On April 19, the Hong Kong Accounting and Financial Reporting Council (AFRC) said that it had noticed that a whistleblower letter was circulating and was widely reported by the media. The report letter is related to the quality management system of PricewaterhouseCoopers (PwC Hong Kong) and the quality management system of China Evergrande Group (03333. HK, "China Evergrande") expressed serious concerns about potential deficiencies in the quality of audits. Hong Kong's AFRC said it would launch an investigation.
On April 23, PwC told the Economic Observer that it was aware of the statement of the Hong Kong Finance and Futures Bureau and would continue to cooperate with regulators on the matter.
Investigated by the Hong Kong Financial and Monetary Bureau
According to the AFRC, the key allegations include: first, failing to establish and maintain an effective quality control system to ensure audit quality and compliance with professional standards and applicable legal and regulatory requirements; secondly, failing to comply with the professional standards for undertaking and maintaining client relationships with China Evergrande in the provision of audit and other professional services; Third, the failure to assign appropriate personnel to key positions in the accounting firm's quality management system could compromise the firm's control function, and fourth, the failure to implement proper audit procedures for the audit of China Evergrande.
According to the AFRC, in view of the seriousness of the allegations, the AFRC 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. 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.
Previously, an open letter "Who brought PwC into the fire pit of Evergrande?" was circulated on the Internet, and the letter was signed as "a part of PwC partners".
The letter pointed out that China Evergrande's financial fraud was so serious that PwC turned a blind eye to more than 10 years of audits, and PwC was deemed to have participated in the fraud. Why did PwC have such a long history and experience as a firm to get to where it is today?
Since China Evergrande's financial fraud was exposed by regulators, the topic of PwC, the auditor, has attracted widespread attention from the market.
On March 18, Evergrande Real Estate Group Co., Ltd. (hereinafter referred to as "Evergrande Real Estate"), a subsidiary of China Evergrande, disclosed that Evergrande Real Estate and related responsible persons recently received a prior notice of administrative punishment and market prohibition from the China Securities Regulatory Commission (hereinafter referred to as the "CSRC") (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 has inflated its income by 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 of 350.157 billion yuan, accounting for 78.54% of the current operating income , corresponding to the inflated cost of 298.868 billion yuan, inflated profit of 51.289 billion yuan, accounting for 86.88% of the total profit of the current period.
In addition, the Prior Notice It was disclosed that in response to the illegal act of false records in Evergrande Real Estate's 2019 annual report, Xia Haijun, then vice chairman of the board of directors and president of China Evergrande, actually managed the daily business affairs of Evergrande Real Estate, organized and arranged the preparation of false financial reports, and the means were particularly bad and the circumstances were particularly serious, and he was the person in charge who was directly responsible;
On April 16, PwC China's official WeChat account issued a statement saying that the anonymous letter contained false information about PwC and some of its partners, and that the relevant remarks were clearly contrary to the facts, which seriously infringed on PwC's business reputation and legal rights, and caused a bad impact. At the same time, PwC China said that it attaches great importance to this matter, has taken countermeasures, and will conduct an in-depth investigation into the matter.
This is not the first time that the AFRC has investigated
This is not the first time that the Hong Kong AFRC has launched an investigation into PwC Hong Kong's audit of China Evergrande.
On October 15, 2021, the Hong Kong Accounting and Finance Bureau said that it had launched an investigation into China Evergrande's reporting on going concern.
According to the AFRC, through monitoring market activity, the group was found to have problems with the adequacy of its reporting on going concern in the auditor's report of China Evergrande's 2020 annual accounts, 2021 interim accounts and PwC Hong Kong's 2020 annual audit. A public complaint was also received in relation to matters relating to the 2020 Annual Accounts and the 2020 Annual Audit.
Although PwC Hong Kong issued an unqualified opinion in its auditor's report on the 2020 annual accounts, it did not mention the material uncertainty of going concern.
In August 2022, the Hong Kong Accounting and Finance Bureau announced on its official website that it had launched an investigation into the accounts and audits of China Evergrande and Evergrande Properties. According to the announcement, the Hong Kong Accounting and Finance Bureau (AFRC) has launched an investigation into PwC Hong Kong's audit of Evergrande Property's 2020 annual accounts.
At that time, the AFRC said that according to the announcements issued by China Evergrande and Evergrande Property on July 22, 2022, respectively, the AFRC identified issues in the accounts relating to the classification of restricted bank deposits and other loans, the measurement of pledge guarantees and the disclosure of related party transactions, as well as issues related to auditing.
On January 29, China Evergrande announced that the Hong Kong High Court had ordered the company to be wound up. Edward Simon Middleton and Wong Wing-sze of Ammann Consultants Limited were appointed by the High Court as joint and individual liquidators of the Company on 29 January 2024.
It also comes after news broke that the liquidators of China Evergrande plan to sue PwC, which Hong Kong faces allegations of negligence.
In this regard, on April 23, China Evergrande's liquidator media consultant replied to the Economic Observer: "At present, we have no information to disclose. The reporter asked relevant people from PricewaterhouseCoopers, but as of press time, no response has been received. The follow-up Economic Observer will continue to pay attention.
According to public information, PwC Hong Kong has been the auditor of China Evergrande since its listing in 2009 and has been working together for 14 years. In January 2023, PwC Hong Kong terminated the cooperation with China Evergrande, and PwC Hong Kong issued an unqualified opinion on the annual audit report of China Evergrande for the past ten years.
According to PwC China's website, PwC is involved in audit, advisory and tax, with operations in 151 countries and regions, and more than 364,000 employees.