🔒 PwC faces record fine in China over Evergrande auditing

In a landmark move, China is set to levy a historic fine against PricewaterhouseCoopers LLP, potentially exceeding 1 billion yuan, over its involvement in a major financial fraud case with China Evergrande Group. This penalty may also entail suspension of some PwC operations on the mainland. Amidst mounting scrutiny, PwC’s reputation takes a hit, sparking concerns about market share. President Xi Jinping’s push for financial stability amplifies the significance of regulatory enforcement.

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By Bloomberg News

China is poised to impose a record fine on PricewaterhouseCoopers LLP and suspend some of the global auditor’s local operations over its role in one of the nation’s biggest alleged financial fraud cases, according to people familiar with the matter. ___STEADY_PAYWALL___

The Ministry of Finance may announce the penalties on PwC as soon as this week over its auditing work for China Evergrande Group, said the people, asking not to be identified discussing a private matter. PwC faces a fine of at least 1 billion yuan ($138 million), the people said. That would exceed the previous record fine for an accounting firm, the 212 million yuan handed out to Deloitte Touche Tohmatsu Ltd. in 2023.

Part of the penalties could also include a halt of operations at some of PwC’s mainland offices, the people said, adding the decision isn’t final and the specifics could be subject to change.

The MoF and PwC didn’t immediately respond to Bloomberg requests for comments.

PwC has been under the spotlight after China launched one of the biggest investigations of financial fraud in history involving developer Evergrande. Authorities earlier this year levied a 4.18 billion yuan fine against the once high-flying real estate firm and said the company’s main unit, Hengda, overstated its revenue by 564 billion yuan in the two years through 2020.  

The penalty will damage PwC’s reputation and “adversely affect the public confidence in accounting,” said Pingyang Gao, a professor in accounting and law from HKU Business School. “I wouldn’t be surprised if the share of the auditing market by those global franchise in China would shrink.”

PwC already lost a handful of Chinese clients in May alone, adding to a list of more than a dozen firms it has stopped auditing in the country in the last two years. China Taiping Insurance Holdings Co., China Merchants Bank Co. and People’s Insurance Company (Group) of China Ltd. were among them.

The penalties come as President Xi Jinping has increased focus on tackling financial risks and crime to stabilize the world’s second largest economy. At a Politburo meeting on Monday, Xi instructed the financial regulators and local governments to implement new rules and make sure financial oversight has “teeth.”   

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. The firm served as 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 accounting firms, PwC was one of the most commonly used by Chinese real estate firms 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 mainland Chinese arm, with more than 1,600 certified accountants, reported revenue of 7.9 billion yuan ($1.1 billion) 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. 

PwC has run into trouble in other jurisdictions. In Hong Kong, the city’s Financial Reporting Council said in 2022 that it was looking into Evergrande’s financial statements for 2020 and expanding an investigation of an audit carried out by PwC. 

The company earlier pledged 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 also fined £5.6 million for failures in auditing Babcock International Group Plc. 

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