PwC Resigns as Evergrande Auditor Over Gaps in Financials

PricewaterhouseCoopers has stepped down as auditor of China Evergrande’s books, citing the failure of the troubled developer to provide information related to its still-unreleased 2021 annual results.

The Big Four accounting firm said it was left in the dark when it asked for details on a laundry list of matters, including the independent investigation into off-balance-sheet items at Evergrande’s electric vehicle unit and a $2 billion loan scheme that led to the developer firing its chief executive and chief financial officer last July.

Because PwC was unable to obtain the information required for the 2021 audit, the firm was not in a position to provide a reasonable estimate of the time required to complete the work, Evergrande said Monday in a filing with the Hong Kong stock exchange. At the board’s urging, PwC resigned with effect on that same day, to be replaced by Hong Kong-based auditor Prism.

“Save as disclosed in this announcement, the board is not aware of other matters relevant to the resignation of PwC that need to be brought to the attention of the company’s shareholders and creditors,” Evergrande chairman Xu Jiayin said in the filing.

Communication Breakdown

In its resignation letter, PwC said it was not kept apprised of a request it made for Evergrande to set up an independent panel under the audit committee, with third-party assistance, to probe the existence of off-balance-sheet wealth management products and other off-book liabilities and undisclosed deposit pledge arrangements of the developer and Evergrande Vehicle.

“PwC was not informed of the progress of such independent investigation and had not received the relevant investigation report and information,” Evergrande said.

The Shenzhen-based builder also failed to provide a final report on $2 billion in bank deposits that were used as pledge guarantees by Evergrande Property Services. Hong Kong’s accounting watchdog had raised questions concerning how the Evergrande subsidiary and PwC had classified “restricted bank deposits and other loans” in company records, the measurement of pledge guarantees made, and disclosures of related-party transactions.

Other missing items included an assessment of Evergrande’s compliance with the terms of certain loan agreements, an accounting of the net realisable value of the company’s properties under development and completed properties held for sale as of 31 December 2021, and lists of pending litigations and related-party transactions.

Debt Restructuring Chatter

In the wake of PwC’s exit, Bloomberg reported that Evergrande was contemplating two potential options for restructuring its $16.6 billion offshore debt load.

One option would involve instalment payments on principal with the time for total repayment reaching as much as 12 years, the news agency said Tuesday, citing sources who asked not to be identified. An issuance of new notes with coupon rates as low as 2 percent would replace the old securities.

Under the second option, creditors would swap part of the debt pile into shares of Evergrande, Evergrande Vehicle and Evergrande Property Services via the issue of new hybrid securities like convertible bonds. These would feature less lengthy instalment plans and coupons of 6 to 7 percent, according to Bloomberg’s sources.

An Evergrande representative had no comment when reached by Bloomberg. In Monday’s HKEX filing, the developer said it was “actively pushing forward the debt restructuring work, and it is particularly important and critical to complete the audited financial statements for 2021”.