Big Four firm PwC faces temporary restrictions on its practice in Hong Kong (Getty Images)
Hong Kong’s accounting watchdog has fined PricewaterhouseCoopers HK$300 million ($38.3 million) over its audits of China Evergrande, marking one of the toughest penalties imposed on a Big Four firm in the city as regulators tighten oversight after the mainland builder’s collapse.
The Accounting and Financial Reporting Council also fined two former PwC partners, Cheung Siu Cheong and Chow Sai Keung, HK$5 million each for their responsibilities in the audits, according to a Thursday announcement.
The sanctions stem from deficiencies flagged in PwC’s work on Evergrande’s financial statements, including failure to adequately assess key audit risks tied to the group’s revenue recognition, asset valuations and going-concern assumptions, the AFRC said.
“The AFRC’s findings reflect serious auditor misconduct, particularly in facilitating manipulation, breaches of audit independence and failures to exercise professional scepticism, which are egregious and wholly unacceptable,” said Denis Cheng, the council’s head of investigation and compliance. “Independence, objectivity and scepticism constitute a non-negotiable foundation of audit practice. These fundamental breaches fall dramatically below the standards expected of a leading firm in Hong Kong.”
Six-Month Practice Limitation
The enforcement action follows allegations contained in a whistleblower report on Evergrande that circulated in Chinese media two years ago, prompting the AFRC to launch a probe into PwC’s relationship with the defaulted developer.
Former Evergrande chairman Xu Jiayin pleaded guilty to fraud charges last week (Getty Images)
The cited deficiencies enabled Evergrande to prematurely recognise revenue and inflate reported profits, as well as materially misstate its properties under development and completed properties held for sale, according to the AFRC.
Those properties were reported at RMB 1.3 billion and RMB 1.4 billion (now $190 million and $205 million), representing 60 percent and 61 percent of the group’s total assets for 2019 and 2020 respectively, the watchdog said.
As part of the disciplinary measures, PwC faces a six-month practice limitation, restricting the scope of certain audit engagements, a penalty aimed at strengthening oversight and ensuring remedial improvements.
“This marks the first time the AFRC has imposed a practice limitation on a public interest entity auditor,” said Hester Leung, the council’s head of discipline. “The combination of hefty pecuniary penalties and a practice limitation is necessary and appropriate, given the serious and egregious audit failures, the substantial weaknesses in the audit firm’s governance and monitoring controls, and the profound and far-reaching impact on the public interest.”
Former Boss Pleads Guilty
The announcement comes after Xu Jiayin, founder and former chairman of Evergrande, pleaded guilty to fraud in a Shenzhen court last week, in a case tied to the company’s financial reporting and fundraising practices.
Xu’s plea marks a major milestone in the legal fallout from Evergrande’s collapse, which left the developer with more than $300 billion in liabilities and kicked off a wave of defaults among Chinese property firms.
Evergrande entered liquidation proceedings in early 2024, and court-appointed liquidators have sought to sell assets and recover value for creditors amid a protracted restructuring process.
In a filing last week, Evergrande Property Services Group said liquidators of the parent company have entered into an exclusivity agreement with an unidentified bidder to negotiate the sale of the parent’s 51 percent stake in the property management arm.
The potential disposal underscores ongoing efforts to monetise assets within the Evergrande group as authorities and creditors work to unwind one of China’s largest corporate failures while containing systemic risks to the broader economy.