PwC China has told clients it expects Chinese authorities to hit it with a six-month business ban that will start as early as September, as part of punishment over its audit of collapsed property developer Evergrande.
The action against PwC comes after China’s securities regulator in March said Evergrande had inflated its mainland revenues by almost $80 billion in the two years before the developer defaulted on its debts in 2021, despite PwC’s China unit giving the accounts a clean bill of health.
The business ban, potentially accompanied by a large fine, would be the toughest ever action by Chinese regulators against a Big Four firm. It comes as Beijing steps up scrutiny over the role played by auditors in financial scandals, in this case in the crisis-hit property sector, which once contributed around a quarter of the country’s gross domestic product.
Though not threatening the survival of PwC Zhong Tian, the entity commonly known as PwC China, the punishment threatens to be highly disruptive. PwC China was the country’s largest accounting firm by revenue in 2022, bringing in Rmb7.9 billion (€986 million), according to government data.
The ban would prevent PwC China from signing off on financial results and initial public offerings and from conducting other regulated activities, multiple clients told the Financial Times. The firm has assured clients that staff will keep working during the suspension and will be able to certify the audit opinions on their 2024 annual reports once the ban is lifted in March.
The countrywide ban would eclipse the punishment handed to rival Deloitte last year for a “serious audit deficiencies” in its work for China Huarong Asset Management. Deloitte paid a $31 million fine and its operations in Beijing were suspended for three months.
Many mainland-listed clients are barred from working with an auditor that has been sanctioned by the authorities within three years.
PwC’s China unit has already lost at least two-thirds of its accounting revenues from mainland-listed clients this year as they have switched to other firms, an exodus that exposes the scale of the fallout from its Evergrande audit failure.
Some of PwC’s state-owned clients are rushing to release midyear results to minimise the collateral damage. Bank of China, which is using PwC for its midterm report but has already switched to EY for its annual audit, has moved its results release date forward by one day to August 29. A person at the bank said finance ministry officials had told them the penalty announcement against PwC was expected by the end of August.
Bank of China did not immediately reply to a request for comment.
Mainland-listed and state-owned clients account for a minority of PwC China’s revenue. It is actively seeking to reassure its biggest internationally listed clients, including Chinese internet giants Alibaba and Tencent, that it can complete their 2024 audits, according to two people at client companies, in an attempt to retain as much of its business as possible. It has also encouraged some clients to sign contracts for future services in 2025.
“PwC promised to complete the annual report, so we chose to believe them,” said one Hong Kong-based client briefed by PwC partners. “If the penalty turns out differently than what they’ve indicated, we may reconsider, but we don’t want to kick them when they’re down.”
The loss of clients and the looming penalties have prompted accelerated lay-offs across PwC’s branches in China that are aimed at cutting costs.
PwC China said that “it would not be appropriate to comment” on “an ongoing regulatory matter”. – Copyright The Financial Times Limited 2024
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