On April 23, the Hong Kong Securities and Futures Commission (SFC) announced an agreement with PwC (PricewaterhouseCoopers) regarding false financial statements issued by China Evergrande Group for the 2019 and 2020 fiscal years. The agreement stipulates that PwC will compensate minority shareholders with HK$1 billion.
PwC Hong Kong, the local operating entity of PricewaterhouseCoopers, has agreed to set aside HK$1 billion to compensate eligible independent minority shareholders of China Evergrande Group. Detailed terms of the compensation process will be disclosed in due course.
Ms. Julia Leung, CEO of the SFC, stated that this marks the first instance where an auditor of a collapsed company has compensated independent minority shareholders for losses incurred due to false and misleading financial statements.
PwC Hong Kong was fined HK$310 million in total, including HK$300 million for the firm and HK$5 million each for two former partners, Zhang Zhaochang and Zhou Shiqiang. The firm also faces a six-month practice restriction and must report on its remediation progress every three months over 12 months while completing specialized training.
PwC had served as Evergrande's auditor since its 2009 listing until their partnership ended in January 2023, spanning 14 years. During this period, PwC also audited Evergrande Services and Evergrande Vehicle, issuing unqualified audit opinions for their financial statements.
The investigation into PwC Hong Kong began in late April 2024, following the circulation of an anonymous letter signed by "a group of PwC partners," which questioned the quality of the firm's audit work for Evergrande and triggered a two-year probe by the Hong Kong Accounting and Financial Reporting Council.
The SFC concluded that Evergrande had overstated its revenue by RMB 213.9 billion in 2019 and RMB 350.2 billion in 2020. Consequently, reported profits of RMB 33.5 billion in 2019 and RMB 31.4 billion in 2020 were, in fact, losses of RMB 7.12 billion and RMB 19.9 billion, respectively. Over these two years alone, PwC was found to have facilitated a profit overstatement of RMB 91.9 billion.
PwC Hong Kong did not admit to the allegations. The SFC determined that reaching a settlement with PwC was in the best interest of Evergrande's minority shareholders. Under the agreement, the matter is fully and finally resolved without further action by the SFC, provided PwC complies with the terms.
On September 13, 2024, China's securities regulator and the Ministry of Finance penalized PwC for its audit work on Evergrande's 2019 and 2020 reports. The investigation found that PwC failed to exercise due professional care, violated auditing standards, and did not maintain proper skepticism, leading to undetected financial fraud.
Audit working papers were inaccurate, with 88% of real estate project observations inconsistent with actual conditions. Site visits were ineffective, as many properties deemed ready for delivery were unfinished or vacant. Sample selection was compromised, and document verification procedures failed.
PwC issued unqualified audit reports for Evergrande's annual statements and provided assurances for several bond issuances, despite false records. The firm was fined RMB 325 million in total, including confiscated illegal income and maximum penalties.
The Ministry of Finance also imposed a separate penalty of RMB 116 million, suspended PwC's business operations for six months, and revoked the license of its Guangzhou branch.
Over 14 years of collaboration, Evergrande paid PwC a total of RMB 288 million in audit fees. In 2021, amid Evergrande's debt crisis, PwC still issued an unqualified audit report and received RMB 54 million in fees. The partnership ended in January 2023.
Following the Evergrande incident, numerous listed companies terminated their engagements with PwC. By March 2024, at least 48 companies had switched auditors, including large state-owned enterprises, with combined audit fees exceeding RMB 800 million.
The history of major accounting firms once included the "Big Five," before Arthur Andersen collapsed due to its involvement in the Enron scandal in 2002. Many of Andersen's employees and clients in Hong Kong and mainland China merged with PwC, boosting its growth in the region. Seven years later, PwC began auditing Evergrande.
On PwC China's website, the first value listed under "Our Mission and Values" is integrity.
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