As of June 3, PricewaterhouseCoopers LLP (PwC), one of the world’s Big Four accounting firms, had lost the top 19 of its 107 clients listed on China’s A-share market, including PetroChina, People’s Insurance Co. of China, China Merchants Bank, China Railway Group Ltd. and some other Fortune Global 500 companies, accounting for more than 25 percent of PwC’s business revenue in China.
A-shares are the stocks of incorporated companies based on the Chinese mainland and listed on mainland stock exchanges. This loss means that in fiscal 2024, PwC’s Waterloo in China will be inevitable.
Chinese clients have dismissed PwC because the accounting firm is currently facing a crisis of confidence in the Chinese market. This situation stems from a government investigation into PwC’s audit fraud at Evergrande Real Estate Group.
On May 31, the China Securities Regulatory Commission, the country’s top securities regulator, announced on its official website that it had imposed administrative sanctions against Evergrande Real Estate Group, the leading subsidiary of real estate developer Evergrande Group, for alleged fraudulent bond issuances and violations in information disclosure. The statement further read that investigations into related intermediary agencies are being expedited.
Evergrande is headquartered in Guangzhou, Guangdong Province, and listed on Hong Kong Exchanges and Clearing Ltd., making it an H-share company. Like A-shares, H-shares are regulated by Chinese law, but they are denominated in Hong Kong dollars.
Several intermediary agencies, including PwC, are involved in the case. Open information shows that PwC had been the audit institution of Evergrande Real Estate Group for 14 years, from its listing in 2009 to January 2023, when the contract was terminated. During this period, PwC issued all unqualified audit opinions to the group, indicating it was satisfied with the financial reporting during the audits. Moreover, it received 276 million yuan ($38.82 million) in audit fees from the group.
However, these 14 years are exactly the period when the group encountered many problems. PwC’s perceived role in failing to identify or disclose issues in the group’s financial statements damaged its reputation. This was particularly detrimental in the context of an audit firm’s role as a “watchdog” ensuring financial transparency and integrity.
Consequently, major clients listed on the A-share market have terminated their contracts with the company. The extent of future client departures as of yet remains uncertain. PwC’s ability to survive this confidence crisis is essential not only for its continued operation in China, but also for its development in the international market.
After China started reforming and opening up its economy in 1978, international accounting firms began establishing offices in China due to the country’s great development potential. Following China’s accession to the World Trade Organization in 2001, the Chinese economy increasingly integrated into global economic development. As businesses expanded their international trade and investment operations, the demand for accounting firms well-versed in the international market grew. China’s continuous efforts to further open up, especially in the finance and taxation sectors, have further facilitated the development of international accounting firms in the country. These companies now enjoy localized treatment in the Chinese market.
According to figures from the Chinese Institute of Certified Public Accountants, the number of certified public accounting firms in China reached 150 in 2023, but topping the list were still the Big Four—PwC, Ernst & Young, Deloitte and KPMG, followed by local Chinese accounting firms BDO China, Pan-China and Ruihua.
A more open China has provided a wide space for foreign accounting firms. To make the most of the opportunities, however, they must adhere to the basic code of conduct that professional agencies and practitioners should abide by. PwC’s crisis of confidence in China reflects the market’s dissatisfaction with the firm’s audit quality and independence. This situation highlights the growing emphasis that listed companies place on independence and objectivity when selecting auditors.
This is undoubtedly a watershed moment for PwC in China. To overcome this crisis, it needs to take active measures to rebuild its market image. PwC is known for its expertise and competence, but it seems that when it comes to ethics and compliance with the law, this Big Four accounting firm still has room for improvement. –The Daily Mail-Beijing Review news exchange item
