PwC Faces Termination by State-Owned Enterprises Over Evergrande Fraud Case (AI Translation)

涉恒大造假案 普华永道接连遭央企解聘

PwC China is experiencing significant repercussions due to the Evergrande financial fraud scandal [para. 1]. PwC's association with Evergrande Real Estate Group Co., Ltd., which falsified its financial records, has severely tarnished the firm's reputation. As a result, several state-owned enterprises (SOEs) and financial institutions have terminated their contracts with PwC [para. 3].

On May 30, PetroChina announced its decision to cancel the proposal to hire PwC as its auditor for the upcoming shareholders' meeting, citing matters that need further verification related to the auditing industry [para. 2]. PetroChina intends to propose new firms for audit roles soon [para. 3]. China Railway Group Limited and various financial institutions, including China Merchants Bank, People's Insurance Company of China, and China Taiping, have also decided to end their partnerships with PwC [para. 4]. These institutions have switched to other auditing firms like Deloitte and Ernst & Young [para. 4][para. 5].

An audit industry professional warns that although the ongoing departures of major clients have not toppled PwC from its leading position in the industry, there is a looming fear that finalized penalties might prompt further client desertions [para. 8]. PwC audited 104 A-share annual report clients in 2023, generating revenues of 876 million yuan, with significant contributions from central state-owned enterprises and financial institutions [para. 9]. The five central enterprises previously mentioned paid PwC a total audit fee of approximately 192 million yuan in 2023 [para. 10].

Evergrande's penalties for its financial fraud include a record fine of 41 billion yuan, with its chairman, Xu Jiayin, barred from the market for life [para. 11]. PwC had been auditing Evergrande’s financial statements since its listing in Hong Kong in 2009 [para. 12][para. 13]. Following Evergrande's crisis in 2021, PwC severed ties in January 2023 [para. 13]. The China Securities Regulatory Commission (CSRC) and the Ministry of Finance are currently investigating PwC’s role in the audit failures [para. 14]. Foreign media speculate that PwC may face a fine of at least 1 billion yuan [para. 15].

The Ministry of Finance's Supervision and Evaluation Bureau is also scrutinizing PwC [para. 14]. Depending on the investigation's outcome, fines under different laws could result in significant financial penalties for PwC [para. 16]. Between 2009 and 2020, PwC received around 288 million yuan from Evergrande for auditing services, with 2019 and 2020 contributions alone totaling 98 million yuan [para. 17].

PwC could also face suspension of practice, as experienced by Deloitte in the past when its Beijing branch was suspended for three months due to deficiencies in its Huarong audit, leading to over 210 million yuan in fines and loss of bid opportunities for major projects [para. 18]. PwC’s Guangzhou office is currently impacted by the Evergrande investigation [para. 19]. Employees have been informed about possible transfers to other offices, and many are seeking employment elsewhere due to the uncertain future [para. 19][para. 20].

PwC Japan underwent a similar crisis in 2006 when accounting fraud led to a two-month suspension, resulting in the dissolution of Chuo Aoyama PwC [para. 20]. However, with strategic guidance from its headquarters, PwC Japan managed to recover over several years [para. 20].

In summary, the seismic impact of Evergrande’s fraud on PwC China has led to loss of key clients and severe reputational damage while impending penalties from ongoing investigations may exacerbate the firm’s challenges significantly [para. 1]-[para. 20].