China's Ministry of Finance (MOF) and the China Securities Regulatory Commission (CSRC) on Friday announced “maximum” penalties on global auditing firm PwC over its failure to perform due diligence in its audit of Evergrande's annual reports and bond issuances, including a total fine of CNY441 million and a six-month business suspension of PwC's auditing unit PwC Zhong Tian. Chinese experts said the move reflects the country's firm determination to enhance regulatory supervision to ensure market fairness and stability. Such an individual case will not affect China's continuous efforts in opening up to foreign businesses that abide by Chinese laws and regulations. In a statement, the CSRC said that an investigation found that PwC failed to perform due diligence in its audit of Evergrande's annual reports and bond issuances in 2019 and 2020, violated multiple auditing standards, and failed in many audit procedures.
Specifically, the CSRC said audit working papers were distorted, and 88% of real estate project records were inconsistent with the actual implementation. On-site visits also did not fulfill their purpose, as most of the real estate projects that were considered to have met delivery conditions during the visits were actually not completed or delivered, and some were just “pieces of vacant land.”
PwC's behavior is not just a simple audit dereliction and failure. It has, to a certain extent, covered up and even condoned Evergrande's financial falsification and fraudulent issuance of corporate bonds. It seriously eroded the foundation of law and integrity, seriously damaged the legitimate rights and interests of investors, seriously undermined market confidence, and should be severely punished in accordance with the law, the CSRC said. The CSRC imposed a “maximum fine” of CNY297 million and confiscated a total of CNY27.74 million in PwC's financial gains from the related business.
In a separate announcement, the MOF also said that an investigation found that PwC knew misstatements in Evergrande's financial reports but failed to identified them, and issued inappropriate audit opinions and false audit reports between 2018 and 2020. The Ministry imposed a fine of CNY116 million and suspended PwC's operations in China for six months and closed down its Guangzhou office. In May, the CSRC had fined Evergrande Real Estate Group CNY4.18 billion for fraudulent bond issuances and false statements.
The MOF and the CSRC vowed to enhance regulatory supervision and ramp up the crackdown on illegal activities to ensure stable market operations. Strengthened regulatory supervision is conducive to maintaining fairness, ensuring market order and promoting high-quality development, Cao Heping, Economist at Peking University, told the Global Times, adding that relevant efforts will also further improve the environment for businesses, including foreign companies. The case against PwC will serve as an example that China regulates market entities in accordance with the law and aims to build a fair and just business environment for all types of businesses, Dong Shaopeng, Senior Research Fellow with the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times.
PwC issued a statement on its global website saying that PwC Zhong Tian’s work in Evergrande’s case fell unacceptably below expected standards. It said it respects the regulators’ decisions and that it would fully comply with the administrative penalties.
Meanwhile, foreign businesses continue to flock to the Chinese market. In the first seven months of 2023, nearly 32,000 new foreign-invested enterprises were established in China, an increase of 11.4% year-on-year, the Global Times and China Daily report.
