Chinese authorities have issued a six-month ban and imposed hefty fines on the international accounting firm PwC for its involvement in auditing the now-collapsed property developer Evergrande.
The ban prevents PwC from signing off on financial results in China, while the fines exceed 400 million yuan ($56.4 million), marking the most severe punishment for any global accounting firm operating in the country.
The penalties come in response to accusations by Chinese regulators that PwC Zhong Tian, PwC’s China division, failed to exercise due diligence during its audits of Evergrande, which collapsed earlier this year amid China’s ongoing property crisis. The Ministry of Finance and the China Securities Regulatory Commission (CSRC) both issued penalties after investigations revealed that PwC’s audits of Evergrande’s mainland subsidiary, Hengda Real Estate, contained “false audit reports” with “serious defects.” In some cases, PwC was accused of overlooking major discrepancies in financial statements and condoning fraudulent activities.
The Ministry of Finance imposed a 116 million yuan fine and ordered PwC’s Guangzhou branch to close. Additionally, the CSRC levied fines and confiscations totaling 325 million yuan, citing that 88% of PwC’s audit records for Evergrande’s real estate projects were unreliable. The investigation revealed that many of the properties reported as ready for delivery were, in fact, still undeveloped land.
PwC’s audits of Evergrande, which spanned 14 years, failed to flag significant issues, including inflated revenues that amounted to $80 billion in 2019 and 2020. The fines and business suspension are part of a broader crackdown by China on excessive borrowing by property developers during a prolonged market slump.
In response to the penalties, PwC acknowledged the shortcomings in its audits and has taken corrective actions, including dismissing six partners and five other staff members involved in the audits. PwC’s global leadership, while disappointed by the audit failures, emphasized that the firm would comply with the administrative penalties and work towards rebuilding trust.
The ban and fines are expected to impact PwC’s business prospects in China, with the firm already facing the loss of clients. Chinese regulators have also warned state-owned companies to avoid hiring auditors that have received regulatory penalties, further complicating PwC’s future operations in the country.
With input from the Associated Press, the Guardian, Reuters, Market Watch.
