The "Big Four" have penetrated deeply into China
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"Due to the false records in the 2019 and 2020 annual reports disclosed by Evergrande Real Estate, the suspected fraudulent issuance of public corporate bonds, and the failure to submit relevant reports or fulfill information disclosure obligations in accordance with the provisions and other violations of laws and regulations, according to the "Administrative Punishment Law of the People's Republic of China", "Securities Law" and other relevant regulations, the China Securities Regulatory Commission ordered Evergrande Real Estate to make corrections, gave warnings, and imposed a fine of 4.175 billion yuan; A number of Evergrande executives, including Ke Peng and others, gave warnings and imposed fines ranging from 47 million yuan to 3 million yuan. ”
On March 18, Evergrande Real Estate Group Co., Ltd. (hereinafter referred to as "Evergrande Real Estate") announced that it had received a prior notice of administrative punishment and market ban from the China Securities Regulatory Commission. This is 172 days since Xu Jiayin, chairman of the board of directors of the company, was taken compulsory measures on suspicion of violating the law and committing crimes.
Source: China Youth Network
It is worth mentioning that this punishment is aimed at Evergrande Real Estate's fraud in 2019 and 2020, which is a long-overdue "heavy blow". As early as 2012, the short-seller Citron believed that China's Ministry of Finance had discovered Evergrande's tendency to falsify its finances, but PricewaterhouseCoopers, an internationally renowned accounting firm, issued an unqualified opinion for Evergrande to exonerate it from the accusations of that year.
Evergrande thundered, and the cooperation was terminated
After many years, Evergrande Real Estate was found to have committed financial fraud, which proves that the accusations of Citron back then were not groundless. As an authoritative institution that has provided financial audit work for Evergrande Real Estate for a long time, PricewaterhouseCoopers, in the first three months of Evergrande's thunderstorm, still insisted that Evergrande's financial report was "unqualified". According to media reports, over the past 14 years, PwC has received more than 400 million yuan in audit fees from Evergrande Group.
However, the partnership ended last year. On January 16, 2023, China Evergrande, Evergrande Property and Evergrande Automobile, three Evergrande-listed companies, announced that PricewaterhouseCoopers (PwC) had resigned as the company's auditor at the suggestion of Evergrande.
In this regard, Evergrande explained: "The group's debt restructuring work is advancing, and it is particularly important to complete the 2021 audited financial statements. As PwC's assessment of the basis for the preparation of the Group's going concern and the impact of related disclosures, the impairment assessment of assets requires additional audit work and procedures, and the parties could not agree on the scope and timetable of work. ”
In PwC's view, the main reason is that it has not received certain information on material matters related to the audit of Evergrande's consolidated financial statements for 2021, so it resigned as Evergrande's auditor.
It can be seen that the 2021 financial report is the cause of the breakdown of the relationship between the two parties.
After the outbreak of the Evergrande crisis in 2021, PwC, as the auditor, issued an unqualified opinion in the 2020 annual report. In October of the same year, the Financial Reporting Council of Hong Kong announced that it would launch an investigation into Evergrande's reporting on going concern, including an inquiry into the financial statements of its 2020 annual accounts and 2021 interim accounts. As the auditor of Evergrande's 2020 accounts, PricewaterhouseCoopers is not immune.
This undoubtedly raises the difficulty and threshold of Evergrande's financial audit.
Therefore, in order to improve its own security, PwC has been more strict and prudent in the audit of Evergrande's annual reports, and has added additional data audit work after major changes in the operation of China Evergrande and related real estate sectors. This would explain why PwC was reluctant to endorse Evergrande after it had not received the audit information and evidence provided by it.
There are many audits, and several times "stepping on thunder"
In the wake of the incident, PwC plans to phase out its audit business with private property developers in China, according to two private real estate companies that have hired PwC as auditors and two sources close to PwC.
According to incomplete statistics, at the beginning of 2022, when a number of private real estate companies reported difficult deliveries in 2021, PwC successively "parted ways" with Hong Kong-listed real estate companies such as World Trade Center, Hopson Development, Ronshine China, Powerlong Real Estate, Sunac China, R&F Properties, and Jingrui Holdings, and these real estate companies and PwC basically started to cooperate from listing, and the cooperation time has been more than 10 years.
The reasons for PwC's exit are generally the same as Evergrande's, basically the two sides cannot reach an agreement on the content of the financial report, and it is difficult for real estate companies to provide the data and evidence required for PwC's audit, and some real estate companies say that they have not been able to reach a consensus on audit fees.
According to media disclosures, in addition to the above-mentioned private real estate enterprises, PwC serves many Chinese enterprises. Among the top 100 companies in China by market capitalization in 2021, as many as 32 companies participated in the audit, including Tencent, Alibaba, Ping An of China, Meituan, Agricultural Bank of China, China Mobile, Xiaomi, Midea, NIO, Beike, Baidu, Mindray Medical, China Petroleum & Chemical Industry, Hong Kong Stock Exchange, NetEase, SF Express, Postal Savings Bank, CITIC Securities, LONGi, China Pacific Insurance, Bank of Communications, Evergrande Automobile, Minsheng Bank, China CITIC Bank and other enterprises, ranking first in the list of "Big Four" accounting firms.
In 2023, Huichen Shares, a listed company on the Science and Technology Innovation Board, which has been exposed for financial fraud for five consecutive years, has hired an auditor for a long time, and PricewaterhouseCoopers. In the annual reports of Huichen shares from 2016 to 2019, PricewaterhouseCoopers issued an unqualified opinion for it, "escorting" the company to fraud.
In just two months into 2024, PwC has faced a new fine.
On February 5, the Hainan Securities Regulatory Bureau disclosed a decision to issue warning letters to PricewaterhouseCoopers Zhongtian Certified Public Accountants (Special General Partnership), Yang Xudong and Tao Bisen.
Source: China Securities Regulatory Commission
After inspecting the audit projects of the 2018 and 2019 financial statements of Hainan Airlines Holdings Co., Ltd., where PwC operates, the Hainan Regulatory Bureau found the following problems: First, there were flaws in the procedures of individual letters. Second, it failed to accurately identify individual related parties and related party guarantees. Third, sufficient and appropriate audit evidence was not obtained for the guarantee of individual related parties. Fourth, the risks related to internal control were not properly assessed.
According to the relevant regulations, the Hainan Securities Regulatory Bureau shall take administrative supervision measures to issue a warning letter to it, and record it in the capital market integrity file database.
How deep is the penetration of the "Big Four"?
Against the backdrop of the United States' continuous introduction of "bad laws" to challenge China, national economic security has become an issue of great concern to China, and the penetration of China's economy by the Big Four accounting firms represented by PricewaterhouseCoopers is particularly noteworthy. The issues of concern mainly refer to the use of China's economic information and information about Chinese enterprises by the "Big Four", or the "fatal blow" to Chinese enterprises and even China's economy at critical moments.
According to data from the Anti-Short Selling Research Center, among the Chinese companies that have been shorted in the U.S. stock market since 2018, some of them have audited the "Big Four". Among the A-share listed companies, the "Big Four" also undertook nearly one-tenth of the audit work.
According to the data, as of February 2023, among all 4,944 A-share listed companies, the four major accounting firms of PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG have served 384 listed companies, including giant central enterprises such as the "Big Four Banks" and "Two Barrels of Oil", with businesses involving dozens of industries such as consumption, financial services, government and public services, life sciences and healthcare, engineering and construction, defense and aerospace. Some of the listed companies and state-owned enterprises that use the four major audits are as follows:
Source: Uncle Luyue of Xueqiu.com
Source: CCTV
It is worth noting that the crackdown on financial fraud was clearly emphasized at this year's Central Financial Work Conference, mentioning the need to achieve full coverage of supervision and strengthen institutional supervision, behavior supervision, functional supervision, penetrating supervision, and continuous supervision. The data shows that under the "zero tolerance" situation, the number of companies investigated by regulatory authorities in 2023 will reach a new high. According to incomplete statistics, in 2023, 157 A-share listed companies will be investigated by the China Securities Regulatory Commission, of which the amount of financial fraud fines will even be hundreds of millions of yuan, while the number of investigations in the same period last year is less than 100.
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Evergrande inflated its income by 564 billion yuan in two years, and Xu Jiayin and others were punished.CBN.2024-03-18.
(2) 564 billion Evergrande fraud is the largest in the world!12 years ago, Citron had already predicted the outcome, and PricewaterhouseCoopers could not escape the blame.Finance Associated Press.2024-03-19.
(3) Evergrande Real Estate intends to be fined 4.175 billion yuan, and the lawyer interprets the four key issues.中国青年网.2024-03-21.
(4) Behind the investigation of PricewaterhouseCoopers: has repeatedly "stepped on thunder" listed companies, is it a lack of ability or an "accomplice"?.Business School Journal.2021-10-29.
(5) Evergrande Department and auditor PricewaterhouseCoopers break up, whether the successor can successfully break through the test is doubtful.Cai Lian Press.2023-01-17.
(6) PwC "broke up" with Evergrande after 14 years of cooperation, and has basically given up the domestic real estate stock business.Real Estate.2023-01-17.