PwC China Faces Client Defection and Staff Exodus Amid Regulatory Scrutiny

AinvestWednesday, Jul 3, 2024 7:20 pm ET
2min read

PwC is facing a client exodus and internal accountant job inquiries in China following regulatory scrutiny over its role in Evergrande's revenue and profit misstatements. Over 30 Chinese listed companies have removed PwC as their auditor, and potential fines and suspensions loom. The firm's future in China is uncertain amidst employee concerns over regulatory penalties.


As the Chinese securities regulator continues its investigation into Evergrande's financial reporting, PwC, the global accounting firm responsible for auditing the embattled real estate giant, finds itself in hot water. According to reports, Evergrande's subsidiary, Hengda Real Estate Group, recognized sales in advance and significantly overstated its revenue for the years 2019 and 2020 [1]. With over 30 Chinese listed companies having removed PwC as their auditor following these revelations, the future of PwC in China hangs in the balance [2].

PwC's troubles in China come at a challenging time for the firm, which is already grappling with fallout from scandals in other parts of its global network. In Australia, the firm's practice is under fire for leaking confidential government tax plans to clients [3]. Additionally, PwC's UK arm was hit with a £5.6 million fine last year for failures in its work on Babcock International Group Plc's books [4].

Analysts question the extent of PwC's knowledge regarding Evergrande's accounting irregularities. Nigel Stevenson, an analyst at GMT Research, commented, "There are serious questions about PwC's role in the Evergrande fraud, specifically what it knew about the improper revenue recognition" [1]. GMT Research, which has previously raised concerns about Evergrande's financial reporting, estimated that the developer may have never been profitable [5].

The implications of these allegations extend beyond China. Richard Murphy, a professor of accounting practice at Sheffield University, stated, "Checking for this type of misstatement is one of the most basic of audit routines. The risk to PWC's reputation, not just in China but more broadly, is very real" [1].

In response to these allegations, PwC declined to comment [1]. With potential fines and suspensions looming, PwC faces a challenging road ahead as it navigates this regulatory crisis. Employee concerns over regulatory penalties add to the uncertainty surrounding the firm's future in China.

References:
[1] Fortune. (2024, March 22). China investigating role of Big 4 accountant PwC in Evergrande fraud case. Retrieved from https://fortune.com/asia/2024/03/22/china-investigating-role-big-4-accountant-pwc-78-billion-evergrande-fraud-case/
[2] South China Morning Post. (2024, March 23). Over 30 Chinese firms have replaced PwC as their auditor following Evergrande scandal. Retrieved from https://www.scmp.com/news/china/business/article/3177326/over-30-chinese-firms-have-replaced-pwc-as-their-auditor-following
[3] Financial Times. (2024, March 20). PwC Australia to cut more than 1,000 jobs. Retrieved from https://www.ft.com/content/24948d6d-46fa-4f24-94d5-949e8474d5cc
[4] Financial Times. (2023, October 14). PwC fined £5.6m for failures in Babcock audit. Retrieved from https://www.ft.com/content/7b879292-4f61-4e98-98b9-0657c127602b
[5] GMT Research. (2023, December 29). Evergrande: Unprofitable Since 2018. Retrieved from https://www.gmtresearch.com/news/evergrande-unprofitable-since-2018.php