Evergrande Liquidators Said Exploring Legal Action Against Former Auditor PwC

The liquidators of China Evergrande Group are reportedly considering a lawsuit against the builder’s former auditor PricewaterhouseCoopers (PwC), as creditors holding $23 billion of the bankrupted company’s offshore debt scramble for compensation.

Appointed last month to liquidate Evergrande’s Hong Kong-listed holding company, Eddie Middleton and Tiffany Wong of restructuring specialist firm Alvarez & Marsal have spoken to at least two law firms about potentially filing a claim against PwC on grounds of negligence, the Financial Times reported over the weekend, citing people with knowledge of the conversations.

Evergrande defaulted in September 2021, less than a year after the Big Four firm had signed off its books, however, liquidators will likely require time and funding to build their case against the world’s second largest auditing firm by revenue, with negligence claims against auditors typically taking at least five years to progress and often ending in settlement, according to market sources who spoke to Mingtiandi.

“While it would be standard practice for liquidators to consider legal action in response to auditor negligence, Evergrande’s offshore creditors still have little cause for optimism as a lawsuit would likely face significant legal and jurisdictional challenges,” said Brock Silvers, chief investment officer at Hong Kong-based Kaiyuan Capital. “(The liquidators’) claim against PwC could easily require over $5 million in funding over several years, and such funding and patience will likely be extremely difficult to secure.”

Representatives of the liquidators declined to comment on the reports.

Under Investigation

The potential lawsuit is not certain to take place and the early stage discussions with law firms do not indicate that Evergrande’s liquidators have discovered any evidence of wrongdoing by PwC, according to the people cited by the Financial Times.

Having served as Evergrande’s auditor since 2008, before the company’s 2009 IPO, PwC had given the developer’s 2020 financials a clean bill of health in its March 2021 independent auditor’s report. Just six months later, Evergrande missed coupon payments on offshore dollar bonds, triggering the company’s default in September 2021.

In October 2021, PwC, along with Evergrande, came under investigation by Hong Kong’s Accounting and Financial Reporting Council, which said that the accounting firm “made no reference to going concern material uncertainties” in its audit of the development giant.

“Based on China Evergrande’s financial position as at 31 December 2020 and 30 June 2021 and the disclosures about its liquidity risks and mitigating actions in the 2020 Annual Accounts and the 2021 Interim Accounts, the FRC considers that there are reasons to…investigate whether PwC’s audit work on China Evergrande’s going concern assessment in the 2020 Audit and its auditor’s report complied with applicable auditing standards,” Hong Kong’s independent accounting watchdog said in a statement at the time.

The investigation was expanded in August 2022 to include Evergrande’s property services arm  after authorities uncovered a RMB 13.4 billion scheme under which the subsidiary had illicitly transferred funds back to the parent company.

PwC resigned as Evergrande’s auditor in January 2023, citing the defaulted developer’s failure to provide information related to its then still-unreleased 2021 financial results.

Onshore Uncertainty

Since 2021, PwC has resigned as auditor of at least 16 other mainland developers including Shimao, Sunac, Guangzhou R&F and Agile, all of which are in or near default. The accounting firm still serves as auditor for Country Garden, China’s former top developer which fell into default in October of last year.

PwC’s Big 4 competitors Ernst & Young and Deloitte have also resigned from auditing mainland builders, reflecting the challenges of conducting due diligence as China’s protracted property slump dents asset valuations and raises scrutiny over opaque financial disclosures.

While Evergrande’s creditors grapple with the challenge of accessing its assets in mainland China, the “one country – two systems” reality is also likely to hamper the liquidators’ ability to take action against PwC offshore.

“PwC Hong Kong will be legally distinct from the onshore auditing entity, and the authority of Hong Kong liquidators remains unrecognised in mainland courts,” said Silvers.