Hong Kong Regulator Launches New Investigation into PwC's Audits of Evergrande

The Hong Kong Accounting and Financial Reporting Council (AFRC) announced on Thursday that it will launch a new investigation into PricewaterhouseCoopers LLP's (PwC) audits of China Evergrande Group, the embattled Chinese property developer. The decision comes after the AFRC received a whistleblower report that "expressed significant concerns" regarding potential deficiencies in PwC's systems of quality management and the quality of its audits of Evergrande.

While the AFRC did not provide further details on the specific allegations or the scope of the investigation, the whistleblower report claimed that PwC failed to assign appropriate personnel to key positions, which "might have compromised the monitoring functions of the firm." The report also raised concerns about potential "deficiencies in PricewaterhouseCoopers' systems of quality management and the quality of the audits of China Evergrande Group."

PwC resigned as Evergrande's auditor early last year amid disagreements over matters relating to the audit of its 2021 accounts. Both Evergrande and PwC have been under investigation by Hong Kong's audit regulator since 2021 over the developer's 2020 accounts.

Why this matters: The new investigation into PwC's audits of Evergrande highlights the ongoing scrutiny of the auditing practices of major accounting firms and the financial troubles faced by one of China's largest property developers. The outcome of this investigation could have significant implications for both PwC and Evergrande, as well as the broader auditing industry and Chinese property market.

The investigation into PwC's audit practices extends beyond Hong Kong and China, with the firm facing issues in other regions like Australia and the UK over audit failures and conflicts of interest. These incidents reflect broader challenges for PwC in maintaining audit quality and addressing conflicts of interest across its global operations.

In March 2024, Chinese authorities were reported to be investigating PwC's audit role in Evergrande's flagship mainland subsidiary, Hengda Real Estate, which was found to have inflated revenue by 78 billion yuan in 2019-2020 and issued bonds with false documents. The China Securities Regulatory Commission (CSRC) fined Hengda Real Estate 583 million yuan, and its chairman and founder, Hui Ka Yan, was fined 7.9 million yuan and banned for life from the securities market. Hengda Real Estate executives were also fined and banned from the securities market. Additionally, in April 2024, the former Chinese Justice Minister, Tang Yijun, was placed under investigation for his involvement with Evergrande.

In January 2024, a Hong Kong court ordered the liquidation of Evergrande, which had 327 billion in liabilities, after it failed to agree on a restructuring plan with creditors. PwC has stated it will conduct its own investigation into the allegations raised by the whistleblower report. The AFRC's investigation is expected to shed more light on the auditing practices surrounding Evergrande and the potential consequences for both the developer and its former auditor.

Key Takeaways

• Hong Kong regulator to probe PwC's audits of Evergrande over whistleblower concerns.
• PwC resigned as Evergrande's auditor in 2023 over disagreements on 2021 accounts.
• PwC faces scrutiny over audit failures and conflicts of interest globally.
• China authorities fined Evergrande's subsidiary and its executives for inflated revenue.
• Hong Kong court ordered Evergrande's liquidation after it failed to restructure $327B debt.