Chinese and Hong Kong regulators are now examining whether PwC’s local operations, PricewaterhouseCoopers Zhong Tian in the mainland and PricewaterhouseCoopers Hong Kong, should have flagged Evergrande’s problems. PwC is bracing for major penalties, including a possible record fine for its mainland China office and temporary suspension of its business there, people familiar with the matter say. 

The suspension could be for six months and start as early as September, according to one person familiar with the matter—potentially shutting it out of the busy season from January to April when auditors ensure companies’ annual reports are compliant. 

Adding to the firm’s woes, Evergrande’s liquidator, Alvarez & Marsal, sued PwC in March for negligence to recoup funds for creditors since Evergrande itself has little money left, according to people familiar with the matter. 

PwC is implementing cost-cutting measures, including layoffs and mandatory nonpaid leaves, and partners are defecting to rivals, people familiar with the matter said. Longtime clients are switching to other auditors, public filings show. 

Both of PwC’s China units resigned from auditing Evergrande in January 2023, citing an inability to access key information, after giving an unqualified—or clean—opinion for 15 consecutive years. In an emailed response to questions, PwC said it wouldn’t be appropriate to comment further, as “this is an ongoing regulatory matter.” 

The situation is an embarrassment for PwC’s global brand, and has dimmed its prospects in the world’s number two economy. 

Like other “Big Four” accounting firms in China, PwC’s offices there are locally-owned and managed independently as part of the global PwC network, whose biggest offices are in New York and London. Asia-Pacific overall contributes approximately 20% of PwC’s global revenue, its annual review shows. 

In mainland China, PwC was the largest accounting firm by revenue in 2022, the latest data shows, raking in about $1.1 billion. In Hong Kong, PwC audited 38% of companies listed on the city’s main board by market value by this March, according to the company’s website. 

PwC’s China troubles have also renewed broader debates about audit quality in the country, which U.S. regulators and some accountants have described as deficient. The fear is that some auditors aren’t doing enough to flag misbehavior that could put U.S. investors at risk.  

“It certainly has not been helpful at all for confidence in Chinese financial statements,” said Charlene Chu, a senior analyst at Autonomous Research. It is disappointing that although it has been three years since Evergrande began to implode, there have been very few tweaks to regulations for auditing Chinese property developers, Chu said.

KPMG, Deloitte and Ernst & Young—the other “Big Four” global accounting firms—also audited Chinese developers that later defaulted. None are known to be facing investigations regarding their China real-estate audits. All three didn’t reply to requests for comment.

Audit questions 

PwC became China’s largest auditor after merging with the local offices of Arthur Andersen in the early 2000s, when that firm ran into trouble following the demise of the energy company Enron. Many Arthur Andersen employees stayed with the merged firm, as did some of its blue-chip clients such as Tsingtao Brewery and China Unicom. 

Its size and prominence made PwC a logical choice for many developers, given their rising profile in China’s economy. 

Long before the real-estate industry ran into trouble and attracted Beijing’s ire, some analysts alleged it was rife with financial chicanery, and called on auditors to pay closer attention. 

Andrew Left of Citron Research—who was barred from trading in Hong Kong securities for five years in 2016 because of his 2012 allegations against Evergrande—and analysts at Hong Kong-based GMT Research said Evergrande was overstating sales and failing to properly write down the value of assets that generated little or no income, such as deserted buildings or empty parking spaces, creating an illusion that profits were holding up. 

In its last auditor’s report for Evergrande, released in April 2021, PwC identified the valuation of properties, including ones called out by analysts as underperforming, as a “key audit matter,” meaning it required Evergrande to make significant and subjective assumptions. But the accounting firm concluded that Evergrande’s estimates were fair and were supported by evidence.

In 2020, Evergrande made $126 million of provisions for writing down the value of such properties, according to its annual report. In its next financial report for 2021, released in 2023 after PwC had resigned, that number surged to $52.4 billion, causing a sharp reversal of Evergrande’s results from $4.4 billion of net profit in 2020 to a $96.2 billion net loss in 2021.

In March, China’s securities regulator found that Evergrande overstated sales by a total of $78.4 billion in 2019 and 2020 and raised $2.9 billion by selling bonds based on inflated sales.

PwC’s audits of Evergrande in those years—and all the other years it audited the developer—concluded the company’s statements were presented fairly, with no bankruptcy or liquidation concerns.

Evergrande’s chairman, Hui Ka Yan, has said that the way it recognized revenue was in line with accounting standards, and that regulators haven’t presented enough evidence in finding fraud. He added that penalties, including a $6.6 million fine for Hui, should be applied to the auditor, not Evergrande and himself. 

Hong Kong’s Accounting and Financial Reporting Council first said it was investigating PwC’s Evergrande audits in October 2021. In April 2024, it said it was launching a second investigation, after a public letter blamed some of the firm’s executives for keeping Evergrande as a client despite its troubles. PwC disputed the letter. The regulator later said it found no evidence supporting the letter, but that its first investigation was continuing. 

China’s securities regulator, meanwhile, said in May that it was pushing ahead with an investigation into “relevant intermediaries” involved in Evergrande’s fraudulent accounts and bond issuances. That includes PwC, people familiar with the matter say.

Feeling the heat  

Any penalty leveled against PwC is likely to dwarf a $31 million fine and three-month suspension China’s finance ministry imposed on Deloitte’s Beijing office in March last year for “serious audit deficiencies” in its work with a big state-owned asset manager, these people say. Deloitte said at the time that it respected the ministry’s decision. 

As storm clouds gather over PwC, approximately three dozen domestically-listed Chinese companies have said in filings that they have either fired its China operation or abandoned plans to reappoint it as their auditor for coming audit work. That means more than one-third of the Chinese domestically-listed companies PwC audited in 2022 had ditched the firm. 

Departed clients include Bank of China and China Life Insurance, as well as state-owned telecommunications giant China Telecom and energy producer PetroChina. 

Axes have fallen in PwC’s Guangzhou, Shanghai, Beijing and Hong Kong offices, people familiar with the matter said. Some non-audit-related departments in Hong Kong were shrunk by two-thirds and others were cut completely. 

Senior partners at PwC have been spending large portions of time reviewing audit papers and preparing for lawsuits, according to a person familiar with the matter. 

China challenges

Some accounting-industry professionals have complained for years about auditing standards in China, saying accounting firms are too willing to overlook needlessly complex corporate structures, among other issues. Others say the criticisms are overblown, and that accounting issues are also prevalent elsewhere.

Attention on audits in China intensified in 2020, when Luckin Coffee, a Starbucks rival, said employees fabricated $310 million in sales for a period in 2019. China’s finance ministry investigated its auditor, Ernst & Young Hua Ming, and found it did nothing wrong. Ernst & Young Hua Ming said it bore no responsibility for financial statements that were questioned at the firm and Luckin has since rebuilt its brand.  

Chinese firms tend to pay their auditors a fraction of what large companies in the U.S. do. The lower fees mean some audit firms often don’t staff enough people and tend to hire staff with less experience, industry professionals say. 

Throughout its years of auditing China Evergrande, a company with $320 billion in assets at its peak in 2020 and hundreds of subsidiaries, PwC’s China and Hong Kong units netted less than $4 million annually on average in fees from Evergrande, the developer’s annual reports show. Exxon Mobil, a company with $376 billion in assets, paid PwC $42 million in audit and audit related fees in 2023, 10 times more.