PwC China faces 6-mth business ban, large fine over Evergrande audit, sources say

By Xie Yu and Julie Zhu

HONG KONG (Reuters) -Chinese regulators will likely impose a six-month business suspension on a big part of PricewaterhouseCoopers' auditing unit in mainland China, as a penalty for its work on troubled property developer Evergrande, according to five sources with knowledge of the matter.

PwC Zhong Tian LLP, the registered accounting entity and the main onshore arm of PwC in China, is expected to be hit with the ban in its securities related business, affecting its work for clients including listed companies, IPO-bound companies and investment funds on the mainland, said the sources who declined to be named as the information was private.

A fine of at least 400 million yuan ($56 million) is expected to accompany the six-month ban, three of the people said. Combined with the business suspension, it would be the toughest ever penalty received by a Big Four accounting firm in China, the three people added.

In the most recent case of a Big Four auditor being hit with hefty penalties, Deloitte's Beijing branch in March last year was fined 211.9 million yuan and the branch's operations were suspended for three months after serious deficiencies were found in its audit of China Huarong Asset Management.

The PwC penalties, which are being mainly handled by China's Ministry of Finance (MOF), the primary regulator of accounting firms in the country, are yet to be finalised, said one of the sources.

"Given this is an ongoing regulatory matter, it would not be appropriate to comment," a PwC spokesperson said in a statement.

The MOF did not immediately respond to requests for comment.

PwC has been under regulatory scrutiny for its role in auditing China Evergrande Group since the developer was accused in March of a $78-billion fraud. PwC audited Evergrande for almost 14 years until early 2023.

Chinese regulators are expected to announce PwC's penalties in the coming weeks, three of the people said.

The Financial Times first reported on Thursday that PwC China expected a six-month business ban by Chinese authorities as early as September.

Bloomberg in May reported that the firm faces a record fine of at least 1 billion yuan ($140 million).

The looming PwC penalties have led to an exodus of clientele and prompted cost cuts and layoffs at the firm in recent months, sources have said, clouding the firm's prospects in the world's second-largest economy.

As part of the penalties, PwC would be barred from signing off on certain key documents for clients in mainland China such as results and IPO applications as well as from carrying out other securities-related services, the sources said.

The business suspension could also affect PwC Zhong Tian, as a whole, from taking on new state-owned or domestically-listed clients in the next three years, in accordance with Chinese regulations.

Last year, domestic regulators reiterated state-owned firms and mainland China-listed companies should be "extremely cautious" about hiring auditors that have received regulatory fines or other penalties in the past three years.

In the past few months, at least 50 Chinese firms, many of which are state-owned enterprises or financial institutions, have either dropped PwC as their auditor or cancelled plans to hire the firm, according to stock exchange filings reviewed by Reuters.

Its largest mainland China-listed audit client, Bank of China, said on Monday it plans to hire EY for its 2024 annual audit. In June, the bank stated that its service agreement with PwC would only be for the interim report review.

PwC Zhong Tian recorded revenues of 7.92 billion yuan in 2022, making it China's highest-earning auditor that year, followed by EY, Deloitte and KPMG, official figures show.

($1 = 7.1322 Chinese yuan)

(Reporting by Xie Yu, Julie Zhu and Beijing newsroom; Additional reporting by Engen Tham; Editing by Sumeet Chatterjee and Jacqueline Wong)