On Friday, September 13, China’s Ministry of Finance and the China Securities Regulatory Commission (CSRC) announced the "maximum" penalty decision for PwC, one of the Big Four accounting firms: a fine of 4.41 billion yuan and a six-month suspension of business qualifications. Experts believe that compared to their international peers, domestic accounting firms in China still have significant gaps in business compliance and other areas.

According to the investigation, PwC and its Guangzhou office issued an inappropriate audit opinion and a false audit report during the audit of Evergrande’s financial statements from 2018 to 2020, despite being aware of significant misstatements in Evergrande’s financial statements.

For the accounting firm, based on relevant regulations in the "Administrative Penalty Law of the People's Republic of China," the CSRC imposed an administrative penalty of 325 million yuan for illegal activities related to the audit of Evergrande’s 2019 and 2020 projects. The Ministry of Finance, according to the "Certified Public Accountants Law of the People's Republic of China," imposed an administrative penalty of 116 million yuan for illegal activities related to the audit of Evergrande’s 2018 project. Additionally, the Ministry of Finance issued a warning, suspended business operations for six months, and revoked the license of PwC’s Guangzhou office.

Sources say that the upcoming penalties have led to a significant loss of clients for PwC and have prompted the firm to cut costs and lay off employees in recent months, casting a shadow over its prospects in the world’s second-largest economy.

As part of the penalty, PwC will be prohibited from signing certain key documents for clients in mainland China, such as performance reports and IPO applications, and will be barred from engaging in other securities-related services.

According to Chinese regulations, this business suspension could also affect PwC’s ability to accept new state-owned or listed clients in mainland China over the next three years.

Business Disruptions and Layoffs Continue

In July this year, PwC responded to news of layoffs by stating that due to changes in external conditions, the company had optimized its organizational structure in response to market demand and was gradually communicating with employees. On July 3, PwC announced that Li Dan would succeed Zhao Baiqi as Chairman of PwC Asia Pacific and China. At that time, the market speculated that Zhao Baiqi’s sudden retirement was attributed to the Evergrande incident.

PwC's loss of clients began on March 22 this year. Four days after Evergrande disclosed the CSRC’s administrative penalty and market entry prohibition notice, CIMC Vehicles (301039.SZ) announced it was ending its partnership with PwC. Since then, the list of firms terminating their contracts with PwC has continued to grow, including several large state-owned and central enterprises, with audit fees totaling over 800 million yuan.

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