Suddenly! The Hong Kong Accounting and Finance Bureau has taken action! Evergrande Real Estate has inflated its income by 560 billion yuan in two years, and the ultimate responsible person for the failure of auditing Evergrande has appeared?
Every reporter: Huang Wanyin Every editor: Cheng Peng, Chen Mengyu
On April 19, the Hong Kong Accounting and Financial Reporting Council (hereinafter referred to as the AFRC) announced that it would investigate the content of the "PricewaterhouseCoopers Audit Evergrande Failure Report Letter" that circulated some time ago. If any misconduct or contravention of the AFRCO is detected, the AFRC will not hesitate to take stringent enforcement action against the firms and individuals involved.
The AFRC noted that a whistleblower letter was circulating and had been widely reported by the media. The letter expresses serious concerns about the quality management system of PricewaterhouseCoopers (PwC Hong Kong) and the potential deficiencies in the quality of audits conducted by China Evergrande Group.
The key allegations include failure to establish and maintain an effective quality control system to ensure audit quality and compliance with professional standards and applicable legal and regulatory requirements, failure to comply with professional standards for undertaking and maintaining client relationships when providing audit and other professional services to China Evergrande Group, failure to assign appropriate personnel to key positions in the accounting firm's quality management system, which may compromise the firm's control function, and failure to perform appropriate audit procedures in the audit of China Evergrande Group.
The AFRC said that in view of the seriousness of the allegations, it has a duty to investigate in order to protect the wider public interest involved in the investment public and the audit of listed entities, as well as to safeguard public confidence in the integrity of the accounting profession.
The ultimate responsible person for the failure of the audit of Evergrande has emerged?
Previously, an anonymous letter of "who brought PwC into the fire pit of Evergrande" circulated on the Internet.
On April 16, PwC's official official account responded that the anonymous letter contained false information about PwC and some of its partners, and that the relevant remarks were obviously contrary to the facts, which seriously infringed on PwC's business reputation and legal rights and caused a bad impact. PwC takes this matter very seriously, has taken countermeasures, and will conduct an in-depth investigation into the matter.
The anonymous letter said that the ultimate responsibility for PwC's failure to audit Evergrande was Zhao Baiji, the chairman, chief partner and CEO of PwC China, and exposed many problems such as PwC's internal audit quality management and personnel suppression.
According to the latest information on PwC's official website on April 16, Zhao Baiji is currently the chairman of PwC Asia Pacific and China, and is also one of the five core members of the PwC global network leadership team, which determines the overall strategy of PwC's global network and sets common standards for member institutions. In 2015, he was elected Chairman of PwC China, and in 2017, he became Chairman of PwC Asia Pacific.
According to public information, since China Evergrande was listed in Hong Kong in 2009, the audit institution has been PricewaterhouseCoopers, and the cooperation has lasted for 14 years until January 2023. At the same time, for Evergrande's annual reports from 2009 to 2020, PwC has issued a standard unqualified opinion.
This year, the financial fraud of Evergrande Real Estate of the Evergrande Department has been confirmed. On March 18, Evergrande Real Estate Group Co., Ltd. (hereinafter referred to as Evergrande Real Estate) announced that Evergrande Real Estate and related responsible persons recently received a prior notice of administrative punishment and market ban from the China Securities Regulatory Commission (hereinafter referred to as the China Securities Regulatory Commission) (Penalty Zi [2024] No. 36) (hereinafter referred to as the "Prior Notice"). The China Securities Regulatory Commission intends to decide to impose a lifetime ban on Xu Jiayin and Xia Haijun from the securities market, order Evergrande Real Estate to make corrections, give a warning, and impose a fine of 4.175 billion yuan.
According to the "Prior Notice", Evergrande Real Estate committed financial fraud by recognizing income in advance, resulting in an inflated income of 213.989 billion yuan in 2019, accounting for 50.14% of the current operating income, corresponding to an inflated cost of 173.267 billion yuan, and an inflated profit of 40.722 billion yuan, accounting for 63.31% of the total profit of the current period, and in 2020, Evergrande Real Estate inflated its income by 350.157 billion yuan, accounting for 78.54% of the current operating income, corresponding to an inflated cost2. 98.868 billion yuan, with an inflated profit of 51.289 billion yuan, accounting for 86.88% of the total profit of the current period.
The announcement also pointed out that in response to the illegal acts of false records in the 2019 annual report and the 2020 annual report of Evergrande Real Estate, Xu Jiayin, the then chairman of Evergrande Real Estate, comprehensively managed the various businesses of Evergrande Real Estate, and instructed other personnel to falsely increase the performance of Evergrande Real Estate's annual report. Xia Haijun, then vice chairman of the board of directors and president of China Evergrande Group (hereinafter referred to as "Evergrande Group"), actually managed the daily operation of Evergrande Real Estate and organized and arranged the preparation of false financial reports, which were particularly bad and the circumstances were particularly serious, and he was the person in charge who was directly responsible.
The results of the previous survey have not yet been released
This is not the first time the AFRC has investigated PwC's audit of China Evergrande.
As early as October 2021, the Financial and Financial Affairs Bureau (formerly known as the FRC) issued an announcement entitled "The Financial Reporting Council Launched an Investigation on China Evergrande Group's Reporting on Going Concerns" (hereinafter referred to as the "Investigation").
According to the Investigation, the AFRC conducted an enquiry into the financial statements of China Evergrande Group for the six months ended 31 December 2020 (2020 annual accounts) and 30 June 2021 (2021 interim accounts).
Through monitoring market activities, the FRC identified problems with the adequacy of the Group's reporting on going concern in the auditor's reports of China Evergrande's 2020 Annual Accounts, 2021 Interim Accounts and PwC's 2020 Annual Audit. The Bureau also received a public complaint about matters relating to the 2020 Annual Accounts and the 2020 Annual Audit.
As at 31 December 2020, China Evergrande reported cash and cash equivalents of RMB159 billion, excluding its current liabilities of RMB1,507 billion, and borrowings due in 2022 amounted to RMB167 billion. In its 2020 annual accounts, China Evergrande did not make a clear statement as to whether there would be material uncertainty as to whether there would be going concern before or after the impact of the mitigation plan was implemented.
PwC issued an unqualified opinion in its auditor's report on the 2020 annual accounts, but did not mention the material uncertainty of going concern.
In the 2021 interim accounts, China Evergrande disclosed that the group was negotiating with suppliers and construction workers on some contracts that had been halted due to overdue property development payables, identified other mitigation measures to be taken to address the liquidity issues it faced, and made an ambiguous statement that it would be appropriate to use a going concern basis in the 2021 interim accounts if the mitigation measures were effectively implemented, but would not be appropriate to use a going concern basis for the preparation of the 2021 interim accounts if it could not be effectively implemented。
However, China Evergrande did not make a clear statement in its 2021 interim accounts as to whether there was material uncertainty as a going concern, and whether the directors' judgment on adopting a going concern basis was appropriate and, if so, whether the judgment was material.
Based on China Evergrande's financial position as at 31 December 2020 and 30 June 2021, as well as the disclosure of its liquidity risk and mitigation measures, the AFRC considers that the following actions are justified:
The first is to inquire whether China Evergrande's 2020 annual accounts and 2021 interim accounts are in compliance with applicable financial reporting standards (IFRS) in relation to the going concern assessment and the disclosures in these financial statements in relation to liquidity risk and the adoption of a going concern accounting basis.
In addition, an investigation was conducted into PwC's audit of the 2020 annual accounts going concern assessment and whether the auditor's report complied with the applicable auditing standards.
In August 2022, the AFRC announced the progress of its investigation into the accounts and audits of China Evergrande and Evergrande Property in relation to certain transactions, expanding the scope of the investigation from China Evergrande to Evergrande Property. The AFRC has commenced an enquiry on the financial statements of Evergrande Property, China Evergrande for the year ended 31 December 2020 (2020 Annual Accounts) and the six months ended 30 June 2021. At the same time, an investigation into the audit of Evergrande Property and China Evergrande 2020 annual accounts conducted by PricewaterhouseCoopers has been initiated.
At that time, the AFRC stated that it would announce the commencement of inquiries and investigations or expand their scope if necessary to protect the interests of shareholders and the investing public, so as to maintain public confidence in the financial markets and the regulatory regime for independent auditors.
However, since then, the AFRC has not released an update on the progress or status of the above investigation.
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Editor|Cheng Peng, Chen Mengyu, Du Bo
Proofreading|Liu Xiaoying
Cover image source: Visual China
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