Watchdog to investigate PwC audits of Evergrande

Hong Kong’s accounting watchdog said it would investigate accounting firm PwC for alleged auditing fraud related to bankrupt Chinese developer China Evergrande Group, adding that it would not hesitate to take enforcement action.

The Accounting and Financial Reporting Council (AFRC) said in a statement that it had taken note of the whistle-blower’s allegations about PwC that circulated in the media earlier in the week.

An anonymous letter expressed concerns regarding potential alleged deficiencies in PwC’s systems of quality management and the quality of Evergrande’s audit, the AFRC said.

“Given the gravity of these allegations and the necessity to safeguard the interests of the investing public, the broader public interest in the auditing of listed entities, and to maintain public confidence in the integrity of the accounting profession, the AFRC is obliged to initiate an investigation.”

In cases where companies or individuals had committed misconduct or violated the Accounting and Financial

Reporting Council Ordinance, the AFRC said it “will not hesitate to take stringent enforcement actions”.

The AFRC noted that the allegations made by the whistle-blower included PwC’s failure to establish and maintain an effective system of quality control, non-compliance with professional standards when conducting client relationships with Evergrande, inadequate personnel assignments in key positions, and insufficient procedures for Evergrande’s audits.

The move came after PwC refuted the accusations in the letter. On Tuesday, PwC said the claims were “clearly contradictory to the facts” and that it had taken measures to investigate the origins of the “false information”.

The AFRC, formerly the Financial Reporting Council, had previously said it would look into Evergrande’s 2020 accounts and their audit by PwC.

In March this year, the China Securities Regulatory Commission said the Guangzhou-based developer had inflated its sales by 564 billion yuan (HK$609 billion) and its profits by 92 billion yuan in the years leading up to its collapse in 2021.

The regulator also imposed a 47 million yuan fine on Hui Ka-yan, Evergrande’s founder and former chairman, and barred him from China’s capital market for life.

In January, the High Court ordered Evergrande, the world’s most indebted real estate developer, to liquidate. As of June last year, its total liabilities were US$332 billion.

Following reforms in recent years that gave it more power, the AFRC is responsible for investigations, all disciplinary and regulatory inspections of listed companies’ auditors, and private company accounting and audit-quality problems.