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our reporter guo jingting reports from beijing

after the china securities regulatory commission imposed administrative penalties on evergrande real estate for financial fraud, fraudulent issuance and other illegal acts in may, pricewaterhousecoopers zhongtian certified public accountants llp (hereinafter referred to as "pwc"), as the auditing agency of evergrande real estate during the above period, has been in a precarious situation.

after experiencing major clients "re-hiring", "changing leadership" in china and asia pacific, and "layoffs" in multiple branches, everyone seemed to have anticipated and even prepared for pwc to be punished.

now the shoe has finally dropped. on the afternoon of september 13, the penalty decision of pwc was finally announced. the ministry of finance and the china securities regulatory commission imposed fines of 116 million yuan and 325 million yuan on pwc zhongtian accounting firm respectively. at the same time, pwc was given a warning, suspended from business for 6 months, and its guangzhou branch was revoked.

"the penalty amount of 325 million yuan is close to the total amount of fines and confiscations we have imposed on more than 50 accounting firms that violated laws and regulations in the past three years." a relevant person in charge of the china securities regulatory commission said when answering reporters' questions.

the person in charge listed several details of the investigation, for example, about 88% of the records in the real estate project observation were inconsistent with the actual implementation, and the contents of the draft records were seriously unreliable. most of the real estate projects that were considered to meet the delivery conditions during the on-site visit were actually not completed and delivered, and some were still not completed and delivered when the csrc conducted an on-site investigation, and some were even "empty land."

in response to the punishment, pwc china and pwc zhongtian issued a statement saying that they respect and firmly obey the relevant administrative punishment decision, and also require relevant members of the management to assume management responsibilities, including former members of the management. pwc china is appointing a new leadership team, including partners with rich quality management experience in the global network.

"the employment of six partners has been terminated and five employees directly involved in the audit of evergrande have been fired. in addition, li dan has agreed to resign from his position as senior partner (tsp) of pwc china," said a statement released on the english website of pwc global.

the reporter noticed that many listed companies require "no relevant administrative penalties within three years" when recruiting auditing agencies. this time, pwc was punished and its business was suspended for 6 months. what impact will it have on pwc's business in china?

in this regard, chen yunsen, director of the capital market supervision and reform research center and professor of the school of accounting at the central university of finance and economics, analyzed in an interview with a reporter from china business news that this means that pwc will not only lose existing audit clients, but may also lose potential clients and market share, especially for listed companies that value reputation and environmental, social and governance (esg) standards. they are more likely to avoid including pwc in their intended partners. this will further limit pwc's business opportunities in a high-standard market environment and affect its brand image and market competitiveness. overall, this penalty will greatly limit pwc's business in china.

"the punishment and six-month suspension of pwc's securities services business will have five major impacts on its business in china: reputation loss, customer loss, business contraction, team instability and pressure for strategic adjustments," tian lihui, dean of the nankai university institute of financial development, told our reporter.

the china securities regulatory commission and the ministry of finance jointly investigated the case and clarified the illegal facts

it is understood that pricewaterhousecoopers provides audit services for evergrande real estate's bond issuance and trading activities, which are regulated by the securities law of the people's republic of china. at the same time, as an auditing agency, pricewaterhousecoopers is also subject to the certified public accountants law of the people's republic of china.

the csrc pointed out that the securities market is centered on information disclosure. the legal liability of issuers for illegal acts is based on their information disclosure documents, and the legal liability of audit institutions for illegal acts is based on the documents they produce and issue. in this case, pricewaterhousecoopers produced and issued the documents and stamped them, and the relevant certified public accountants signed them, making them the legally responsible entities stipulated in the securities law of the people's republic of china.

as the competent authority for the cpa industry, the ministry of finance conducts comprehensive supervision over the practice quality and project quality control of audit institutions, as well as the governance and personnel management of audit institutions. it can hold pwc's head office and its branches, the signing cpas, and other cpas involved in audit projects fully accountable for their conduct.

therefore, the investigation of pwc requires communication and cooperation between the csrc and the ministry of finance. in the administrative penalty stage, the csrc confiscated all of pwc's illegal business income in the relevant year and imposed the maximum fine.

during the administrative penalty stage, in accordance with article 29 of the administrative penalty law of the people's republic of china, which stipulates that "administrative penalties of fines shall not be imposed more than twice on the same illegal act of a party. if the same illegal act violates multiple legal norms and should be punished with a fine, the penalty with the higher amount of the fine shall be imposed", the ministry of finance and the china securities regulatory commission jointly imposed administrative penalties on pricewaterhousecoopers.

specifically, the csrc imposed administrative penalties on pricewaterhousecoopers for failing to perform its duties diligently in the audit of evergrande real estate's annual report and bond issuance. according to the provisions of the securities law of the people's republic of china, pricewaterhousecoopers was fined ten times the amount of illegal business income it had earned, with a total fine of 277.4 million yuan. for the four times of unpaid bond issuance audit services, the csrc imposed a maximum fine of 5 million yuan each time, with a total fine of 20 million yuan. the total fines and confiscations on pricewaterhousecoopers amounted to 325 million yuan.

on the same day, the ministry of finance imposed administrative penalties of confiscation of illegal gains and a fine of rmb 116 million on pricewaterhousecoopers for its illegal acts in the audit project of evergrande real estate in 2018 in accordance with the certified public accountants law of the people's republic of china. at the same time, the ministry of finance imposed administrative penalties of warning, suspension of business for 6 months and revocation of pricewaterhousecoopers guangzhou branch in accordance with the certified public accountants law of the people's republic of china.

"i will support the ministry of finance in holding pricewaterhousecoopers accountable for its illegal activities involving evergrande real estate's 2018 audit project, which are difficult to hold accountable under the securities law of the people's republic of china. at the same time, i will also pay attention to the ministry of finance's decision to punish pricewaterhousecoopers guangzhou branch and other relevant certified public accountants." a relevant person in charge of the china securities regulatory commission said.

in chen yunsen's view, this punishment breaks the filter of the previous endorsement of the "big four". at the same time, the amount of the punishment is also the "highest" in history, reflecting the determination of the regulatory authorities to strengthen supervision. this kind of punishment can have a deterrent effect on the entire audit industry, especially based on the modern capital market with chinese characteristics, it can greatly promote other audit institutions to strictly abide by the regulations, improve the audit quality, and strengthen the "gatekeeper" responsibility of intermediary institutions, thereby achieving the purpose of maintaining the healthy and stable development of the capital market.

the ministry of finance disclosed the details of the case handled in collaboration with the china securities regulatory commission. for example, during the inspection stage, the china securities regulatory commission investigated evergrande real estate's 2019 and 2020 annual reports for false records, fraudulent issuance of corporate bonds and other illegal acts in accordance with the law. the ministry of finance made full use of the investigation results of the china securities regulatory commission to verify the accounting responsibilities of evergrande real estate, and on this basis, checked and determined the audit responsibilities of pricewaterhousecoopers in 2019 and 2020; combined with the clues of problems reported by relevant parties, further inspections found that pricewaterhousecoopers' audit violations in 2018 and determined the corresponding audit responsibilities.

the ministry of finance found that during the audit of evergrande real estate's financial statements from 2018 to 2020, pricewaterhousecoopers and its guangzhou branch were aware that there were material misstatements in evergrande real estate's financial statements but did not point them out, issued inappropriate audit opinions, and issued false audit reports.

the main problems include: first, the design and implementation of the main audit procedures related to evergrande real estate's revenue from 2018 to 2020 were seriously flawed, and many procedures reached false conclusions; in 2020, it was aware that evergrande real estate recognized revenue in advance but did not point it out. second, it lost its independence, prepared consolidated financial statements for evergrande real estate, and prepared adjusting entries at the level of consolidated financial statements to inflate profits. third, it knew or should have known that evergrande real estate had a large amount of restricted monetary funds, did not point out the major misstatements in the financial statements, and concealed or covered them up in various ways. fourth, it did not point out the major accounting errors of evergrande real estate in 2020, such as inflated development costs and arbitrary recognition of investment properties. fifth, it did not maintain professional skepticism and did not discover the major accounting errors caused by evergrande real estate's financing method of "equity in name only, debt in reality" and inaccurate scope of consolidated financial statements. sixth, it did not point out that evergrande real estate did not disclose major litigation and arbitration matters in accordance with regulations, and the audit procedures such as other receivables, audit sampling, and going concern were not implemented in place, and project quality control failed.

the csrc disclosed more details, such as the out-of-control of the scope of audit sample selection, allowing evergrande real estate to replace samples, and excluding real estate projects marked as "not allowed to visit" by evergrande real estate from the visit samples. there were also failures in the document inspection procedures, such as verifying that there were no abnormalities in the delivery list, but in fact a large number of owners signed and confirmed the date later than the balance sheet date.

"china evergrande group is registered overseas and its audit report is issued by pricewaterhousecoopers hong kong (hereinafter referred to as "pricewaterhousecoopers"). since pricewaterhousecoopers is a hong kong accounting firm, its supervisory authority belongs to the hong kong regulatory agency. in accordance with relevant laws and regulations, the ministry of finance will actively coordinate and cooperate with the hong kong accounting and financial reporting authority to investigate and deal with pricewaterhousecoopers' illegal acts through the cross-border audit supervision cooperation mechanism." the ministry of finance said.

chen yunsen analyzed that the joint punishment by the ministry of finance and the china securities regulatory commission shows the importance of cross-departmental supervision and cooperation. the "guiding opinions on deepening the promotion of cross-departmental comprehensive supervision" issued by the general office of the state council pointed out that it is necessary to establish and improve the cross-departmental comprehensive supervision system, improve the coordinated supervision mechanism, enhance the accuracy and effectiveness of supervision, and provide strong support for promoting high-quality development. the synergy between regulatory departments can improve the efficiency and intensity of supervision, help to quickly and accurately handle complex accounting and auditing issues, and ensure the transparency and fairness of the market.

in chen yunsen's view, in the future, my country should further coordinate development and safety in strengthening financial audit supervision, continue to strengthen the responsibilities of intermediary institutions, and enhance the professional quality and sense of responsibility of auditors. at the same time, it should further strengthen supervision, increase the cost of violations, introduce more technological means such as big data and artificial intelligence, and use technological supervision and intelligent supervision to improve audit efficiency and quality, and better prevent capital market risks.

falling into reputation crisis, customers losing a lot, "four major" pattern may change

compared with the "record-breaking" fine, the impact of the "qualification penalty" of suspending business operations for six months has attracted much attention.

a month ago, the leading domestic accounting firm baker tilly international was punished by the regulator. on the night when the csrc issued the penalty notice, the review status of six ipo projects audited by baker tilly international on the beijing stock exchange was collectively changed to "suspended review". within half a month, some of its ipos, refinancing, and major asset restructurings were put on hold.

the same situation as tianzhi international, the business qualification will not be restored until 2025, which means that the annual report audit of clients served by pricewaterhousecoopers will be affected. however, the shanghai municipal finance bureau recently issued a reply approving singapore pricewaterhousecoopers limited partnership to temporarily perform audit business in mainland china, approving the firm to accept the commission of overseas clients to temporarily perform audit business in mainland china and issuing one copy of the (shanghai finance and accounting) zi waisuo lin zheng no. 104 "foreign accounting firm temporary audit business permit", which is valid for half a year.

wind data shows that in 2023, pwc audited more than 100 a-share listed companies, covering multiple industries such as finance, transportation, software and information technology services, and received audit fees exceeding 800 million yuan. the audit fees of 13 clients also reached tens of millions.

according to incomplete statistics from reporters, since the beginning of 2024, pwc has been rehired by more than 30 a-share or hong kong-listed companies. as of september 13, large central state-owned enterprises such as bank of china (601988.sh), china telecom (601728.sh), china life (601628.sh), china petroleum (601857.sh), china insurance (601319.sh), china railway construction (601390.sh), shanghai electric (601727.sh), and china merchants bank (600036.sh) have successively issued announcements to replace their annual report audit institutions from pwc to other accounting institutions.

according to statistics from reporters, in 2023, the top eight a-share listed companies in terms of annual audit fees of pwc all chose to part ways with it. in 2023, the total audit fees of the above eight companies alone reached 500 million yuan, accounting for 62% of pwc's annual audit fees.

the loss of the "big order" has dealt a heavy blow to pwc's audit business. in 2023, the highest audit remuneration came from bank of china (601988.sh), with an audit fee of 193 million yuan. on august 19, 2024, bank of china announced that it plans to hire ernst & young huaming and ernst & young as domestic and international auditors for 2024, respectively, replacing the original pricewaterhousecoopers zhongtian and pricewaterhousecoopers. as for the reason for the proposed change of accounting firms, bank of china said that it was based on the relevant regulations on the selection of accounting firms, combined with market information, based on the principle of prudence, and considering the business needs of the bank.

judging from the information disclosed by the above listed companies, there are many reasons for the change. pricewaterhousecoopers' continuous appointment period has reached the national service period. however, some listed companies did not explain the reasons for the change, and some listed companies changed their reasons because "the company is still waiting for further verification of the relevant matters of the proposed renewal of the accounting firm". the industry speculates that this may be related to the fraudulent issuance of bonds and illegal information disclosure by evergrande real estate.

according to the comprehensive evaluation ranking of 100 accounting firms released by the chinese institute of certified public accountants, pricewaterhousecoopers has been at the top of the list in terms of revenue since 2002.

according to pwc china’s official website, the total number of pwc employees in mainland china, hong kong and macau exceeds 20,000, including more than 800 partners.

according to the re-employment announcements released by listed companies, it is not difficult to see that the big orders lost by pricewaterhousecoopers were "swallowed up" by the three major accounting firms represented by ey, kpmg and deloitte.

"a damaged reputation will reduce the market's trust in pwc, and other potential clients may be cautious about it when choosing an audit firm, affecting its future business expansion. some clients, based on compliance considerations, especially large listed companies and financial institutions that are more sensitive to the compliance records of audit firms, will choose to cooperate with other audit firms that have not been punished in order to avoid potential risks and reputational impacts," tian lihui analyzed.

in tian lihui's view, the loss of a large number of customers will not only directly affect its current business income, but also may cause some business teams to be idle due to the sharp decrease in business volume, which will lead to problems such as personnel adjustments, resulting in a certain degree of contraction in business scale. excellent auditors may choose to switch to other audit institutions or financial companies with better development prospects and good reputations due to concerns about career development and reduced business opportunities, further affecting the stability of the team and business execution capabilities, and hindering the subsequent recovery and expansion of business.

on july 1, the former pwc asia pacific and china chairman, raymond chao, officially retired and was replaced by dan lee as the chairman of pwc asia pacific and china. in just two months, dan lee has become a passing guest.

the reporter checked the "evergrande 2020 public offering of corporate bonds (first phase) to professional investors prospectus" and found that in addition to the four signing certified public accountants, li dan signed as the head of the accounting firm.

"pwc china is appointing a new leadership team, including partners with extensive quality management experience in the global network. the new leadership team will be committed to promoting the improvement of quality management and will make pwc's commitment to trust and integrity in the capital markets a top priority," pwc said.

at the same time, a statement released on the english official website of pwc global showed that hemione hudson, pwc global chief risk and regulatory officer, has been appointed as interim head of pwc's china business and will take over the china business after completing the necessary steps for the transfer.

"pwc needs to adjust its strategy, re-examine its business model, risk management mechanism and internal quality control system to adapt to market changes and regulatory requirements," tian lihui further stated.

it is worth mentioning that the aftermath of the punishment may affect pwc’s business operations in the next three years.

for example, the bidding accounting firm requires that the bidder has no record of administrative penalties within a certain period of time. specifically, in order to avoid the ipo process being stalled due to the punishment of the accounting firm, the ipo accounting firm selection announcement issued by hunan ordnance industry group co., ltd. requires that the bidding accounting firm guarantee that it will not be restricted by the csrc's suspension of acceptance or review of application materials within one year, and will not be suspended from securities business qualifications. once fined, it must pay compensation at twice the amount of the fees paid.

another example is that when the export-import bank of china was bidding for the annual audit accounting firm procurement project from 2023 to 2025, it also proposed the restrictive condition that "in the past three years, no administrative penalties such as confiscation of illegal gains, fines, suspension of part of the business, etc. were imposed by the ministry of finance or provincial finance departments due to illegal and irregular behaviors, and no more than two warnings were given by the ministry of finance or provincial finance departments."

what impact will the frequent "loss of orders" by leading accounting firms have on the industry's competitive landscape? tian lihui analyzed that other accounting firms may take advantage of pwc's current predicament and actively strive for its lost clients, thereby intensifying competition within the industry. regulatory agencies will also increase their supervision of accounting firms, increasing the compliance costs of the accounting and auditing industry.

last year, one of the big four international accounting firms, deloitte, was also punished. on march 17, the ministry of finance issued a penalty announcement for reference. the announcement showed that administrative penalties were imposed on the accounting information quality of china huarong (2799.hk) and its auditing agency, deloitte touche tohmatsu cpa ltd. (hereinafter referred to as "deloitte"): china huarong and its seven subsidiaries were fined 100,000 yuan each, deloitte's head office was given a warning, and deloitte's beijing branch was fined 212 million yuan and suspended from business for three months.

"the global audit industry will also be inspired by this incident and should draw lessons from it, increase its attention to audit quality, ensure the independence and fairness of audit work, and prevent similar incidents from happening. first, regulatory authorities in various countries should strengthen cross-border audit supervision cooperation and jointly combat financial fraud and audit fraud. secondly, audit institutions should strengthen internal control and risk management to ensure the independence and objectivity of audit work. finally, the industry should strengthen self-discipline and integrity building to enhance the overall image and credibility of the audit industry." tian lihui further stated.

a reporter from china business news contacted pricewaterhousecoopers' branch in china, pricewaterhousecoopers zhongtian llp, regarding the progress of rectification, organizational structure adjustments, staff layoff ratios, and company business strategy adjustments. as of press time, no response was received.

(editor: xia xin reviewer: he shasha proofreader: yan jingning)