By Rebecca Feng
China's finance ministry and securities regulator imposed record fines and a six-month suspension on PricewaterhouseCoopers's operation in the country over its audits of China Evergrande Group, the real-estate developer whose collapse in late 2021 jump-started the country's property crisis.
The $62 million in fines, handed down by regulators on Friday, was the country's largest-ever penalty imposed on a Big Four accounting firm. It is also the first major penalty levied against an auditor related to China's real-estate collapse.
In addition, PwC's operations in mainland China will be suspended for six months and its Guangzhou office was shut down by the finance ministry. The suspension effectively freezes the firm out of the audit-busy months of January to April, making it impossible to sign off on companies' annual reports during that period.
The ban will also impact some Chinese companies that are in the process of going public in Hong Kong or the U.S., and were counting on PwC to provide audited statements as a condition of their listing.
PwC didn't have an immediate comment.
In auditing Evergrande's financial statements from 2018 to 2020, PwC China knew that the results contained material misstatements but didn't specify them, the Ministry of Finance said in a statement.
In a separate statement, the Chinese securities regulator said that PwC violated numerous auditing standards and its auditors failed to maintain professional skepticism.
Specifically, it said about 88% of PwC China's audit papers on work done to inspect Evergrande's real-estate projects were "seriously unreliable." While PwC's on-site visits to selected Evergrande properties concluded that some homes were ready to be delivered, most of them were actually unfinished, and some were "empty pieces of land," the regulator said. Additionally, it said PwC didn't inspect projects that Evergrande forbade it to inspect.
The regulator said there were also deficiencies in PwC's work done to verify homeowners' signatures. The firm's internal review processes were "mere formalities," according to the statement.
In March, Chinese regulators found that Evergrande's main onshore Chinese unit, Hengda Real Estate, had committed wide-scale fraud, inflating its sales by roughly $78 billion in 2019 and 2020. The firm's founder and former chairman, Hui Ka Yan, was banned for life from working in finance. Evergrande, already in liquidation at that time, was fined $578 million.
At the time, Hui disputed the regulators' finding and said that the fine should be applied to the auditor, not the company and himself. Previously, Evergrande had defended its published financial statements, saying that they were audited.
Evergrande didn't immediately comment on Friday.
The finance ministry and securities regulator will also coordinate with the Hong Kong Accounting and Financial Reporting Council to further investigate violations of PwC Hong Kong, the regulators said in a statement.
China's property bust has weighed on the country's economy for several years, after regulators clamped down on new borrowing by overleveraged developers in 2021, leading many to collapse. China's home prices sank into a downward spiral, and questions about the developers' audits intensified.
PwC Zhong Tian in the mainland and PwC Hong Kong, which together form PwC China, had been the longtime auditors for Evergrande, which once was China's biggest property developer before it defaulted in late 2021. PwC Zhong Tian and PwC Hong Kong both resigned as Evergrande's auditor early last year, citing an inability to access key information, and the developer was ordered to be liquidated in January this year.
PwC, for each financial statement it audited, gave Evergrande an unqualified, or clean, opinion. That meant PwC assessed that the property developer had reported its results accurately and posed no bankruptcy or liquidation concerns.
The scrutiny by Chinese regulators has been an embarrassment for PwC's global brand, and has hurt the firm's prospects in mainland China, where PwC was the largest accounting firm by revenue in 2022, raking in about $1.1 billion. In Hong Kong, PwC audited 38% of companies listed on the city's main board by market value by this March, according to the company's website.
Even before Friday's penalty was levied, dozens of long-term heavyweight clients, including Bank of China and state-owned telecommunications giant China Telecom, had ditched PwC as their auditor. By the end of August, more than one-third of PwC's Chinese domestically-listed audit clients had parted ways with the firm.
Inside the firm, layoffs and mandatory unpaid leaves have been imposed and partners have been interviewing at rivals, The Wall Street Journal previously reported.
The $62 million penalty on PwC China dwarfed a $31 million fine and three-month suspension imposed on Deloitte's Beijing office in March last year for "serious audit deficiencies" in its work with a big state-owned asset manager. Deloitte said at the time that it respected the ministry's decision.
The fine also exceeded the $41 million in fees PwC had received as Evergrande's auditor from 2009 to 2020, Evergrande's published annual reports show. PwC was also Evergrande's auditor from 2006 to 2009, but the audit fees during those years weren't made public.
PwC's China offices are locally owned and managed independently as part of PwC's global network, whose biggest offices are in New York and London. The structure is similar to other Big Four accounting firms. PwC China, which also includes Macau offices, employs more than 20,000 professionals across 29 cities in China, the auditor said on its website.
PwC was the auditor of choice for many large and now-defaulted Chinese developers, including Evergrande, Country Garden, Sunac China and Shimao Group. The other three Big Four accounting firms -- KPMG, Deloitte and Ernst & Young -- also audited Chinese developers that later defaulted.
Meanwhile, earlier this month, the Shanghai finance bureau gave PwC Singapore a temporary six-month permit to perform audit functions in mainland China. But their audit reports don't have legal effect in mainland China, according to official rules.
Write to Rebecca Feng at rebecca.feng@wsj.com
(END) Dow Jones Newswires
September 13, 2024 07:46 ET (11:46 GMT)
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