(This May 5 story has been corrected to read ‘China Securities Regulatory Commission’ instead of ‘China Securities & Futures Commission’)
China’s “teeth and thorns” are coming for PricewaterhouseCoopers. Those are the words President Xi Jinping has used to outline how he wants regulations enforced in the People’s Republic. That could translate into PwC’s local unit being hit with a fine of at least 1 billion yuan ($138 million) and some office suspensions, Bloomberg reported, opens new tab, for its role as auditor of China Evergrande (3333.HK), opens new tab. While rivals are already benefitting from its looming punishment, such a decision would put all financial intermediaries on notice.
As auditor for 107 A-share companies as of 2023, per financial data provider Wind, PwC China was the market leader among overseas accounting firms. That business brought in revenue close to 900 million yuan a year. Almost 20 clients, though, including $250 billion PetroChina (601857.SS), opens new tab, $120 billion China Merchants Bank (600036.SS), opens new tab and $10 billion China Railway (601390.SS), opens new tab have recently severed ties with the firm. More may follow if and when PwC China is censured.
The China Securities Regulatory Commission (CSRC) has already set a standard. On Friday it imposed a 4.2 billion yuan fine on Evergrande’s onshore unit after determining the company, once the country’s biggest homebuilder, had inflated revenue by $78 billion in 2019 and 2020. That’s the maximum penalty possible, representing a fifth of bond proceeds raised using fraudulent data.
For auditors, though, the punishment can be up to five times the fees earned from the client in question. PwC China raked in some 270 million yuan from Evergrande between 2009 and 2023, according to state-back financial newswire Cailian.
That explains how the accounting firm’s fine could end up surpassing the previous record of 212 million yuan which the Ministry of Finance slapped on Deloitte Touche Tohmatsu last year – as well as closing its Beijing office for three months. That was for audit deficiencies in its work with China CITIC Financial Asset Management (2799.HK), opens new tab, previously known as China Huarong whose chair was executed in 2021 for accepting bribes.
Deloitte is now one of the firms picking up some of the companies, and staff, deserting its rival, suggesting quick comebacks are possible.
PwC, though, may have to deal with more offices being shuttered for longer. It may also face a damaging lawsuit from liquidators of Evergrande if the CSRC’s verdict reinforces their claims. These would harm PwC’s prospects of recovery. It would also send a strong message to accountants, law firms, banks and brokers that China’s watchdogs have more than enough bite to match their bark.
CONTEXT NEWS
The Ministry of Finance is poised to impose a record $138 million fine on PricewaterhouseCoopers’s China unit and suspend some of its local operations over its role in China Evergrande’s financial scandal, Bloomberg reported on May 31, citing people familiar with the matter. A slew of state firms including PetroChina, China Merchants Bank and China Railway have recently dropped PwC China as their auditor.
The China Securities Regulatory Commission (CSRC) said on May 31 that it had decided to give a maximum 4.175 billion yuan ($587 million) fine to the main unit of Evergrande for information disclosure violations and other misconduct. The stock market watchdog also said it is pushing forward with the investigation of relevant intermediary agencies.
