China set to impose record fine on PwC and suspend local operations in Evergrande-linked fraud case

1039

30th May 2024 – (Beijing) China is reportedly preparing to levy a historic fine on PricewaterhouseCoopers LLP (PwC) and suspend some of the global auditing firm’s local operations due to its alleged involvement in a major financial fraud case. According to sources familiar with the matter, the Ministry of Finance (MoF) is expected to announce the penalties against PwC this week in relation to its auditing work for China Evergrande Group. The fine is projected to exceed 1 billion yuan ($138 million), surpassing the previous record fine of 212 million yuan imposed on Deloitte Touche Tohmatsu Ltd. in 2023.

The specific penalties may also entail the suspension of operations at certain PwC offices in mainland China, although the details are subject to change as the decision has not been finalized. Both the MoF and PwC have yet to respond to requests for comments from Bloomberg.

PwC has been under scrutiny following China’s extensive investigation into financial fraud, involving the prominent developer Evergrande. Earlier this year, authorities imposed a hefty fine of 4.18 billion yuan on the real estate firm, alleging that its main unit, Hengda, had overstated revenue by 564 billion yuan between 2018 and 2020.

In recent months, PwC has lost several Chinese clients, joining a growing list of more than a dozen firms it has stopped auditing in the country over the past two years. Notable companies that severed ties with PwC include China Taiping Insurance Holdings Co., China Merchants Bank Co., and People’s Insurance Company (Group) of China Ltd.

These penalties come as President Xi Jinping intensifies efforts to address financial risks and combat crime in order to stabilize China’s economy, the world’s second-largest. During a recent Politburo meeting, President Xi instructed financial regulators and local governments to enforce new regulations and ensure effective financial oversight.

PricewaterhouseCoopers Zhong Tian LLP, a Shanghai-based firm affiliated with PwC’s global network, served as Hengda’s auditor during the period in question. The firm had been Evergrande’s auditor for over a decade before resigning in January 2023 due to audit-related disagreements, as stated by the developer.

Among the “Big Four” accounting firms, PwC was frequently engaged by Chinese real estate companies listed in Hong Kong, according to Bloomberg’s data. PwC audited the financial records of major developers such as Country Garden Holdings Co. and Sunac China Holdings Ltd., both of which later faced debt defaults.

PwC’s mainland Chinese arm, which comprises over 1,600 certified accountants, reported revenues of 7.9 billion yuan ($1.1 billion) in 2022. This made it the highest-earning local rival among more than 9,000 competitors, based on official data. However, this figure pales in comparison to PwC’s global revenue of $50.3 billion during the same year.

PwC has encountered difficulties in other jurisdictions as well. In Hong Kong, the city’s Financial Reporting Council announced in 2022 that it was examining Evergrande’s financial statements for 2020 and expanding its investigation into PwC’s audit of the company.

Previously, the company pledged to enhance governance controls in Australia following allegations of a significant conflict of interest involving the leaking of government tax plans to its clients. In the United Kingdom, PwC’s network was fined £5.6 million for audit failures related to Babcock International Group Plc