PricewaterhouseCoopers' auditing unit in mainland China, PwC Zhong Tian LLP, has been hit with the harshest penalty ever imposed on a Big Four accounting firm in China. Regulators announced a six-month business suspension and a record fine of 441 million yuan ($62 million) for the firm's audit work on the troubled property developer China Evergrande Group. The China Securities Regulatory Commission (CSRC) found that PwC "turned a blind eye" to and "even condoned" Evergrande's $78 billion fraud while auditing its onshore flagship unit, Hengda Real Estate, in 2019 and 2020. The probe revealed that 88% of PwC's observation records on Evergrande's real estate projects were inauthentic or untrue, making its audit working papers "severely unreliable."
This regulatory action comes amid significant client exodus and layoffs at PwC China. More than 40 Chinese firms, including major state-owned enterprises and financial institutions like Bank of China, China Life Insurance, and PetroChina, have dropped PwC as their auditor or canceled plans to hire the firm. For instance, PetroChina paid PwC nearly 200 million yuan ($28 million) in accounting fees last year. EY and KPMG have been the primary beneficiaries, together securing over half of these former PwC clients, with some reports indicating EY offered fee discounts.
The penalties will severely impact PwC's standing in China, where it was the top-earning auditor in 2022. The six-month suspension bars PwC Zhong Tian from signing off on key documents for mainland China clients, such as financial results and IPO applications. Furthermore, the unit will be prohibited from taking on new state-owned or domestically-listed clients for three years. Analysts, like Gary Ng, Asia-Pacific senior economist at Natixis, suggest that PwC's market share in China will decline in the short term, directly benefiting the other Big Three auditing firms (EY, KPMG, Deloitte). PwC had approximately 400 Chinese clients, including tech giants Alibaba and Tencent, as of March this year.
