China Bans PwC’s Chinese Unit for Six Months Over Evergrande Audit Failures

Chinese authorities have imposed a six-month ban on PwC’s Chinese unit, accusing it of being complicit in the downfall of the massive property developer Evergrande. The ban, announced on Friday, stems from flawed audit work performed by PwC Zhong Tian, part of a broader trend of increased scrutiny on Western auditing firms by both Chinese and U.S. regulators.

The penalties, which include a record fine of 441 million yuan (approximately $62 million), were imposed by China’s Ministry of Finance and the China Securities Regulatory Commission (CSRC). According to the regulators, PwC Zhong Tian’s audits of Hengda Real Estate, a subsidiary of Evergrande, were negligent and contributed to the company's financial collapse.

Following an investigation, the CSRC stated that PwC “turned a blind eye” or “even condoned” fraudulent activities by Evergrande while auditing Hengda in 2019 and 2020. "PwC’s behavior goes beyond mere auditing failure. It, to a certain extent, covered up and even condoned Hengda Real Estate’s financial fraud and fraudulent issuance of corporate bonds," the CSRC noted in a statement, according to Reuters.

The CSRC’s investigation into Evergrande, which culminated in a March 2023 ruling, accused the company of participating in a $78 billion fraud. Evergrande was subsequently fined 4.18 billion yuan ($577 million), Reuters reported.

Reacting to the penalties, PwC’s global chair, Mohamed Kande, expressed disappointment in the audit work performed on Hengda. "The firm’s audit of Hengda fell well below our high expectations and was completely unacceptable,” Kande said in a statement. He added that PwC “cooperated fully with its regulators, respects their decisions, and will fully comply with the administrative penalties.”

The punitive measures taken against PwC Zhong Tian are part of a broader crackdown by Chinese authorities on auditing firms. Earlier this year, in March 2023, Deloitte’s Beijing branch faced a three-month suspension and a fine of 212 million yuan (then $30.8 million) for failing to assess the asset quality of China Huarong Asset Management Co., Reuters reported.

Meanwhile, U.S. regulators have also been scrutinizing the audit work of Western firms in China. In March 2023, the Public Company Accounting Oversight Board (PCAOB) fined KPMG’s China-based partners $150,000 for auditing violations at education service provider Tarena International. Additionally, in 2022, the U.S. Securities and Exchange Commission fined Deloitte $20 million for deficiencies in audits conducted by its Chinese subsidiaries.

Following the passage of the Holding Foreign Companies Accountable Act in 2020, the PCAOB has stepped up its efforts to address misconduct by U.S.-based firms auditing in China. In one instance, the PCAOB levied $7 million in fines against two PwC affiliates operating in China and Hong Kong.

What sets the penalties against PwC apart is their severity. The six-month ban on PwC Zhong Tian’s auditing in China is expected to severely impact its operations. In addition to the suspension, the firm will be barred from taking on new state-owned or domestically listed clients for the next three years, as per Chinese regulations, Reuters reported. Furthermore, Chinese authorities have closed PwC Zhong Tian’s Guangzhou branch, which had conducted the controversial audits of Hengda.

Despite these setbacks, PwC remains committed to its operations in China, where it employs 18,000 people. “China remains an important part of the PwC network, and I remain confident in the China firm’s partners and staff as we work together to rebuild trust with stakeholders,” Kande said.

To address the fallout, PwC has terminated six partners and five employees directly involved in the Hengda audit. The firm is also pursuing financial penalties against current and former leadership involved in the audit. However, these internal actions may not be enough to satisfy Chinese regulators, who have implied that PwC played an active role in enabling Evergrande’s fraudulent activities. This raises the possibility that PwC auditors could face charges alongside Evergrande executives if further legal action is taken.

The unfolding situation underscores the increasing scrutiny and pressure Western auditing firms face in China, particularly in high-profile cases like Evergrande’s collapse.

By fLEXI tEAM