On April 23, the Securities and Futures Commission of Hong Kong announced that PricewaterhouseCoopers (PwC) has reached an agreement with them regarding the fraudulent financial statements of China Evergrande Group for 2019 and 2020. PwC has agreed to compensate shareholders with a sum of 1 billion Hong Kong dollars. Some netizens pointed out that this 1 billion compensation is unlikely to fill the 2.4 trillion debt hole of Evergrande.
According to the agreement, the Securities and Futures Commission of Hong Kong and PwC have agreed to resolve the matter entirely and conclusively without admitting any legal liability. The commission will not take any further action against PwC as long as PwC fulfills the terms of the agreement.
The Securities and Futures Commission of Hong Kong concluded that the audited annual revenues of China Evergrande for the 2019 and 2020 fiscal years were inflated by 213.9 billion yuan or 44.79%, and 350.2 billion yuan or 69.03% respectively.
The commission reminded independent minority shareholders and intermediary institutions of China Evergrande to keep records of transactions related to the company’s shares for the purpose of making claims for compensation. Intermediary institutions should also provide reasonable assistance to these shareholders in filing claims.
During the fiscal years of 2019 and 2020, PwC was the “overall account checker” for China Evergrande. Its mainland subsidiary, PwC Zhongtian, assisted PwC in auditing the financial statements of China Evergrande.
Furthermore, the Financial Reporting Council of Hong Kong also took disciplinary actions against PwC and its two former partners and responsible officers, Zhang Zhaochang and Zhou Shiqiang, for improper conduct in relation to the audit of Evergrande by PwC.
PwC served as the reporting accountant when Evergrande Group went public in 2009 and has been the auditor of the group until early 2023.
The Financial Reporting Council found several serious audit failures in the Evergrande audit conducted by PwC, particularly facilitating and endorsing improper management practices that inflated the reported profits and liquidity of the group; failing to exercise professional skepticism when audit risks intensified; significant deficiencies in audit independence; issuing unqualified audit opinions without sufficient and appropriate audit evidence or in some cases even lacking relevant evidence.
In light of the above circumstances, the Financial Reporting Council publicly censured PwC, Zhang Zhaochang, Zhou Shiqiang; imposed fines of 300 million HK dollars, 5 million HK dollars, and 5 million HK dollars respectively on PwC, Zhang Zhaochang, and Zhou Shiqiang; and placed immediate practice restrictions on PwC, prohibiting them from taking on new clients or issuing related reports for public interest entities within 6 months.
On April 23, PwC released a statement stating that they have reached an agreement with the Securities and Futures Commission of Hong Kong but did not admit any responsibility or agree with the conclusions.
In September 2024, the China Securities Regulatory Commission issued administrative penalties for negligence in the audit work related to Evergrande’s real estate annual report and bond issuance by PwC Zhongtian. The Ministry of Finance of China fined PwC Zhongtian 116 million yuan and suspended its business for 6 months, revoking the Guangzhou branch of PwC Zhongtian.
The investigation revealed that Evergrande inflated its revenue by as much as 564.1 billion yuan and profit by 92 billion yuan in 2019 and 2020.
Evergrande’s debt crisis is the largest bankruptcy case of a global real estate company, with total liabilities of approximately 2.4 trillion yuan, leading to a rupture in its funding chain and unfinished projects scattered across the country.
On April 13, Xu Jiayin appeared in court and was charged with eight counts, including illegally absorbing public deposits, fundraising fraud, fraudulent issuance of securities, among others. He pleaded guilty in court.
The more pressing question now is: how much of the 2.4 trillion debt hole left by Evergrande can be recovered? Who will compensate the millions of homeowners affected by unfinished projects?