The Hong Kong Securities and Futures Commission (SFC) has reached an agreement with PwC Hong Kong, under which PwC Hong Kong will set aside HKD 1 billion to compensate eligible independent minority shareholders of China Evergrande Group. Detailed terms of the compensation process will be announced in due course. Meanwhile, independent minority shareholders of Evergrande and their intermediaries are advised to retain transaction records related to the company's shares to facilitate compensation claims. Intermediaries should also provide reasonable assistance to these shareholders for submitting their claims.
PwC Hong Kong acted as the auditor for Evergrande's financial statements for the fiscal years ended December 31, 2019, and December 31, 2020. The SFC's investigation focused on Evergrande's results announcements and annual reports, uncovering that the now-liquidated developer had significantly inflated its annual revenue and profit for those two fiscal years. The SFC also reviewed the role of PwC Hong Kong, concluding that market misconduct had occurred due to Evergrande disseminating false and misleading financial information and the auditor's serious breach of professional duties.
Under the agreement, the SFC and PwC Hong Kong have resolved the matter fully and finally without admission of liability, with the SFC agreeing not to take further action against PwC Hong Kong provided the firm complies with the agreement's terms.
The SFC determined that Evergrande's 2019 and 2020 annual reports and results announcements contained materially false or misleading information, particularly regarding revenue recognition. Evergrande prematurely recognized revenue from property sales before project completion and delivery to buyers, thereby manipulating its annual revenue and profit to significantly exaggerate audited figures. The SFC concluded that Evergrande's audited annual revenue was inflated by RMB 213.9 billion (44.79%) for FY2019 and RMB 350.2 billion (69.03%) for FY2020. Consequently, Evergrande's audited annual profits of RMB 33.5 billion (FY2019) and RMB 31.4 billion (FY2020) should have been losses of RMB 7.12 billion and RMB 19.9 billion, respectively.
While PwC Hong Kong does not admit to the following, the SFC found that during its tenure as Evergrande's auditor, PwC Hong Kong was involved in disclosing false/misleading information under the Securities and Futures Ordinance; failed to maintain auditor independence; lacked sufficient professional skepticism in audit planning, execution, and addressing non-compliance; failed to design effective site inspections to determine construction/delivery status for proper revenue recognition; acquiesced to management's manipulation of audit samples and site visits, concealing premature revenue recognition; and inadequately verified the authenticity of supporting documents.
Prioritizing shareholder compensation, the SFC determined that the agreement with PwC Hong Kong best serves the interests of Evergrande's independent minority shareholders. The HKD 1 billion fund will be distributed through a process overseen by an independent manager. This marks the first instance of an auditor compensating minority shareholders for losses due to false/misleading financial statements after a company's collapse, sending a clear message about holding listed companies and auditors accountable for accurate financial disclosures to maintain market integrity and protect investors.
Auditors serve as essential gatekeepers and pillars of confidence in Hong Kong's financial system. When audit firms undermine controls for reporting accuracy, they damage investor trust, market integrity, and the accountability foundation of Hong Kong's market success. The SFC will take action to protect affected shareholders' interests in such cases.
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