PwC's shocking melon: Who brought PwC into the fire pit of Evergrande?

来源 | 金融界1号狙击手

The China Securities Regulatory Commission decided to impose a lifetime ban on Xu Jiayin and Xia Haijun from entering the securities market, and fined Evergrande Real Estate 4.175 billion yuan, Xu Jiayin was fined 47 million yuan, and Xia Haijun was fined 15 million yuan. The reason is that Xu Jiayin made decisions and organized the implementation of financial fraud, and the means were particularly bad and the circumstances were particularly serious.

It is reported that Evergrande Real Estate has inflated its income by 213.989 billion yuan in 2019, accounting for 50.14% of the current operating income, and in 2020, Evergrande Real Estate inflated its income by 350.157 billion yuan, accounting for 78.54% of the current operating income.

From 2009 to 2020, PricewaterhouseCoopers has been the auditor of China Evergrande since Wind disclosed Evergrande's annual report, and all of them are "unqualified audit reports".

At that time, there was a lot of discussion about what role PwC played in China Evergrande's fraud and what kind of punishment it would receive.

Now, a 13-page PDF open letter has completely torn apart the fig leaf of PwC. The title of the open letter is straightforward: Who brought PwC into the fire pit of Evergrande?

The following is the content of the open letter:

Who brought PwC into the fire pit of Evergrande? - An open letter

The issue of PwC's audit of Evergrande has seen a lot of excitement. Everyone condemned PwC, but no one asked, who is responsible for the failure of the Evergrande audit at PwC?

The ultimate responsibility for PwC's failure to audit Evergrande is Zhao Baiji:

Patrick Chiu is the Chairman, Senior Partner and Chief Executive Officer of PwC Asia Pacific and China. In terms of time period: from 2005 to 2013, Zhao Baiji served as the head of PwC's audit business line (Evergrande was Zhao Baiji's client); Since 2014, Zhao Baiji has served as the leader of PricewaterhouseCoopers.

Evergrande's financial fraud was so serious that PwC turned a blind eye to more than 10 years of auditing, and PwC was deemed to have participated in the fraud. Why did PwC come to this point where it is today? How did Zhao Baiji bring PwC into the fire pit of Evergrande? Summing up our close observation and experience, we put forward the following reasons, which are worthy of reflection by every accounting firm and regulatory department.

1. Pursue high income for partners. One of Zhao's slogans is: PwC's EPEP - Equity Partner Income, which I lead, is the highest in history and the highest among the Big Four. Chiu's annual salary income from PricewaterhouseCoopers is HK$50 million (note that he also has a tax arrangement, and the actual personal income tax is as low as 7.5%). In the pursuit of high income of partners, Evergrande is a very good customer. In 2014, the previous generation of PwC leaders raised an inquiry to dismiss Evergrande, but was stopped by Zhao Baiji, who said: Selling a house in the mainland is as fast as selling a cake, and PwC must use good services to keep up with the pace of customers. In PwC, there is a well-known Zhao Baiji inner circle (innercircle), called the "200 million club", that is, less than 10 people, from PwC every year to divide 200 million. It is not surprising that the managing partner of the accounting firm and his small gang once they have the highest goal of dividing the money, go to the fire pit of Evergrande.

2. Audit quality management has become a means of suppressing opponents in the political struggle at PwC. Although PwC is a brand, it is formed in China by the merger of PwC, PwC and Arthur Andersen. As we all know, in PwC, there are 300 yuan, Arthur Andersen people share 130 yuan, old PwC people share 90 yuan, and old Coopers people share 80 yuan. Patrick Chiu is a partner of Arthur Andersen. He arranged for Arthur Andersen's cronies to be the in-house quality management managing partner. Almost all of PwC's audit quality management positions are controlled by Arthur Andersen's partners, and Arthur Andersen's retired partner is also retained, and there is a female partner surnamed Huang from Arthur Andersen, who is almost 70 years old, and is also an audit quality consultant at PwC, who works at Prince Building every day. Then, Zhao Baiji used the audit project as an excuse to suppress those who opposed him. One partner who is very experienced in real estate audit projects is Guo Zhiping (former real estate industry audit leader), who was originally from the old Puhua department, and he opposed the radical approach of Arthur Andersen partners, and as a result, he was suppressed by Zhao Baiji, and his salary was halved before retirement, and unfortunately he suffered from cancer. Another partner who opposed the issuance of the audit report for Evergrande was the PwC Southern Audit Partner, named Wu Weilun, who was jointly won by Zhao Baiji, Sun Baoyuan, and Cai Chuqing, and the Southern Audit Partner was replaced by Arthur Andersen.

3. Evading quality inspections by international networks. The PwC International Network regularly reviews the audit quality of its member firms. By hiring a retired senior PwC partner and offering him a high salary, he acted as a lobbyist for the China and Hong Kong firms to cover up the actual audit quality of PwC China. These retirees, who have held international leadership positions in international network audit quality inspections, take PwC China's money and say that PwC China's audit quality is good. But in fact, when the U.S. regulator (PCAOB) later examined Alibaba's audit working papers, one of PwC's international quality oversight partners who was involved said he did not expect PwC China's audit quality levels to rot so badly. PwC is a leader in the audit industry, but there is a leader that is not well known to the outside world: PwC partners such as Zhao Baiji have refused to be inspected by Hong Kong and US regulators on the grounds that audit working papers are in Chinese mainland and are state secrets. In fact, they are trying to preserve their own share of the money, on the one hand, they can make a lot of money, but on the other hand, the quality of the audit work does not need to be checked. It is precisely this reason that has led to the distrust of the capital markets of China and the United States.

Fourth, PwC's management in the Asia-Pacific region is basically paralyzed. For nearly 10 years, Mr. Chiu has served as the Chairman of PwC Asia Pacific for nearly 10 years, with a focus on three major markets: China (including Hong Kong), Australia and Southeast Asia (including Singapore). However, under the management concept of EPEP (Equity Partner Income) advocated by Zhao Baiji, the management of the Asia-Pacific region is not in place, in addition to PwC China, another disaster is that PwC Australia has committed serious violations, because a number of PwC partners leaked Australian government secrets, the Australian government has completely terminated the cooperation with PwC Australia (terminated all contracts), and began to investigate PwC. Later, the PwC International Network intervened in the investigation of PwC Australia, halting Zhao Baiji as chairman of the Asia Pacific region, and PwC Australia fired 37 partners and nearly 500 employees, a move unprecedented in history. In order to assume management responsibilities in the Asia-Pacific region, Zhao Baigen is now unable to enter Australia, otherwise he will face the risk of being detained by the Australian government for investigation. At present, PwC's management in Asia Pacific is completely paralyzed.

Fifth, on audit independence and other services provided by PwC to Evergrande and Xu Jiayin family offices. At present, people are generally concerned about PwC's audit services, but another question that must be asked is whether PwC has assisted Evergrande in providing tax consulting services and cross-border transaction services to Evergrande and Xu Jiayin's family offices, and whether it has illegally assisted them in transferring money abroad. PwC's service to Evergrande is definitely not limited to audit services.

The bloody lessons for the next generation of PwC partners and industry insiders are:

 First, PwC advises clients on a corporate governance structure of "checks and balances". May I ask, at PwC, who can check and balance Zhao Baiji, and who can challenge Zhao Baiji? The issue of governance of Chinese accounting firms has been put on the agenda. For example, should the personal income of senior executives of Chinese accounting firms be disclosed? On one occasion, when a regulator conducted an investigation into PwC, PwC's response to the regulator was that a man named Sun Baoyuan was in charge of supervising Zhao Baiji, which was a joke in itself. At PwC, Sun Baoyuan is famous for having no backbone for money. It was Sun Baoyuan who assisted Zhao Baiji to win Wu Weilun, who opposed Evergrande's audit project.

Second, because Evergrande's financial fraud is so serious, and the audit of the two accounting subjects of "house" and "cash/bank deposits" has not been properly carried out, should PwC be regarded as involved in the fraud in law? Has PwC participated in assisting the Xu Jiayin family in transferring funds overseas? Investigate these problems, investigate the legal responsibility of the responsible partners of PwC, and arrest the black sheep (and also clean the partners of the industry) In the short term, it is a pain for PwC, but in the long run, it is conducive to PwC and the long-term stability of the industry.

Third, PwC's management power was originally held by the Hong Kong partners, and for monetary purposes, Chiu has been seeking re-election for the 3.5th term (10 years have been completed, 2.5 terms). Now, he has reluctantly stepped aside, handing over the position of chairman and lead partner of PwC China to Li Dan, a partner in Chinese mainland. This is the first and first time that the management of the Big Four has been held by a mainland partner. The other members of the 200 million club include Yang Zhiwei, Cui Zhiyi, Cai Chuqing, and so on, should they return the 200 million yuan they take each year to the company as the Evergrande compensation fund? This is something that should be seriously considered in the partnership contract. After these people retired, they were still bargaining with Li Dan to stay in the company as consultants and continue to get money. As of today, Li Dan has not even appointed his chief financial officer. In doing so, are they worthy of PwC's next generation of partners?

Fourth, the most important consideration in choosing a leader in a partnership is character. Zhao Baiji covered up his greed and jealousy for a certain period of time, but once the power was in his hands and his true form was revealed, in order to be able to get more money for himself from the partnership, it was accidental and inevitable to bring PwC's career for more than 100 years to the fire pit of Evergrande. This must be based on Zhao Baiji's character. PwC's lesson is bitter that the character of the leader is paramount in the selection of the senior partner in future terms, including the nomination.

Fifth, we don't want PwC to fall, and most of PwC's partners are good, dedicated professionals. The market also needs PwC. But how can Zhao Baiji and the members of his 200 million club be held accountable? At the end of June and the beginning of July every year, PricewaterhouseCoopers holds a general meeting of its partners at the Venetian Casino in Macao. Zhao Baiji lives in the presidential suite, holds meetings during the day and gambles at night.

It remains to be seen where PwC China's partner conference will be held this year, and whether Zhao Baiji's disgraceful retirement celebration will be held. At least the Venetian Casino is not the place we recommend.

In addition, what is the budget for Zhao Baiji's retirement celebration? As mentioned earlier, Guo Zhiping, the former chief partner of the real estate industry audit who was suppressed by Zhao Baiji, entered China in 1992 to help set up the old Puhua. 30 years later, in 2022, he retired. His apprentices at PricewaterhouseCoopers (including Li Dan) held a retirement party for him, which was in fact a farewell party for his life (Guo Zhiping had cancer), which was attended by more people than expected (in fact, it was to warm up and express dissatisfaction with Zhao Baiji and other partners in Arthur Andersen's small circle), exceeding the budget by 30,000 yuan. It is said that in order to show loyalty to Zhao Baiji, Li Dan did not approve the expenditure of 30,000 yuan, which was later paid by Guo Zhiping himself. That's how history educates. We suggest that a retirement party should not be held for Zhao Baiji, because the money should be saved to compensate Evergrande's investors and banks.

Zhao Baiji made a request to Li Dan, after retirement, he will serve as the honorary chairman of PricewaterhouseCoopers. Mr. Tsai's request was that he should serve as an adviser to PricewaterhouseCoopers in Hong Kong. Both are going to take money (and more importantly, cover their butts). Refer to the original retired partners of Arthur Andersen who worked as consultants in the company The price code is 800 Hong Kong dollars per person per year. If this is the case, our advice to PwC partners is that neither Zhao nor any of his members of the $200 million club should retire until PwC has finished the Evergrande lawsuit.

Final Words:

First, PwC is under investigation by the Ministry of Finance in China and facing the prosecution of Evergrande's liquidators in Hong Kong, which PwC must face. At the same time, however, PwC must be courageous to engage an independent expert to conduct an independent inquiry into PwC's governance, culture and accountability, as PwC has done in Australia, and to make the findings publicly available. PwC exists for the public interest, and building social integrity is its most important responsibility, and if it fails to conduct an independent investigation, it will be a debt to the market. This is also the only way PwC can save its confidence in the market.

Second, during Zhao Baiji's 10 years as the leader of PricewaterhouseCoopers, the chief financial officer used was Cui Zhiyi, which remained unchanged for 10 years. And PwC knows that Cui Zhiyi is a person who has no moral standards at all. PwC is a company in China with an annual turnover of more than HK$20 billion and an annual profit of more than HK$5 billion for partners to distribute. The finances of such a company are a small circle, operated by two people, and the financial accounts are not open (note that the partners are also not public). The audit department of the PwC international network is required to conduct an internal audit of the finances of the company, including the Cayman Islands expense accounts held by Mr. Chiu and Mr. Choi, and disclose the results of the internal audit to all partners. It is necessary to carefully verify and review Zhao Baiji's whistleblower letters in the past 10 years, and return the truth of the facts to the PwC partners.

Ewan Clarkeson, PwC's Ethics Partner, is invited to arrange resources to translate this open letter into English and submit it to PwC International and its network leaders.

Third, these three months from July to September 2024 are the time for PwC partners to make performance evaluations and determine the basis for their contributions. In the event of retaliation against any partner, especially PwC and PwC, we will publish a second open letter and make some of the relevant working papers public.

Part of PwC partners

March 2024

来源 | 金融界1号狙击手