Chinese regulators have issued a six-month business suspension and a record fine of 441 million yuan to PwC’s auditing unit in mainland China for their audit of China Evergrande Group. The regulators found that PwC Zhong Tian LLP assisted in covering up and condoning Evergrande’s fraud during audits of the developer’s flagship unit in 2019 and 2020. The China Securities Regulatory Commission stated that PwC seriously eroded the basis of law and good faith, damaging investors’ interests. This penalty is the toughest ever received by a Big Four accounting firm in China and comes amid an exodus of clientele and layoffs at the firm.
This move is expected to impact PwC’s prospects in the Chinese economy, as PwC Zhong Tian was the country’s top-earning auditor in 2022. PwC network expressed disappointment in the audit work done by PwC Zhong Tian, stating that it did not meet the standards expected of member firms. In response to the investigation, PwC China’s territory senior partner stepped down, and Hemione Hudson, the firm’s global risk and regulatory leader, took over. The Ministry of Finance imposed the six-month business suspension and a fine of 116 million yuan for auditing failures in 2018 related to Evergrande.
The CSRC confiscated PwC Zhong Tian’s revenue related to the Evergrande case and fined the unit an additional 297 million yuan. The CSRC stated that PwC had covered up and condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds, warranting severe punishment according to the law. Chinese clients, including state-owned enterprises and financial institutions, have been leaving PwC following the regulatory investigation. The firm had around 400 Chinese clients, including tech giants Alibaba and Tencent, in March but has seen over 50 firms drop PwC as their auditor or cancel plans to hire the firm.
The penalties imposed on PwC in China raise concerns about the integrity of accounting practices and the oversight of auditing firms in the country. The CSRC’s investigation into PwC’s role in covering up Evergrande’s fraudulent activities highlights the importance of regulatory scrutiny in ensuring transparency and accountability in financial reporting. The impact of the penalties on PwC’s business operations and reputation in China underscores the consequences of failing to meet regulatory requirements and uphold professional standards in auditing practices. Despite the severity of the penalties, PwC has taken steps to address the situation by implementing accountability and remedial actions within the firm.
The fallout from the investigation into PwC’s auditing of Evergrande reflects broader concerns about corporate governance and financial accountability in China’s business environment. The penalties imposed by Chinese regulators send a clear message to auditing firms about the consequences of failing to fulfill their responsibilities and uphold ethical standards in their work. The regulatory actions against PwC highlight the challenges faced by multinational firms operating in China and the importance of compliance with local regulations and regulatory requirements. Moving forward, PwC will need to rebuild trust with clients and regulators in China to regain its standing in the market and restore its reputation as a trusted auditing firm.
