One of the world’s largest accounting firms is facing massive financial penalties after Hong Kong authorities determined it failed to properly audit a collapsed Chinese real estate company that overstated its earnings by billions of dollars.
PricewaterhouseCoopers will pay HK$1.3 billion ($166 million) in penalties and compensation following its flawed audit work for China Evergrande, Hong Kong financial regulators announced Thursday. The firm also faces a six-month prohibition on accepting new clients, while two former partners received public censure and individual fines of HK$5 million each for professional misconduct.
Evergrande, formerly among China’s largest property development companies and once considered too massive to collapse, went into default in 2021. The company became the globe’s most debt-laden developer, carrying approximately $300 billion in obligations. Its spectacular collapse marked the most significant failure in China’s real estate industry, which has been struggling with a cash crisis following government efforts to limit excessive borrowing practices.
China’s property market downturn continues to affect the nation’s economy, suppressing home values nationwide and dampening consumer confidence and investment activity, which has slowed the country’s overall economic expansion.
Earlier in 2024, Chinese mainland regulators imposed a 441 million yuan ($62 million) penalty on PwC for its Evergrande audit work. Chinese officials also implemented a six-month suspension of the accounting firm, citing “false” findings in audit reports and “serious defects” in auditing methods.
Hong Kong’s Securities and Futures Commission stated Thursday that its investigation into PwC’s examination of Evergrande’s 2019 and 2020 financial records revealed that yearly revenue and earnings were “substantially overstated.”
According to regulators, Evergrande artificially inflated annual revenue and profits through “prematurely recognising revenue from property sales before the completion and delivery of properties to buyers.” The commission found revenues were inflated by approximately 564 billion yuan ($83 billion) across both years, matching conclusions reached by Chinese authorities in September 2024 when they levied their own penalties against PwC.
The Hong Kong commission identified “serious breaches” of professional responsibilities by PwC. Officials announced they had negotiated a settlement with PwC that does not require the firm to admit wrongdoing, under which PwC will allocate HK$1 billion to compensate Evergrande’s minority shareholders.
Hong Kong’s Accounting and Financial Reporting Council issued a separate statement calling PwC’s audit failures for Evergrande “particularly egregious,” accusing the accounting firm of “knowingly permitting” unsupported or unjustified adjustments in financial statements.
“We acknowledge that the work on the Evergrande audits fell well below our high expectations and the expectations of our stakeholders,” PwC Hong Kong stated Thursday. “Resolving these regulatory matters is an important step for the firm.”
Following Evergrande’s collapse and a Hong Kong court’s 2024 liquidation order for China Evergrande, PwC experienced significant client losses and staff departures. Evergrande’s liquidators are pursuing separate legal proceedings against PwC in Hong Kong courts, seeking to recover funds for creditors.
Evergrande’s founder, Hui Ka Yan, who was previously ranked among Asia’s wealthiest individuals, entered guilty pleas this month to fraud and bribery charges in a mainland Chinese court following his detention in China.
