PwC’s auditing unit in mainland China has been handed a six-month suspension and a fine of 441m yuan ($62m) over its audit of the now-defunct property developer China Evergrande Group.
The penalties have been imposed by the Ministry of Finance of the People’s Republic of China and the China Securities Regulatory Commission on PwC Zhong Tian LLP, PwC’s registered accounting entity and primary onshore division in China.
China’s securities regulator has accused PwC Zhong Tian LLP of negligence in its audit of Evergrande’s onshore flagship unit, Hengda Real Estate, and its bond issuance in 2019 and 2020.
PwC Zhong Tian allegedly overlooked fraudulent activities, with the regulator stating that PwC “turned a blind eye” to Evergrande’s misconduct.
The investigation was prompted by allegations in March of a $78bn fraud at Evergrande over two years.
PwC Zhong Tian has audited Evergrande for nearly 14 years, ending its relationship in early 2023.
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By GlobalDataIn response to the penalties, PwC in its press statement said: “We are disappointed by PwC Zhong Tian’s (or “PwC ZT”) audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network.
“PwC ZT cooperated fully with its regulators, respects their decisions, and will fully comply with the administrative penalties.”
PwC Zhong Tian is now prohibited from endorsing essential financial documents for mainland China clients and is barred from acquiring new state-owned or domestically-listed clients for three years.
Consequently, PwC China’s territory senior partner Daniel Li has resigned from his role due to his “former responsibilities” in the auditing division.
The company also terminated the employment of six partners and withdrew five staff involved in the Hengda audit work.
The Ministry of Finance (MOF), which also mandated the closure of PwC Zhong Tian’s Guangzhou branch responsible for the Hengda audit, found that the firm had ignored “material misstatements” and even issued false audit reports.
The MOF fined PwC Zhong Tian an additional $16.4m for its 2018 audit failures of Hengda.
The China Securities Regulatory Commission (CSRC) fined PwC Zhong Tian $46m, highlighting that 88% of the firm’s observation records on Evergrande’s real estate projects in 2019 and 2020 were found to be “inauthentic or untrue.”
The CSRC also criticised PwC for failing to inspect properties accurately and for deliberately excluding certain properties from audit samples.
China Securities Regulatory Commission (CSRC) was quoted by Reuters as saying in a statement: “PwC’s behaviour goes beyond mere auditing failure. It, to a certain extent, covered up and even condoned Hengda Real Estate’s financial fraud and fraudulent issuance of corporate bonds.”
