PwC Slapped with Record US$62.2 Million Fine and Six-Month Ban Over Evergrande Audit Failures

• 23 October 2024
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PwC Zhong Tian, the China arm of the global accounting giant, has been fined a record US$62.2 million and banned from auditing for six months for its failure to identify financial misstatements in China Evergrande Group’s accounts between 2018 and 2020. The penalties, the most severe imposed on an audit firm in China, are part of Beijing’s broader crackdown on financial mismanagement and efforts to uphold market integrity, according to scmp announcement on September 13, 2024.

PwC Zhong Tian’s shortcomings were particularly glaring, as the firm failed to detect false accounting treatments in Evergrande’s financial statements during its audit period. The China Securities Regulatory Commission (CSRC) revealed that the firm also failed to identify that some properties listed as completed were actually empty land. “PwC Zhong Tian and its Guangzhou unit did not give an appropriate audit opinion to point out these false accounting treatments,” the Ministry of Finance said.

Further intensifying the punishment, CSRC imposed a US$44.6 million (325 million yuan) fine for the 2019-2020 audit failures, while the Ministry of Finance levied an additional US$15.9 million (116 million yuan) fine for the 2018 audit oversight. The penalties represent up to 10 times the audit fees PwC received for these engagements. The Ministry also suspended PwC Zhong Tian from operating for six months and revoked the registration of its Guangzhou branch, alongside the dismissal of six partners and five staff directly involved in Evergrande’s audit.

Hengda Real Estate, a key unit of the developer, was found to have significantly inflated its financial performance. According to the China Securities Regulatory Commission (CSRC), the company overstated sales by a staggering 79.4 billion USD and exaggerated profits by 13.0 billion USD. These discrepancies were uncovered after PwC, Evergrande’s auditor, resigned in January 2023 due to disagreements. The revelation underscored the firm’s audit failings and raised serious concerns about the accuracy of its financial reporting.

PwC’s global chair, Mohamed Kande, expressed strong disapproval of the firm’s performance, calling the audit work “completely unacceptable.” He added, “The work performed by PwC Zhong Tian’s Hengda audit team fell well below our high expectations. There is no room for this at PwC.” Kande assured that PwC had initiated a remediation program to strengthen its China operations and rebuild trust with stakeholders.

The penalties may not be the end of PwC’s troubles, as Hong Kong’s Accounting and Financial Reporting Council (AFRC) is continuing its investigation into PwC’s audit work related to Evergrande’s 2020 accounts. The AFRC’s probe is expected to delve deeper into the firm’s cross-border audit practices, sending a strong message about the role of auditors as gatekeepers of financial transparency.

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