Chinese regulators have issued a six-month business suspension and a record fine of 441 million yuan ($62 million) to PwC’s auditing unit in China for their audit of troubled property developer China Evergrande Group. The China Securities Regulatory Commission found that PwC Zhong Tian LLP helped cover up and condone Evergrande’s fraud while auditing the annual results of the developer’s onshore flagship unit, Hengda Real Estate, in 2019 and 2020, severely eroding the basis of law and good faith and damaging investors’ interests.
The Chinese authorities have been investigating PwC’s role in the accounting of Hengda Real Estate since the CSRC accused the developer of a $78 billion fraud over a two-year period ending in 2020. This is the toughest penalty ever imposed on a Big Four accounting firm in China, and comes as PwC has faced an exodus of clients and layoffs in recent months. The business suspension and fines are likely to impact PwC’s prospects in the second-largest economy in the world.
PwC Zhong Tian, the top-earning auditor in China in 2022, has faced criticism for falling below the standards expected of member firms of the PwC network in their audit of Hengda. As part of their accountability and remedial actions, PwC announced that the China territory senior partner had stepped down and that global risk and regulatory leader Hermione Hudson would take over. The Ministry of Finance imposed the suspension and a fine on PwC Zhong Tian for their auditing failure of Hengda in 2018.
The CSRC has confiscated revenue from the Evergrande case, fined PwC Zhong Tian, and criticized the firm for covering up and condoning Evergrande’s financial fraud and fraudulent issuance of corporate bonds. This severe punishment was deemed necessary according to law. Following the launch of the regulatory investigation into PwC, a growing number of Chinese clients, including state-owned enterprises and financial institutions, have been leaving the firm. Multiple Chinese firms, including Bank of China, have either dropped PwC as their auditor or canceled plans to hire them.
In response to the regulatory actions and penalties, PwC issued a statement expressing disappointment in the audit work of Hengda by PwC Zhong Tian, acknowledging that it fell below expected standards. The firm emphasized the importance of accountability and remedial actions in addressing the situation. With the suspension and fines imposed, PwC’s future in the Chinese market is uncertain, as the firm faces challenges in retaining clients and rebuilding trust in their auditing practices.
