Chairman and Chief Editor
Bedour Ibrahim

No decision has been made on whether to penalize the auditor

China Scrutinizes PwC Role in $78 Billion Evergrande Fraud Case

Friday 22/March/2024 - 04:23 PM
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Chinese authorities are examining the role of PricewaterhouseCoopers LLP in China Evergrande Group’s accounting practices after the developer was accused of a $78 billion fraud، ramping up pressure on the global accounting giant that audited a slew of developers before the sector’s meltdown.

The country’s securities regulator this week accused Evergrande’s main onshore subsidiary Hengda Real Estate Group of recognizing sales in advance and massively overstating its revenue in the two years through 2020، prior to Evergrande’s default.

Chinese officials are now looking into PwC as they continue their probes of the developer’s founder Hui Ka Yan، according to people familiar with the matter. They are in contact with some former PwC accountants who handled Evergrande’s audit، one of the people said، asking not to be identified discussing a private matter.

Penalizing the auditor

No decision has been made on whether to penalize the auditor، said the people، adding that officials are still investigating other suspected crimes of Hui، who was detained last year. PwC declined to comment.

Beijing’s fresh revelations of Evergrande’s fraud come at a difficult time for PwC، which is dealing with the fallout of scandals in other parts of its global network، and has cut jobs from the UK to Canada. The firm’s practice in Australia — which is also slashing jobs — came under fire for leaking confidential government tax plans to clients. PwC’s UK arm was hit with a £5.6 million fine last year for failures in its work on Babcock International Group Plc’s books.

“There are serious questions about PwC’s role in the Evergrande fraud، specifically what it knew about the improper revenue recognition،” said Nigel Stevenson، an analyst at accounting research firm GMT Research Ltd. in Hong Kong.

GMT has previously questioned the accuracy of Evergrande’s financial reporting، and alleged in December 2023 that the developer may have never been profitable. In response، Evergrande said the research firm’s recent report was “without basis.” 

By inflating revenue، Hengda also overstated a total of 91.9 billion yuan ($12.7 billion) in profit، or more than three-quarters of its reported income between 2019 and 2020، according to the China Securities Regulatory Commission. That’s about 20 times the inflated profit at Enron Corp.’s 2001 scandal، which ultimately brought down its auditor Arthur Andersen.

“Checking for this type of misstatement is one of the most basic of audit routines،” said Richard Murphy، professor of accounting practice at Sheffield University in the UK. “The risk to PWC’s reputation، not just in China but more broadly، is very real.”

Prior to 2021، Evergrande recorded revenue from contracted sales of many projects before completing and delivering the homes to buyers. Its aggressive revenue-recognition tactics enabled the developer to report lower liabilities and leverage ratios during those years، which facilitated its sales of domestic and international bonds. The world’s most indebted developer began having cash-flow problems in 2021 and spiraled into default، imperiling millions of apartment units that it had pre-sold to buyers but hadn’t completed.