PwC is in crisis in China as partners face penalties over their audit of collapsed real estate developer Evergrande and some clients rethink their relationship with the accounting firm.
China’s securities regulator ruled in March that Evergrande inflated its mainland revenues by nearly $80 billion in the two years before the developer defaulted in 2021, despite PwC giving its financial statements a clean bill of health.
The partners fear they could face one of the largest fines ever imposed on any of China’s big four accounting firms, as well as other sanctions. According to insiders and former partners still close to the firm, this has led to power struggles among senior management.
PwC enjoyed success during China’s property boom, but following the collapse of Evergrande and the slowdown of the property sector, the firm’s future business in the country is fraught with uncertainty ahead of a change in leadership.
There is “a lot at stake” for PwC China’s partners in this situation, said Francine McKenna, an accounting lecturer at the University of Miami Herbert Business School. “The Big Four Chinese firms are also part of global networks, and many multinational companies operating in China rely on them for auditing, tax and advisory services.”
The partners believe that potential regulatory action could be even worse than the penalty that rival Deloitte received last year for a “poor audit” of China Huarong Asset Management. Deloitte paid a $31 million fine and had its operations in Beijing suspended for three months.
“The current partners are prepared for the impending upheaval,” said a former PwC partner.
Evergrande was one of China’s largest developers and its collapse sent shockwaves through the economy. Its founder, Hui Ka Yan, faces a lifetime ban from public markets following regulatory findings in March. PwC had been auditing the company since 2009 before resigning in 2023.
Beijing Finance Ministry officials have discussed possible penalties for the company’s failure to detect the accounting irregularities. These include a hefty fine, the suspension or closure of some of PwC’s regional offices and restrictions on auditing state-owned companies, a person familiar with the matter said.
PwC China had eight central government-controlled SOE audit clients in 2022, accounting for about 6 percent of revenue, according to the Ministry of Finance. Regulators reiterated last year that state-owned enterprises should generally not hire auditors who have received significant fines or other penalties within three years.
A director of a listed mainland state-owned company said its board had discussed in recent weeks removing PwC as an auditor if Beijing imposed severe penalties. Last Friday, state-owned insurance group PICC announced that it had fired PwC after just three years as an auditor and hired EY instead.
The uncertainty has also spread to PwC clients, not just state-owned companies. Shanghai-listed Eastroc Beverage canceled a shareholder vote scheduled for last Friday that would have reappointed the company as auditor, saying it needed to “further review related matters surrounding the audit firm.”
“PwC China is cooperating with its regulators in relation to all proceedings involving Evergrande,” the company said, declining to comment further. China’s finance ministry did not respond to a request for comment.
Xue Yunkui, an accounting professor at the Cheung Kong Graduate School of Business in Beijing who sits on the boards of several listed companies, said officials would likely weigh severe punishment of PwC against the possibility of disrupting capital markets through actions that destabilize the company. “Everyone is waiting for guidance from the regulator,” he said.
According to the Ministry of Finance, PwC has the largest market share among the four major accounting firms in China, with revenue of RMB 7.9 billion (US$1.1 billion) in 2022. The company has nearly 800 partners and more than 20,000 employees in mainland China.
The firm is one of the most important in PwC’s global network, which generated revenues of $53 billion last fiscal year. Raymund Chao, chairman of PwC China, is part of the global network’s five-person leadership team and holds the title of chairman for Asia Pacific.
Chao also heads PwC’s business in Hong Kong, where regulators are investigating the audit of Evergrande’s Hong Kong-listed parent company. People close to Evergrande’s liquidators have said they are considering legal action against PwC.
The Big Four accounting firms operate as legally separate, locally managed partnerships under a global umbrella that coordinates marketing and monitors quality.
The fallout from the Evergrande audit threatens to deepen a broader slowdown in the Chinese market that has affected all four major accounting firms but has been particularly difficult for PwC. At the start of this decade, the company counted many of the largest property developers among its audit clients, including Country Garden, Shimao and Sunac. It has since withdrawn from many of these mandates.
The slowdown was already evident in PwC’s last fiscal year to June 2023, when the Asia-Pacific region saw the weakest revenue growth in the global network at just 7 percent, compared to more than 10 percent in Europe and the Americas. The Asia-Pacific numbers were flattered by 24 percent growth in India, suggesting China was a significant laggard.
The crisis comes amid a leadership change at PwC China and marks a bitter end to Chao’s nine years at the helm. He is expected to retire on June 30 after Daniel Li, an audit partner in Shanghai, was elected unopposed and will become the first mainland Chinese to lead the firm.
“Evergrande will continue to be Daniel’s biggest challenge after its acquisition,” said a China-based partner at a rival Big Four firm who was anticipating an opportunity to take on business from state-owned companies. “Whether PwC can recover from this or not is in the hands of the authorities.”
In April, PwC reported to Chinese authorities about an open letter circulating on social media, allegedly written by a group of PwC China partners, that attacked Chao’s leadership and his dealings with Evergrande.
The letter alluded to long-simmering tensions between internal factions. These date back to the merger of PwC’s Chinese and Hong Kong operations with Arthur Andersen’s Chinese arm in 2002, which saw Chao and other senior figures join the firm.
The prospect of financial penalties over Evergrande has intensified criticism of Chao’s actions, and the origin of the open letter has become a “whodunnit” mystery inside and outside PwC.
The letter claims that Chao, then head of the company’s auditing division, fended off an attempt to sell off Evergrande as a client back in 2014. Previously, allegations of aggressive accounting had emerged for the first time and then-chairman Silas Yang and other partners had raised questions.
PwC China had previously said the letter contained “inaccurate statements and false allegations.” Chao declined to comment.
Yang, who hails from PwC’s former Hong Kong arm and retired in 2015 to work as an administrator of the prestigious Hong Kong Jockey Club, also declined to comment when contacted by the Financial Times. However, some of his post-retirement thoughts can be found on his LinkedIn profile in a comment on a video about EY in China.
“The profession does indeed face many challenges. I’m just glad I’m out of there now,” he wrote, using an acronym for “troublesome practice matters,” the euphemism used internally at PwC for deals that get the company into regulatory trouble.
“Luckily there were no TPMs when I was younger! 🙏🏻🙏🏻,” he wrote.
Additional reporting by Kaye Wiggins in Hong Kong and Simon Foy in London