ESG Post

Corporate Governance

PwC fined, suspended in China over Evergrande audit scandal

Chinese regulators imposed a six-month business suspension and a record fine of 441 million yuan ($62 million) on PwC’s auditing arm in mainland China on Friday, citing its audit of the troubled property developer China Evergrande Group. According to China’s securities regulator, PwC Zhong Tian LLP helped cover up and “condone” Evergrande’s fraud while auditing the financial results of Hengda Real Estate, the developer’s key onshore unit, in 2019 and 2020.

“PwC has seriously eroded the basis of law and good faith, and damaged investors’ interest,” said the China Securities Regulatory Commission (CSRC) in a statement.

Since March, Chinese authorities have been scrutinising PwC’s role in Hengda’s accounting after the CSRC accused Evergrande of a $78-billion fraud spanning two years until 2020.

The penalties mark the harshest ever for a Big Four accounting firm in China, amid a backdrop of client exits and layoffs at PwC. This development could severely impact PwC’s future in the world’s second-largest economy. PwC Zhong Tian, the firm’s primary entity in China, was the country’s top-earning auditor in 2022, according to official records.

The PwC network expressed disappointment with PwC Zhong Tian’s audit of Hengda, stating that the work “fell unacceptably below the standards expected” of member firms. As part of its accountability measures, PwC China’s territory senior partner Daniel Li has stepped down, with global risk and regulatory leader Hermione Hudson taking his place.

China’s Ministry of Finance (MOF) imposed a six-month business suspension and an additional fine of 116 million yuan ($16 million) for PwC Zhong Tian’s auditing failures in 2018. The CSRC confiscated 27.7 million yuan in revenue from the Evergrande case and fined the firm 297 million yuan.

“PwC has, to a certain extent, covered up and even condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds,” said the CSRC statement, adding, “It (PwC) has to be severely punished according to law.”

In recent months, many Chinese clients, including state-owned enterprises and financial institutions, have distanced themselves from PwC following the regulatory investigation. By March this year, PwC had about 400 Chinese clients, including Alibaba and Tencent, but more than 50, including PwC’s largest mainland client Bank of China, have since dropped the firm or scrapped plans to hire it.