Financial Crime World

Title: Record Fine and Operational Suspension Threatened for PricewaterhouseCoopers in China over Evergrande Audit Scandal

China Prepares to Impose Record Fine and Suspend Some Local Operations of PricewaterhouseCoopers (PwC)

The Chinese authorities are preparing to impose a record-breaking fine on PricewaterhouseCoopers LLP (PwC) and could suspend some of its local operations as part of escalating penalties for its involvement in the financial fraud case linked to China Evergrande Group.

Hefty Fine and Partial Operational Halt for PwC’s China Affiliate

  • Over 1 billion yuan ($138 million) fine: Sources close to the matter disclose that the Ministry of Finance intends to announce a hefty fine against PricewaterhouseCoopers for its work as Evergrande’s auditor during the time of suspected fraudulent activities.
  • Partial operational halt: A partial halt of operations may be imposed on some of PricewaterhouseCoopers’ mainland offices as part of the punitive measures.

Evergrande: Formerly Prominent Real Estate Firm Slapped with Record Fine for Overstated Revenue

  • Slapped with a record 4.18 billion yuan fine: Evergrande, formerly a prominent real estate firm, was fined this year for overstated revenue during the two preceding years.
  • Auditing failure allegations: PricewaterhouseCoopers is accused of failing to adequately audit Evergrande’s financial statements, leading to the company’s downfall and one of the largest investigations of financial fraud in Chinese history.

Increased Concerns over Financial Risks and Criminal Activities in China

  • Stricter oversight: With President Xi Jinping expressing increased concerns regarding financial risks and criminal activities to stabilize China’s second-largest economy, financial regulators and local governments received instructions to enforce stronger oversight during a recent Politburo meeting.

PricewaterhouseCoopers Zhong Tian LLP Resigned as Evergrande’s Auditor in 2023

  • Global network affiliate: PricewaterhouseCoopers Zhong Tian LLP, the Chinese affiliate under PwC’s global network, was Evergrande’s auditor of record during the period under scrutiny and resigned in January 2023 due to “audit-related disagreements.”
  • Decade-long association: Before its resignation, the affiliate served as Evergrande’s auditor for over a decade.

Preferred Choice for Chinese Real Estate Corps Listed in Hong Kong: PwC’s Global Network Earned $1.1 Billion in China in 2022

  • Major player in China: Among the Big Four accounting firms, PwC was the preferred choice for numerous Chinese real estate corporations listed in Hong Kong, including Country Garden Holdings Co. and Sunac China Holdings Ltd., both of which later defaulted on their debt.

Scrutiny Elsewhere: PwC Faces Investigations and Backlash over Evergrande Scandal

  • Hong Kong Financial Reporting Council investigation: The Hong Kong Financial Reporting Council initiated an investigation into Evergrande’s financial statements for 2020 and expanded its probe into PwC’s audit.
  • Global backlash: The company also faced severe backlash in Australia following questions concerning a potential conflict of interest and a fine of £5.6 million for auditing failures with Babcock International Group Plc in the UK.

Implications for PricewaterhouseCoopers in China

  • Reputational damage: “The penalties against PwC will inevitably harm its reputation and adversely impact public trust in accounting,” stated Pingyang Gao, a professor in accounting and law from HKU Business School.
  • Market share contraction: Gao further added, “I wouldn’t be surprised if the share of the Chinese auditing market held by these global franchises contracts subsequently.”