PwC hit with record fine and six-month ban in China over Evergrande work

PwC’s auditing arm in mainland China, PwC Zhong Tian, has been hit with a six-month business suspension and a record fine of 441 million yuan ($62 million) by Chinese regulators due to its handling of the audit for the troubled property developer Evergrande Group. The fine marks the harshest penalty ever imposed on a Big Four accounting firm in China.

China’s Ministry of Finance and the China Securities Regulatory Commission (CSRC) announced the penalties following an investigation into PwC’s audits of Evergrande’s flagship unit, Hengda Real Estate, in 2019 and 2020. According to the CSRC, PwC Zhong Tian failed to uncover, and in some cases, allegedly helped conceal Evergrande’s financial misconduct, including fraudulent financial reporting and improper issuance of corporate bonds.

The CSRC accused PwC of “seriously eroding the basis of law and good faith” and damaging the interests of investors. Authorities further revealed that PwC had knowledge of major misstatements in Evergrande’s financial statements during the audit from 2018 to 2020, but failed to take appropriate action, issuing misleading audit reports instead.

Beyond the 441 million yuan penalty, PwC was fined an additional 116 million yuan ($16 million) for earlier audit failures related to Hengda in 2018. The revenue PwC generated from its work for Evergrande, totaling 27.7 million yuan, was also confiscated by the regulators.

The penalties have cast a shadow over PwC’s operations in China, where it until recently the top-earning audit firm. The company has already faced a wave of client losses, with more than 50 companies, including major state-owned enterprises and financial institutions, cutting ties with PwC since the regulatory investigation began. Among these clients is Bank of China, PwC’s largest mainland client, as well as tech giants Alibaba and Tencent.

In the wake of the fallout, PwC has had to fire hundreds of partners and staff, with many of those released taking on positions at rivals such as Deloitte, EY, and KPMG.

In response to the record fine and six-month ban, PwC’s network issued a statement expressing its disappointment with the performance of its Chinese business. PwC’s global chairman, Mohamed Kande, said that the performance of the audit team responsible for Evergrande was “completely unacceptable”.

Kande assured stakeholders that the firm has initiated a comprehensive remediation program and has dismissed six partners, with additional staff also facing consequences for their involvement.

A mega collapse

Evergrande, once China’s largest property developer, collapsed under the weight of $78 billion in inflated revenues reported between 2019 and 2020. The company’s founder, Hui Ka Yan, has since been detained and fined $6.5 million by Chinese authorities.