AsianFin -- Chinese regulators slap PricewaterhouseCoopers LLP (PwC) with record fines and a temporary operation ban in China over its involvement in audit of China Evergrande Group (Evergrande), a collapsed property developer that was accused of a US$78 billion fraud.
Credit：PwC China
China Securities Regulatory Commission (CSRC) announced Friday an administrative penalty on PwC’s auditing unit in China for failing to live up to its obligations in auditing annual reports and bond issuance of Evergrande Real Estate Group, a flagship real estate unit of Evergrande in mainland China. CSRC decided to confiscate PwC Zhong Tian LLP 's revenue related to the Evergrande case of RMB27.74 million and fined it RMB 297 million yuan, bringing the total to RMB325 million (US$45.8 million), which, according to the commission, was a "record-breaking" punishment against auditing firms.
A separate regulator, China’s Ministry of Finance (MOF) said it imposed fines and confiscations totaling RMB116 million (US$16.35 million), as well as a six-month business suspension on PwC Zhong Tian while revocation of its Guangzhou branch and an administrative warning. The fines of US$62 million in total, was China’s country’s largest-ever penalty imposed on a Big Four accounting firm. The previous record fine for an accounting firm is a RMB212 million penalty given to Deloitte in 2023.
The penalty comes as PwC failed to meet its auditing responsibilities for 2019 and 2020 annual reports and bond issuance of Evergrande Real Estate Group, according to CSRC. Evergrande was alleged to inflate its business revenues and profits in 2019 and 2020 during its issuance of corporate bonds. PwC violated multiple audit standards and requirements during the audit process, did not make correct professional judgments, and failed to detect significant and widespread financial fraud, the securities regulator said.
The severe penalties were the fallout of the severe financial fraud case of Evergrande. The property developer was fined by China’s top regulator RMB4.175 billion for fraudulent bond issuance and information disclosure violations, the CSRC said in a statement on May 31, 2024. A probe by the CSRC found that it had inflated revenue by 213.99 billion yuan, or half of the total, in 2019. In 2020, sales were inflated by 350 billion yuan, or 78.5% of the total. The developer issued bonds based on those falsified statements.
The CSRC claimed, in a statement Friday, PwC Zhong Tian had such extremely ineffective on-site inspections that 88% of the records kept by the firm regarding the real estate projects were inconsistent with the actual implementation and were seriously unreliable. "PwC's behavior goes beyond mere auditing failure. To some extent, it covered up and even condoned Evergrande Real Estate Group's financial fraud and fraudulent issuance of corporate bonds," said the CSRC.
The MOF said both PwC Zhong Tian and its Guangzhou branch were aware of "material misstatements" in the audit of the developer between 2018 and 2020 but failed to point them out, and even covered them up in various ways and issued false audit reports.
The fine that Chinese authorities hit PwC is the first major penalty levied against an auditor related to China’s real-estate collapse. Evergrande had engaged PwC as its auditor for 14 years from 2009 until January this year, when they ended their partnership. During this period, PwC provided unqualified opinions on Evergrande’s annual reports from 2009 to 2020. According to data compiled by Bloomberg, PwC was one of the most frequently used accounting firms by Chinese real estate companies listed in Hong Kong. It audited the financials of some of the largest developers in the country, such as Country Garden Holdings and Sunac China Holdings, before these companies defaulted on their debts.
In response to administrative penalties announced by two Chinese regulators, PwC’s global chair Mohamed Kande said the audit work performed by PwC Zhong Tian’s Evergrandeaudit team “fell well below our high expectations and was completely unacceptable.” PwC China said it has taken a number of accountability and remedial actions to address this matter, including to terminate the employment of 6 partners and exited 5 staff directly involved in the Evergrande audit work, and to take accountability actions and commenced the process of issuing financial penalties for current and former firm leadership who were responsible for the business.
