PwC, one of the four largest accounting firms globally, is embroiled in a scandal of Evergrande’s financial fraud in China. Over the past three months since March this year, at least 36 clients have terminated their cooperation with PwC, resulting in an audit fee loss of up to 665 million yuan.
According to Bloomberg, the Chinese authorities are weighing the imposition of a record fine on PwC and may suspend some of its local operations. The company is facing a fine of at least 1 billion yuan (138 million US dollars), far exceeding the 210 million yuan fine imposed on Deloitte last year, which would set a new record for the largest fine ever imposed by the Chinese government on an accounting firm.
The consecutive loss of major clients has put tremendous pressure on PwC’s business and revenue in China. While the final outcome of the regulatory penalties by Chinese authorities is yet to be determined, the global renowned company has suffered a severe blow to its reputation and operating rights in China.
Reports from Bloomberg indicate that some Chinese clients of PwC are currently in talks with other accounting firms, awaiting the results of regulatory investigations before deciding whether to change their audit agencies.
The looming threat of regulatory penalties from the Chinese government has also left PwC’s employees in China feeling uneasy. While it is unclear how many have already resigned, internal sources reveal that partners from other major international and domestic accounting firms have received dozens of job application letters from PwC employees.
According to regulatory documents, as of the end of December 2023, PwC had 291 partners and 1,710 registered accountants.
On Wednesday of this week (July 3), PwC announced that Daniel Li would succeed Raymund Chao, who retired at the end of June, as the Chairman of PwC Asia Pacific and China. Daniel Li, 53, a graduate of Shanghai University of Finance and Economics in 1993, joined PwC and became a partner in 2004. He is the first mainland Chinese to hold this position.
PwC is the accounting firm with the highest revenue in mainland China. Compared to the other three international Big Four accounting firms, PwC Zhong Tian (PwC’s entity in China) ranked first in business revenues from 2020 to 2023.
Data from the Chinese Institute of Certified Public Accountants shows that PwC’s revenue in 2022 was 7.925 billion yuan, with audit revenue at 6.837 billion yuan. In that year, PwC audited about 400 Chinese companies listed in Shanghai, Shenzhen, Hong Kong, or New York. Revenue dropped to 7.137 billion yuan in 2023.
Among the 36 Chinese listed companies that have let go of PwC, 26 have appointed new audit agencies. Approximately two-thirds have chosen Ernst & Young, Deloitte, or KPMG, including Qingdao Brewery Co., Ltd., state-owned China Cinda Asset Management Co., and China Merchants Bank Co., Ltd.
Eight companies opted for local Chinese audit firms. Official figures from the Chinese government show that domestic firms accounted for 51% of total revenue among the largest 12 accounting firms in China (including the Big Four and top domestic firms), exceeding the 44% in 2012.
PwC’s major clients in China include tech giants Tencent Holdings Limited, Alibaba Group Holding Limited, Meituan, and Xiaomi, which continue to use PwC’s services.
The company also provides audit services for many consumer goods companies and real estate developers. Due to the ongoing decline in the Chinese real estate market, PwC has been downsizing this area of business. However, the leading real estate company in China, Evergrande Group, faced a debt crisis in 2021, with PwC being its audit firm also implicated.
In March this year, Evergrande Real Estate received an administrative penalty notice and a fine of 4.175 billion yuan for financial fraud. According to the penalty letter, Evergrande Real Estate artificially inflated its revenue by 564.1 billion yuan in its annual reports for 2019 and 2020. PwC had issued unqualified opinions for Evergrande’s annual audits from 2009 to 2020.
Since April, PwC has been embroiled in numerous controversies and has been reported by individuals claiming to be former partners of the firm. The Hong Kong Institute of Certified Public Accountants expressed serious concerns on April 19 about the quality management system of PwC and potential deficiencies in its audit of Evergrande.
This content is about PwC’s recent challenges in China due to the Evergrande scandal, which has led to client losses, financial penalties, and reputational damage. The future of PwC in the Chinese market remains uncertain as regulatory investigations continue.