Hong Kong Accounting Watchdog Launches Probe of PwC Role at Evergrande

Hong Kong regulators have opened an investigation into PricewaterhouseCoopers and its relationship with China Evergrande, with the inquiry coming on the heels of reports that mainland authorities are probing PwC’s role in dodgy bookkeeping at the bankrupt developer.

The Accounting and Financial Reporting Council announced late last week that it was moved to act by claims made in a “whistle-blower report” circulating in Chinese media. The anonymous letter expressed concerns about potential deficiencies in PwC’s quality management systems and the quality of the accounting giant’s audits of Shenzhen-based Evergrande, the AFRC said in a release.

The allegations include PwC’s failure to establish and maintain an effective system of quality control to ensure audit quality and compliance with professional standards and applicable legal and regulatory requirements, according to the council, which monitors the accounting profession in Hong Kong.

“The AFRC will not hesitate to take stringent enforcement actions against any firms and individuals if they are found to have committed any misconduct or violated the Accounting and Financial Reporting Council Ordinance,” the watchdog said.

Firm Blasts Letter

The letter — purportedly written by individuals claiming to be PwC partners — also charged that the Big Four firm failed to adhere to professional standards in respect of its client relationship with Evergrande, neglected to assign appropriate personnel to key positions responsible for the firm’s system of quality management, and didn’t perform adequate audit procedures for Evergrande’s books.

“Given the gravity of these allegations and the necessity to safeguard the interests of the investing public, the broader public interest in the auditing of listed entities, and to maintain public confidence in the integrity of the accounting profession, the AFRC is obliged to initiate an investigation,” the council said.

London-based PwC’s China arm had issued a statement last Tuesday saying the letter contained “inaccurate statements and false allegations” that could tarnish the firm’s reputation and infringe its legal rights.

“Our firm is treating this incident with high priority and is taking a series of appropriate measures and will fully investigate this matter,” PwC Zhong Tian said. “We have promptly reported this matter to the relevant authorities and reserve our right to pursue appropriate action.”

Fake Financials Fallout

Bloomberg reported last month that Chinese officials were examining PwC’s work as the real estate giant’s auditor after a mainland regulator found that Evergrande’s onshore flagship, Hengda Real Estate, had committed financial fraud by recognising sales in advance, therefore overstating revenue for the years 2019 and 2020 by a combined RMB 564 billion ($78 billion).

The China Securities Regulatory Commission slapped Evergrande’s founder and former chairman, Xu Jiayin, with a lifetime ban from the country’s securities market for his part in the deception. The regulator imposed RMB 47 million in fines on Xu, who also goes by the Cantonese name Hui Ka Yan and was reported to have been detained by mainland authorities last September on suspicion of “illegal crimes”.

PwC resigned as Evergrande’s auditor in January 2023, citing the company’s failure to provide information related to its then still-unreleased 2021 financial results. The liquidators of the world’s most indebted developer are reportedly considering a lawsuit against PwC on grounds of negligence.