PwC’s auditing unit in mainland China has been slapped with a six-month business suspension and a record fine of 441 million yuan ($62 million) over its audit of troubled property developer China Evergrande Group, CNN reports.
The penalty, delivered by Chinese regulators on Friday, marks the toughest action ever taken against a Big Four accounting firm in the country. The Chinese Securities Regulatory Commission (CSRC) accused PwC Zhong Tian LLP of helping to cover up and even condone Evergrande’s fraudulent activities while auditing the developer’s flagship unit, Hengda Real Estate, in 2019 and 2020.
“PwC has seriously eroded the basis of law and good faith, and damaged investors’ interest,” stated the CSRC.
The investigation, launched in March after the CSRC accused Evergrande of a $78 billion fraud, found that PwC Zhong Tian had failed to properly scrutinize the developer’s financial statements, ultimately contributing to the company’s eventual collapse.
The CSRC confiscated an additional 27.7 million yuan from PwC Zhong Tian for its role in the Evergrande case and levied a 297 million yuan fine. The Ministry of Finance also imposed a 116 million yuan fine for auditing failures related to Hengda in 2018.
The repercussions for PwC are significant. PwC Zhong Tian, the firm’s main onshore arm in China, was the country’s top-earning auditor in 2022. This suspension will significantly hinder its operations and cloud its future prospects in the world’s second-largest economy.
“We are disappointed by PwC Zhong Tian’s audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network,” said the PwC network in a statement.
As a consequence of this scandal, Daniel Li, PwC China’s territory senior partner, has stepped down, and Hemione Hudson, the firm’s global risk and regulatory leader, has taken over.
The impact of this scandal is already being felt by PwC. A growing number of Chinese clients, including major state-owned enterprises and financial institutions, have been leaving the firm since the investigation began.
More than 50 Chinese firms, including Bank of China, PwC’s largest mainland China-listed client, have either dropped the firm as their auditor or canceled their plans to hire it. This exodus of clients comes at a critical time for PwC, which already faces a challenging environment in China due to increased regulatory scrutiny.
