior to the latest round of layoffs, the threat of regulatory penalties and the loss of Chinese corporate clients had unnerved PwC China staffers and prompted some to seek opportunities elsewhere. Partners at other major international and domestic accounting firms received dozens of job inquiries from their peers at PwC, people familiar with the matter had said.
During the housing boom, most Chinese property developers raked in cash by selling partially built homes and promising to deliver them in a few years. Home buyers put down deposits and took out mortgages to buy the properties. Their money was supposed to be put in escrow accounts, and released to the developers when construction was completed.
While many Chinese developers have stated in their annual reports similar revenue-recognition policies, Evergrande may have pushed the limits further.
Prior to 2021, Evergrande recorded revenue from contracted sales of many projects before completing and delivering the homes to buyers. Its aggressive revenue-recognition tactics enabled the developer to report lower liabilities and leverage ratios during those years, which facilitated its sales of domestic and international bonds.
China Vanke Co., whose auditor is KPMG LLP, said in its 2022 annual report that it recognizes revenue from property sales when three criteria are met. That includes when “the property is accepted by the customer, or deemed as accepted according to the sale and purchase agreement, whichever is earlier.”
PwC has run into trouble in other regions. In Hong Kong, the city’s Financial Reporting Council said that it’s still carrying out a separate investigation into the audits carried out by PwC on Evergrande, after it found no supporting evidence for some of the allegations made against the firm in an anonymous whistleblower letter that circulated on social media in April. Evergrande’s liquidators also started court proceedings against PwC in Hong Kong.
The accounting firm also pledged earlier to boost governance controls in Australia over questions of a serious conflict of interest in leaking government tax plans to its clients. Its UK network was separately fined £5.6 million ($7.4 million) for failures in auditing Babcock International Group Plc.
(Updates with more details about PwC and Evergrande.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
