PwC China banned for 6 months over Evergrande Audit fiasco!

• PwC China prepares for a 6 months ban and hefty penalties.
• The reason? Failing to properly audit the Chinese property developer Evergrande.
• Last year, Deloitte China was also fined $31 million for audit deficiencies related to its work with China Huarong Asset Management.
• Here is the rundown.

What’s the ban about?

PwC China (locally known as PwC Zhong Tian) is under heavy scrutiny by the Chinese authorities following the firm’s audit of the collapsed property giant Evergrande.

The regulatory body alleges that the property developer Evergrande had inflated its mainland revenues by nearly $80 billion in 2019 and 2020.

PwC China signed off on its accounts despite the irregularities in their financial reports.

This can probably be the toughest action ever taken by Chinese regulators against a Big 4 firm.

When will the ban take effect?

The ban is set to commence as early as September 2024.

PwC China is preparing for a six-month business ban, possibly coupled with a fine of at least 400 million yuan ($56 million), according to sources.

The penalty

The ban would prevent PwC China from,

• Signing off on financial results
• Conducting initial public offerings (IPOs)
• Performing other regulated activities

Also read: KPMG under scrutiny: Why the Auditor is being criticized in relation to Three Failed Banks in the US.

The consequences…

Clients’ departure

As a result, clients have started to leave PwC China. Mainland-listed and state-owned clients, who make up a minority of PwC China’s revenue, are particularly sensitive to the ban.

Layoffs to cut costs

This loss of clients has reportedly triggered job cuts across PwC’s branches in China and salary reductions.

Revenues tumbling

PwC was the country’s largest accounting firm by revenue ($1bn or Rmb7.9bn) in 2022.

However, the fallout from the Evergrande audit failure has been severe. PwC China has lost at least two-thirds of its accounting revenues from mainland-listed clients this year as they switch to other firms.

Big 4 sector under scrutiny

The crackdown on Big 4 auditors is not a first-of-its-kind case.

Last year Deloitte’s China arm was fined $31 million and had its Beijing operations suspended for three months due to audit deficiencies in its work for China Huarong Asset Management.

Also read: NFRA hits BSR & Associates with a massive ₹10 crore penalty

Wrapping up…

The penalties against PwC, primarily overseen by China’s Ministry of Finance (MOF), the main regulator for accounting firms in the country, are still awaiting finalization, according to one source.

While the firm has assured clients that it will be able to certify audit opinions on their 2024 annual reports once the ban is lifted in March, the firm’s reputation has taken a significant hit.

The challenge now lies in whether PwC China can rebuild trust and retain its position in the highly competitive Chinese market.