PwC has resigned from its role as auditor for Eternal Beauty following a disagreement primarily concerning an unexplained HKD 70 million prepayment.
To clarify, PwC's Hong Kong branch, acting as the IPO audit firm for Eternal Beauty, is referred to here as PwC. Eternal Beauty is a perfume company that listed on the Hong Kong Stock Exchange in June 2025. Its founder, Liu Jurong, began his perfume distribution business in the 1980s. By 2023, Eternal Beauty had grown into the largest perfume group in China, excluding brand-owning parent companies, and was fully owned by Liu and his wife at the time.
Eternal Beauty commenced its listing preparations in 2023 and submitted its first application in July 2024, which lapsed in January 2025. A second application was filed in February 2025, leading to a successful listing in June 2025. Post-IPO, Liu and his wife retained a 75% stake in the company. Public financial data shows that from 2023 to 2025, Eternal Beauty reported a profit of HKD 606 million, with the couple receiving cumulative dividends of HKD 624 million over the same period, effectively distributing all profits.
The dispute that led to PwC's resignation centers on an unclear HKD 70 million prepayment. Eternal Beauty raised HKD 883 million from its IPO. The prepayment in question represents less than 8% of the total funds raised and is slightly less than the total listing expenses of HKD 73.1 million. The company stated the prepayment was for multi-year public relations services, data analysis, consulting, and social media promotion. PwC sought to verify the actual use of these funds.
PwC submitted a detailed list of inquiries to Eternal Beauty's management: 1) The background of the three suppliers and their potential involvement in the IPO process; 2) Whether adequate internal controls and approval procedures were followed before the decision; 3) Whether the service fees paid were in line with market rates; 4) Whether this payment should be classified as a listing expense or fall under the planned use of IPO proceeds. The final question arose because legal advisors and accountants accounted for HKD 30.2 million of the listing expenses.
The prepayment amounts to the three service providers appeared inconsistent with typical IPO expenditures. In response, Eternal Beauty established an investigation committee comprising independent non-executive directors in January, appointing legal advisors and forensic accountants to conduct a probe. As the financial reporting season approached, Eternal Beauty noted that PwC had not commenced the fiscal year's audit by March 16. PwC stated it had not received the necessary explanations, documents, or information, nor was it informed of the detailed scope of the independent investigation.
PwC's position was clear: without results from the independent investigation, it could not proceed with the 2025 financial audit. Furthermore, the lack of transparency regarding the investigation's details raised doubts about its legitimacy. Additionally, the issues surrounding the HKD 70 million payment necessitated extra audit procedures, for which PwC requested additional fees. The timeline for these extra steps was uncertain due to a lack of information, and the associated costs required mutual agreement. Eternal Beauty viewed this as an attempt to demand a higher price unfairly.
Having been listed for less than a full fiscal year, Eternal Beauty faces potential regulatory scrutiny if it fails to publish its financial reports on time. Its stock has already declined over 26% since listing. The company found PwC's stance on the uncertain timeline for additional procedures unacceptable and refused to pay extra fees. Consequently, the board decided to replace the auditor and requested PwC's resignation. PwC submitted a resignation letter, and the two parties parted ways during a critical period for financial reporting.
The fallout between Eternal Beauty and its auditor over financial opacity, less than a year after its IPO, highlights a significant corporate governance risk. Public attention is now focused on the fact that the founders distributed all profits from three fiscal years prior to the listing and then made a substantial prepayment to three suppliers shortly after going public. If these are legitimate suppliers, why is the transaction unclear? In other markets, similar arrangements have sometimes been used to divert company funds for private benefit or to manipulate financial performance.
The separation appears to be a compromise but is, in reality, an acrimonious end to their relationship. PwC is perceived as using the client's confidential transaction details to delay the audit and demand a higher fee, while Eternal Beauty, fearing delayed financial reports, refused to pay more and dismissed the auditor. Their disagreements had been brewing privately but have now become public due to the resignation. PwC lost a client after failing to secure a fee increase, and Eternal Beauty, by dismissing PwC, may still face challenges in justifying the HKD 70 million transaction.
The prepayment allowed PwC to detect the scent of the three suppliers. While it may have believed it had leverage over the perfume company, it is worth remembering that the founders had already distributed all pre-IPO profits. Now, having lost the client, PwC might ruefully reflect on the situation. Meanwhile, Eternal Beauty must recognize that as a public company, outdated practices are no longer acceptable. Imperfect transactions and financial opacity could lead to severe consequences for the listed entity.
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