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recently, the ministry of finance issued the maximum fine to pricewaterhousecoopers, a world-renowned accounting firm, confiscating 441 million yuan and suspending its business for half a year. subsequently, pricewaterhousecoopers closed its guangzhou office.

the impact on pwc after the punishment is obvious, with more than 30 a-share listed companies announcing the termination of cooperation with it. at present, most of pwc's terminated clients have been taken over by the other three major international accounting firms (deloitte, kpmg, and ey). some even believe that the world's four largest accounting firms may become just three.

data shows that at the beginning of this century, there were five major accounting firms in the world, namely pricewaterhousecoopers, kpmg, ernst & young, deloitte, and andersen. in 2002, andersen, which had a history of 117 years, declared bankruptcy due to the enron incident, which made the industry sigh. in 1999, andersen's annual revenue was 11.3 billion us dollars, with 2,651 partners and nearly 80,000 employees worldwide, and a total of 389 offices around the world.

the cooperation between andersen and enron began in 1985. by the time enron was investigated, andersen had been auditing enron for 16 years. andersen took on all of enron's external auditing and consulting business. of course, enron's remuneration to andersen was also sky-high, reaching $52 million in 2001.

andersen and enron had a close relationship. more than 100 andersen employees worked for enron at the same time, including enron's chief accountant and financial director and other senior executives from andersen. half of the board members came from andersen or had direct or indirect connections with andersen. enron concealed hundreds of millions of dollars in debt and fabricated a net profit of 586 million dollars in the four years from 1997 to 2001, and andersen played an indispensable role.

but the fake financial data will eventually be revealed. in october 2001, the us securities and exchange commission (sec) launched an investigation into enron. in order to help enron evade punishment, andersen's houston office destroyed thousands of pages of enron's documents after receiving the sec's investigation notice on october 17. it did not stop destroying documents until it received a subpoena from the sec on november 8. as enron declared bankruptcy in december 2001 and the investigation deepened, andersen admitted to destroying documents in january 2002. the department of justice filed a criminal lawsuit against andersen on march 14, 2002, charging him with obstruction of justice.

in order to avoid being implicated and to find a way out, andersen's overseas companies left andersen one after another. on march 21, 2002, andersen in hong kong and andersen in china announced that they would join pricewaterhousecoopers, which became the first domino to andersen's collapse. subsequently, andersen in russia, new zealand, singapore, the philippines, and taiwan successively announced their mergers into ernst & young; andersen in japan and thailand merged into kpmg... the "century-old company" was destroyed in an instant.

it has only been 22 years since andersen's mistake. will pricewaterhousecoopers make the same mistake?

the relationship between pwc and andersen

after andersen went bankrupt in march 2002, andersen china joined pricewaterhousecoopers, which placed former andersen employees. raymond chao, current chairman, chief partner and ceo of pricewaterhousecoopers asia pacific and china, is a partner from andersen.

accounting firms, like law firms, mostly adopt a partnership system. chao pak-kei has previously publicly stated that the epep - equity partner income - of pricewaterhousecoopers, which he leads, is the highest in history and the highest among the big four accounting firms.

an unnamed pwc employee said that although pwc is an international brand, pwc china is a merger of pwc, coopers and andersen. the three firms have different profit sharing. for example, if there is a profit of 300 yuan, andersen will get 130 yuan, the old pwc will get 90 yuan, and the old coopers will get 80 yuan. this is basically the structure of profit sharing.

the employee said: "almost all audit quality management positions at pwc are controlled by andersen partners. it is not surprising that they chose evergrande in pursuit of high partner income."

the employee also revealed that in 2014, the previous generation of pwc leaders questioned the cooperation with evergrande and demanded that the cooperation be terminated, but some senior executives insisted on their own opinions and did not adopt the suggestions. they said, "selling houses in the mainland is as fast as selling cakes. pwc must keep up with the pace of customers with good services."

in april this year, an open letter of complaint titled "who led pwc into the fire pit of evergrande?" was circulated online, signed by some pwc partners. the core of the open letter was that there was a "200 million club" within pwc, a core circle of less than 10 people, who took 200 million yuan from pwc every year.

uncle li, who used to work at andersen, believes that "the letter is full of emotions, but does not mention any figures or evidence. if there is evidence, you can report it to the china securities regulatory commission under your real name. the '200 million club' and 'distributing a lot of money every year' are just information errors, because the salaries of the 'big four' partners are announced every year, and the bosses will come up with a more reasonable distribution plan before distributing dividends. it is normal to distribute 10 to 20 million yuan in dividends every year, which is not uncommon among the big four. as the top company in the industry with annual revenue of tens of billions of dollars, it is not an exaggeration for pwc's executives to earn tens of millions a year."

why did it happen to evergrande?

the cooperation between evergrande and pwc began in 2009. before evergrande's bankruptcy in china, pwc issued an unqualified audit opinion with the highest credit rating for evergrande.

in response to the public complaint letter "who led pwc into the fire pit of evergrande?" on the internet, the hong kong accounting and financial reporting council responded on april 19 this year. it said it would formally launch an investigation into the content of the "pwc's complaint letter on the failure of the evergrande audit". the announcement disclosed that once any misconduct or violation of the "accounting and financial reporting council ordinance" is found, it will not hesitate to take severe enforcement actions against the firms and individuals involved. this is the first time that the regulator has used harsher words against pwc.

judging from the financial report, evergrande's "rapid development history" is somewhat strange. china's real estate industry took a leap forward in 2016, with sales exceeding the 10 trillion yuan mark for the first time, with total sales of 11,762.7 billion yuan, a year-on-year increase of 34.8%. in 2013, evergrande's sales just exceeded 100 billion yuan, and in 2016, evergrande's sales reached 373.4 billion yuan, ranking first in the industry. at the same time, evergrande's financial report shows that in the five years from 2014 to 2018, its revenue was 111.4 billion yuan, 133.1 billion yuan, 211.4 billion yuan, 311 billion yuan and 466.2 billion yuan, respectively, with increases of 18.92%, 19.51%, 58.83%, 47.08% and 49.89%, respectively. revenue increased by 354.8 billion yuan during this period, creating a myth of "high-speed growth".

according to the information on the official website of the supervision and evaluation bureau, pricewaterhousecoopers and its guangzhou branch knew that there were major misstatements in evergrande real estate's financial statements from 2018 to 2020, but failed to point them out, issued inappropriate audit opinions, and issued false audit reports. "a piece of vacant land was considered to meet the conditions for handover, but evergrande did not allow it to go, so it gave up the visit." the original "gatekeeper" has completely become an "accomplice."

however, wu qiannan, chief accountant of anhui xinqi logistics equipment co., ltd., believes that it is unlikely that pwc will become the next andersen. "it is expected that pwc will be heavily fined, but the severity of the punishment shows that the state will strengthen its supervision of accounting firms. among the big four accounting firms, pwc is not the only one that has close contact with real estate companies. if pwc has huge problems in the audit of evergrande, the other firms may also have the same problems. punishing pwc now may feel like killing a chicken to scare the monkey."

are there really problems with auditing?

this time, the severe punishment imposed on pwc has already come true.

in 2021, evergrande went bankrupt and changed its accounting firm. after evergrande changed its accountant, the successor accountant also issued a new audit report with the audit opinion category of "unable to express an opinion". in the new annual report, the successor accountant did not directly indicate a change in accounting policies, but pointed out some problems.

the unnamed pwc employee mentioned above believes that the big four accounting firms rely heavily on credible third-party evidence in their audits. "in fact, there is a view in the industry that after the real estate industry went into recession, the ability of real estate to refinance has deteriorated. in addition, evergrande has spread its business too wide, with grain and oil, ice springs, and automobiles all burning money. the deterioration of its financing ability has led to a break in its capital chain. at the same time, due to the downturn in the real estate industry, the assets under construction have shrunk significantly, and the asset impairment is large. these are the root causes of evergrande's bankruptcy, not what evergrande really did."

bt finance checked the national land transaction income from 2016 to 2023 and found that the national land transaction amount reached 8705.1 billion yuan in 2021, but it quickly plummeted to 6685.4 billion yuan in 2022, and then fell again to 5799.6 billion yuan in 2023, with a clear downward trend. from 2016 to 2020, the amount increased from 3754.7 billion yuan to 8414.2 billion yuan, more than doubling in just five years.

according to a report by china national radio on september 13, pwc repeatedly violated auditing standards in its audits of evergrande in 2019 and 2020. the working papers were distorted, on-site visits were invalid, sample selection was out of control, and document inspection failed. pwc, which is known for its business capabilities and professional standards, fell short of standards in evergrande.

the csrc's words were even more severe, "pwc was not simply negligent in its audit duties, but to a certain extent covered up and even condoned evergrande real estate's financial fraud and fraudulent issuance of corporate bonds, which seriously eroded the legal and honest basis, seriously damaged the legitimate rights and interests of investors, and seriously undermined market confidence." according to bloomberg, citing people familiar with the matter, the ministry of finance may soon announce an administrative penalty decision on pwc. according to the report, pwc may face a fine of at least 1 billion yuan, and the penalty announced now may only be the beginning.

the three major firms divide up pwc’s big clients?

according to phoenix.com, as of the first half of 2021, before evergrande’s bankruptcy, pwc had reached cooperation with 18 representative chinese real estate companies, ranking second in terms of cooperation scale among the big four accounting firms.

with the collapse of evergrande, pwc's reputation has plummeted, and the loss of credibility has caused pwc to lose a large number of clients. bt finance has found that there are more than 30 state-owned enterprises and central enterprises that have terminated their contracts with pwc since 2024. among them are china national petroleum corporation, china railway construction corporation, china merchants bank, china life insurance, china insurance group, etc. according to data, the amount of these lost clients is nearly 300 million yuan.

(screenshot of petrochina announcement)

the hong kong accounting and finance bureau, which has previously announced that it will launch an investigation into pwc, will take severe enforcement actions against pwc and related individuals if it finds that pwc has engaged in misconduct or violated the accounting and financial reporting council ordinance. pwc is very likely to face double penalties from institutions in mainland china and hong kong.

according to china national radio, the china securities regulatory commission has noticed that relevant regulatory agencies in hong kong, china have recently stated that they are conducting an independent investigation into the audit of evergrande group's auditing agency. if relevant parties in hong kong, china make a request in the future, the china securities regulatory commission will work with the ministry of finance through cross-border law enforcement cooperation mechanisms and channels to actively cooperate with relevant parties in investigating and handling relevant illegal acts.

at present, a small number of partners of pwc have left voluntarily or involuntarily. currently, there are nearly 20,000 employees. except for a small number who chose to resign, most employees are working normally. wind data shows that pwc's audit clients in 2023 are still huge, including 107 a-share listed companies and 414 hong kong-listed companies. even in the case of negative public opinion, there are still companies that choose pwc. for example, shanghai jahwa decided to re-employ pwc zhongtian as its audit agency for 2024.

however, compared with the number of renewals, the number of terminations is greater. according to incomplete statistics, at least 48 listed companies have changed or cancelled their contracts with pwc, including more than 30 companies whose audit fees in the previous year were over 5 million yuan. these 48 disappeared clients have become clients of competitors, including 11 companies that changed to ernst & young, 10 companies that changed to kpmg, and 8 companies that changed to deloitte.

it may take some time for the final conclusion of the specific punishment and business loss faced by pwc due to the evergrande incident to become clear. however, pwc's major clients have terminated their contracts and turned to competitors such as ey and kpmg, which may affect the market structure of the "big four". what is certain is that whoever lives up to the trust and truly takes on the responsibility of being the "gatekeeper" of the securities market will have the last laugh.

author | meng xiao