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PwC pushes back on claims partners ignored alleged $117.8bn Evergrande fraud
A letter circulated on Chinese social media has claimed that partners at big four accounting firm PwC turned a blind eye to the fraudulent financial reporting of property giant Evergrande.
Nick Wilson
Editor’s note: This story first appeared on Lawyers Weekly’s sister brand, Accounting Times.
In a letter posted to PwC Zhong Tian’s website, the firm said it had referred the matter to authorities and would “fully investigate” the incident, which could “tarnish” its reputation.
The news follows Lawyers Weekly’s reporting on Evergrande, with Australia-based real estate partners weighing the potential legal implications for Australian lawyers and clients.
In March, Evergrande announced its founder had been barred from Chinese financial markets for life, while authorities alleged the firm had falsified its revenue to the tune of $117.8 billion in the lead-up to its collapse.
The letter, titled, “Who Brought PwC into the Fire Pit of Evergrande?” was credited to unnamed partners at PwC. It was circulated on Chinese social media weeks after reports that the Chinese government was looking into PwC’s role in the fraud.
According to The Telegraph, the letter alleged a former partner had suggested dropping Evergrande as a client due to some concerns, but a senior executive intervened.
The letter also reportedly urged PwC to engage with independent experts to review the firm’s governance, culture, and accountability.
PwC resigned as Evergrande’s auditor early last year, over disagreements pertaining to the audit of its accounts.
The property developer’s board recommended PwC resign after they failed to agree on the “timetable and the scope of work in respect of the assessment on the group’s going concern basis” and the “procedures required for the assets impairment assessment”, according to a regulatory filing.
In its letter of resignation, PwC said it had yet to receive information concerning “significant matters” to Evergrande’s 2021 audit, including cash flow forecasts and consolidated financial statements.
This made it impossible for the firm to determine the scope of necessary audit work or provide a timeline for the audit, said PwC.
Chinese officials have contacted former PwC accountants who worked on Evergrande’s audit though no decision has yet to be made on whether the firm will be penalised, reported Bloomberg.
Evergrande was ordered to liquidate by a Hong Kong court last year following its failure to restructure the $300 billion it owed to its investors.
Five years prior, it had been listed as the world’s most valuable real estate company.
Multiple reports have compared Evergrande’s collapse to that of Enron in 2001, the demise of which brought down then-big five US accounting firm Arthur Andersen.
Then, as now, auditors will “likely be on the hook for some blame,” wrote Reuters columnists.
“The Evergrande fiasco could accelerate the retreat of the big four in China. PwC’s mainland, Hong Kong, and Macau operations boast over 800 partners,” they said.
Between 2019 and 2020, the firm’s founder artificially inflated the firm’s profits in reports to the tune of $19.4 billion.
Richard Murphy, professor of accounting practice at Sheffield University, told Bloomberg: “Checking for this type of misstatement is one of the most basic audit routines.”
“The risk to PwC’s reputation, not just in China but more broadly, is very real.”
While the Evergrande case is an extreme one, it does raise the temperature on the need for greater oversight of big four audit quality.
The Canadian Public Accountability Board recently released the findings of its big four audit review, in which two were given failing grades.
Meanwhile, the audit deficiency rate of the US arms of Deloitte, EY, and PwC nearly doubled in the PCAOB’s most recent inspection report.
On average, 24 per cent of the three firm’s audits were deficient, meaning their conclusions were based on insufficient evidence. EY’s deficiency rate was 46 per cent, greater than the other two firms combined.
Closer to home, Doug Niven, former Australian Securities and Investments Commission (ASIC) chief accountant, submitted to the ongoing Australian parliamentary inquiry into consulting that greater transparency around the quality of the Australian big four’s audits was needed.
Niven took shots at ASIC’s decision last year to cease publishing its annual audit quality scorecards into the nation’s six largest firms.
“Sufficient levels of surveillance and transparency of findings provide evidence of the need for improvements in conduct in a regulated population,” he said.
“A problem does not cease to exist just because of the extent of the problem is less apparent.”
