PwC is facing a crisis in China as partners brace for sanctions over an audit of bankrupt developer Evergrande and some clients reassess their relationship with the accounting firm.
China’s securities regulator ruled in March that Evergrande inflated its onshore revenue by nearly $80 billion in the two years before the developer defaulted on its debts in 2021, despite PwC giving the accounts a clean bill of health.
The partners fear they could face one of the biggest fines ever levied on a Big Four accounting firm in China and other sanctions, which has sparked a row among senior figures, according to insiders and former partners who remain close to the company.
PwC has enjoyed success on the back of China’s property boom, but the collapse of Evergrande and a slowdown in the real estate sector have left the firm’s future business in the country shrouded in uncertainty ahead of a change in leadership.
The situation is “high stakes” for PwC’s partners in China, said Francine McKenna, a lecturer in accounting at the University of Miami Herbert Business School. “China’s Big Four firms are also part of global networks, and many multinational firms operating in China count on them to provide audit, tax and consulting services.”
The partners believe any regulatory action could overshadow a penalty handed down by rival Deloitte last year for “inadequate auditing” of China Huarong Asset Management. Deloitte paid a $31 million fine and had its operations in Beijing suspended for three months.
“Current partners are prepared for impact,” said one former PwC partner.
Evergrande was one of China’s biggest developers and its collapse sent shockwaves through the economy. Founder Hui Ka Yan faces a lifetime ban from public markets as a result of regulatory findings in March. PwC audited the company as early as 2009 before resigning in 2023.
Officials at Beijing’s finance ministry have discussed possible penalties for the firm’s failure to detect accounting irregularities, including a hefty fine, the suspension or closure of some PwC regional offices and restrictions on auditing state-owned enterprises, a person briefed on the matter said. matter.
As of 2022, PwC China had eight central government-controlled SOE audit clients, accounting for about 6 percent of revenue, according to Finance Ministry data. Regulators reiterated last year that state-owned companies typically should not hire auditors who have received significant fines or other punishment within three years.
The director of the mainland-listed state-owned enterprise said its board had discussed in recent weeks dropping PwC as its auditor if Beijing imposes heavy sanctions. Last Friday, state-run insurance group PICC said it had fired PwC as auditor after just three years, hiring EY instead.
The uncertainty extended to PwC’s non-SOE clients. Shanghai-listed Eastroc Beverage canceled a shareholder vote scheduled for last Friday that would have reappointed the firm as its auditor, saying it needed to “further verify related matters regarding the accounting firm.”
“PwC China is cooperating with its regulators regarding any proceedings involving Evergrande,” the firm said, declining to comment further. China’s Ministry of Finance did not respond to a request for comment.
Xue Yunkui, an accounting professor at the Cheung Kong Graduate School of Business in Beijing who sits on the boards of several listed companies, said officials are likely to weigh PwC’s harsh punishment against the possibility of disrupting capital markets by taking steps that destabilize the firm. “Everyone is waiting for guidance from the regulator,” he said.
PwC has the largest Chinese market share among the Big Four accounting firms, with sales of Rmb7.9 billion ($1.1 billion) in 2022, according to the Ministry of Finance. It has nearly 800 partners and more than 20,000 employees in mainland China.
The business is one of the most important in the global PwC network, which had $53 billion in revenue in its last fiscal year. Raymund Chao, chairman of PwC China, is part of the five-member global network leadership team, where he holds the title of Asia Pacific chairman.
Chao is also in charge of PwC’s Hong Kong business, where regulators are investigating an audit of Evergrande’s Hong Kong-listed parent company. People close to Evergrande’s liquidators have said they are considering legal action against PwC.
The Big Four accounting firms operate as legally separate, locally owned partnerships under a global umbrella that coordinate marketing and oversee quality.
The fallout from Evergrande’s audit threatens to complicate a broader slowdown in the Chinese market that has hit all the Big Four accountancy firms but has been particularly difficult for PwC. At the beginning of this decade, it counted many of the biggest developers among its audit clients, including Country Garden, Shimao and Sunac, and has since resigned from many engagements.
The slowdown was already evident in PwC’s latest fiscal year to June 2023, when the Asia-Pacific region posted the weakest revenue growth in the global network, at just 7 percent, compared with more than 10 percent in Europe and the Americas. The Asia-Pacific figure was flattered by 24 percent growth in India, suggesting China was lagging well behind.
The crisis comes amid a leadership shakeup at PwC China and marks a bitter end to Cha’s nine years at the top job. He is due to retire on June 30 after Shanghai audit partner Daniel Li was elected unopposed to be the first mainland Chinese to lead the firm.
“Evergrande will continue to be the biggest challenge for Daniel when he takes over,” said a China-based partner of the rival Big Four, who had been eyeing an opportunity from SOE. “Whether or not PwC recovers from this will be in the hands of the authorities.”
In April, PwC reported to Chinese authorities an open letter circulating on social media, purportedly written by a group of PwC partners in China, that attacked Chao’s leadership and his dealings with Evergrande.
The letter played on long-simmering tensions between internal factions that date back to the 2002 merger of PwC’s Chinese and Hong Kong firms with the Chinese arm of Arthur Andersen, which brought Chao and other senior figures to the firm.
The prospect of financial sanctions over Evergrande has sharpened criticism of Chao’s record, and the origin of the open letter has become an “incredible” mystery inside and outside PwC.
The letter alleged that Chao, then head of the firm’s audit department, fended off an effort to drop Evergrande as a client in 2014 when allegations of aggressive accounting first surfaced and then chairman Silas Yang and other partners raised questions.
PwC China previously said the letter contained “inaccurate statements and false allegations”. Chao declined to comment.
Yang, who hails from the old Hong Kong arm of PwC and retired in 2015 to become a trustee of the prestigious Hong Kong Jockey Club, also declined to comment when contacted by the Financial Times. However, his LinkedIn profile includes some of his post-retirement thoughts in a comment on a video about EY in China.
“This profession really faces many challenges. I’m just glad I’m out of it now,” he wrote, going on to use shorthand for “problem practices matter,” a euphemism used internally at PwC for businesses that get the firm into regulatory trouble.
“Fortunately there were no TPMs in my years! 🙏🏻🙏🏻,” he wrote.
Additional reporting from Kaye Wiggins in Hong Kong and Simon Foy in London