Last Friday, China’s securities regulator formally announced it will impose a 4.18 billion yuan (US$577 million) fine on Evergrande’s onshore unit Hengda, citing fraudulent bond issuance and violations on information disclosures. China’s Ministry of Finance could also announce a penalty of at least 1 billion yuan on PwC, according to a Bloomberg report last week.
“Having played a crucial role in the financial falsification of Evergrande,” PwC’s penalty is likely to be proportional to that of the developer, according to Su Jinyu, an associate at Jingtian & Gongcheng, a Beijing-based law firm.
Over the past two weeks, at least six state-owned firms, including China Cinda Asset Management, PetroChina and China Railway Group, have axed their plans to work with PwC, costing the auditor over 232 million yuan in fees.
In 2023, PwC signed contracts with 107 clients in mainland China and Hong Kong for a total of 869 million yuan in auditing fees, according to data compiled by financial information provider Wind.
Most of the big companies that have ditched PwC hired other “big four” firms as their auditors. For example, Shenzhen-listed China Merchants Port Group, another subsidiary under CMG, cited “precautionary” deliberations by shareholders as the main reason for changing its auditor. The big four accounting firms are PwC, KPMG, Deloitte and EY.
Central government authorities have stipulated that state-owned firms and listed companies, “in principle”, should not hire the same auditor for more than eight years. Should a firm seek to extend its contract, it needs to “holistically evaluate” the quality of the incumbent auditor’s previous work, as well as the assessments of shareholders and regulators, according to an official directive published in May 2023. No firm is allowed to work with the same auditor for more than 10 years.
Over the past two years, regulators have underscored the crucial gatekeeper role of financial and legal intermediaries, as Beijing advances its agenda to reform the capital market.
“Being gatekeepers means that intermediaries, including auditors and brokerage firms, now play an almost decisive role in protecting the rights and interests of investors,” said Su. “Any fraudulent behaviour on their part will not be tolerated.”
Shen Meng, director at Beijing-based investment firm Chanson & Co, said with PwC mired in crisis, international accounting firms is likely to face stronger scrutiny as regulators tilt their support towards domestic players.