Change in China as PwC gets burned in Beijing’s great property bust
PwC has rejected the ‘false allegations’ in anonymous letter published on social media. By Adam Mawardi
‘All sorts of behaviour is excused and allowed on the basis that if it makes you rich, it must be good’
In an eerie village of pink and blue fairytale houses in an unfinished theme park in eastern China, billboards advertise Evergrande’s once ambitious plans to build a tourism empire bigger than Disney.
The derelict amusement park is among the 800 development projects and scores of vacant homes across China abandoned after the world’s most indebted property developer collapsed two years ago.
As liquidators take over the debt-ridden property giant, which owes more than $300bn (£240bn) to banks and bondholders, critics now question who should take responsibility for its downfall.
According to claims in an anonymous letter shared on Chinese social media platform WeChat last week, questions surround the role of Evergrande’s former auditor: PwC. The open letter, which purports to have been signed by unnamed PwC partners, claimed the professional services firm “turned a blind eye” while auditing Evergrande for more than a decade.
The letter also accused Raymund Chao, chairman of PwC Asia Pacific and China, of being ultimately responsible for bringing the firm into the “hot pit” of Evergrande, which filed for bankruptcy last year.
It also raised questions about the other services PwC has provided to Evergrande and the family office of its scandal-hit founder, Hui Ka Yan. He was last year subject to “mandatory measures” on suspicion of crimes, the group announced in a regulatory filing. The open letter, written in Mandarin, urged PwC to hire independent experts to review the firm’s governance, culture and accountability while also ensuring the “bad apples” behind Evergrande’s audit failures are held responsible. “If it cannot conduct an independent investigation, it owes the market an explanation. This is also the only way PwC can restore market confidence for itself,” the anonymous authors wrote.
PwC has rejected the “inaccurate statements and false allegations” in the letter, which it argued could tarnish its reputation and infringe its legal rights.
The big four accountant said it will investigate the letter and has reported the incident to the relevant authorities.
How exactly PwC approaches this investigation will be closely watched, given that anonymous authors threatened to publish a second letter and audit working papers in the event the firm retaliates against any partner.
The outburst is understood to have shocked insiders as Chao is typically regarded as a well-respected figure whom partners look to for direction.
“This is a huge problem for the reputation of PwC and I believe that puts a lot of pressure on him [Chao] to step down,” says one former PwC Hong Kong accountant.
The strongly-worded letter is the latest headache for PwC since it resigned as Evergrande’s auditor after more than a decade. The advisory firm, which had audited Evergrande when it listed in Hong Kong in 2009, stepped down last year after disagreements over the developer’s accounts.
PwC has been under investigation by the Accounting and Financial Reporting Council (AFRC), Hong Kong’s audit watchdog, since 2021. The watchdog questioned why Evergrande was given a clean bill of health despite high debt levels and insufficient cash reserves. The inquiry is ongoing. On Friday, the AFRC announced plans to investigate the “whistleblower allegations” in the anonymous letter.
The professional services firm has since faced further scrutiny as Chinese authorities investigate PwC’s role in Evergrande’s accounting practices weeks after the developer was accused of fraudulently inflating its revenue by 560bn yuan (£62bn) in the years before defaulting in 2021. Chinese officials have contacted former PwC accountants who audited Evergrande, although have yet to decide whether to penalise PwC, Bloomberg reported.
Meanwhile, Evergrande’s liquidators are reportedly preparing for a potential professional negligence lawsuit against PwC to recoup compensation on behalf of creditors, the Financial Times reported.
The collapse of Evergrande brings into question the role auditors played in enabling China’s debt-fuelled property bubble. Foreign-linked auditing and consulting firms over the past decade entered China to capitalise on the opportunities thrown up by the country’s booming property market. A combination of overbuilding, Covid restrictions and tighter government controls resulted in a wave of bankruptcies that has upended the world’s second largest economy.
“Big four” firms, including PwC, now stand accused of failing to spot the early signs. George Magnus, economist and research associate at the University of Oxford China Centre, says: “In the upcycle in a long-standing property market appreciation, everybody becomes very optimistic. All sorts of behaviour is excused and allowed on the basis that if it makes you rich, it must be good.”
Evergrande, which triggered a cash crunch across China’s property sector, isn’t the only one to lose their Western accountant. Big four auditors have resigned from indebted property developers and property management companies en masse after uncertainty around hidden debts made it more difficult to sign off on their accounts.
Demand for international auditors could change as China’s debt-ridden private developers give way to the dominance of state-backed developers, says Magnus. “China’s property market is reverting to what it was before it became a fully privatised market.”
The potential reduced role for foreign-linked firms plays into recent calls by Beijing for Chinese companies to switch to homegrown auditors once their contracts with big four firms end.
Although the big four’s global brand recognition has made them more attractive than smaller Chinese rivals, the property crisis and tightening regulation could change this.
Their reputations may yet be called into question, depending on how the PwC-Evergrande scandal unfolds.
Yan was contacted for comment.