PwC braces for severe regulatory penalties in China over Evergrande scandal

The Chinese arm of PwC is bracing for significant regulatory penalties following its involvement in auditing the troubled property developer Evergrande. Reports suggest that PwC, through its local subsidiary PwC Zhong Tian, is expected to face a six-month suspension starting in September, alongside a substantial fine.

The anticipated suspension will impact PwC Zhong Tian’s ability to engage in key activities such as signing off on financial statements and handling initial public offerings (IPOs) for clients. This suspension is poised to be the most severe penalty ever imposed on a Big Four firm in China.

Alongside the suspension, the accounting and consulting firm is expected to be hit with a fine of at least 400 million yuan ($56 million), though some estimates suggest the fine could reach up to 1 billion yuan ($140 million).

The scrutiny of PwC stems from its audit work with Evergrande, which was revealed in March to have inflated its revenues by nearly $80 billion over two years. The developer, which had been the world's most indebted property developer before its collapse, was fined $580 million for the fraud, and its founder, Hui Ka Yan, faced a $6.5 million fine and detention.

PwC audited Evergrande for nearly 14 years until early 2023, and its role in the scandal has drawn intense regulatory scrutiny. The penalties being considered by China’s Ministry of Finance, the primary regulator of accounting firms in China, have led to a significant client exodus and financial strain for the firm.

PwC is meanwhile also facing an exodus of talent in the wake of the scandal.

Several high-profile clients, including the Bank of China and China Life Insurance, have already severed ties with PwC, opting to switch to other auditors such as EY. This trend reflects broader concerns over the firm’s reliability and potential impact on its future business prospects in China.

The situation at PwC contrasts sharply with the previous regulatory actions against other Big Four firms. Last year, Deloitte’s Beijing branch faced a three-month suspension and a 212 million yuan fine for deficiencies in its audit of China Huarong Asset Management. However, the penalties facing PwC are set to be more severe, underscoring the intense regulatory climate in China.

As the regulatory process continues, PwC’s future operations in China are likely to be constrained, particularly in terms of acquiring new clients, especially state-owned and listed companies. The broader impact of these penalties may influence how state-owned enterprises and listed companies approach their auditing decisions in the coming years.

The Ministry of Finance is expected to finalize and announce PwC's penalties in the coming weeks, further clarifying the extent of the firm’s punishment and its implications for its operations in the world’s second-largest economy.