Called to account

Facing an FRC probe in Hong Kong

It has been a torrid time for auditing firms in China. Regulators have stepped up their oversight, fining a number of auditors after a spate of stock market frauds. Ruihua – formerly a leading auditor of A-share companies – was even closed down after a series of accounting scandals broke, including a misstatement in the audit of the cash position at Kangdexin, a laminated filmmaker, that was off by Rmb30 billion ($4.68 billion).

More irregularities are emerging, this time in the banking sector. Investors were shocked last week when pharma firm Jemincare Group accused a branch of China Bohai Bank of using its Rmb2.8 billion deposit as collateral for a loan to another client. The Hong Kong-listed lender then revealed in a stock exchange circular that it has reported the matter for further investigation.

Other scandals have included the high-profile debacle at US-listed Luckin Coffee (see WiC490). Auditors in cross-border situations like these find themselves in a jurisdictional no-man’s land with Washington and Beijing tussling over laws that could see Chinese firms delisted from American exchanges for flouting US audit requirements.

The Chinese authorities take the opposite line, citing state secrecy laws in refusing to make audit results of Chinese companies available to US regulators.

For PricewaterhouseCoopers, in particular, things seem to be going from bad to worse. It stoked anger in China in September on revelations that a human resources executive in Australia had dressed up as “a bat from Wuhan” during a staff event, while another mocked Chinese accents .

Both employees at PwC’s Australian operations were sacked and local CEO Tom Seymour apologised for the “racist and offensive” behaviour.

Maybe the incident helps to explain the limited sympathy on offer among Chinese when the accounting giant surfaced again as a hot topic on weibo last week. This time round, netizens were responding to Hong Kong’s Financial Reporting Council (FRC), which had announced an investigation into PwC’s most recent audit report for China Evergrande.

Evergrande has been in a frenetic race to avoid a default that would turn it into one of the most spectacular corporate failures in Chinese history – an event that would also have an impact on its auditor.

In late October Hong Kong’s FRC, a statutory body, said it would investigate after receiving a complaint from a member of the public over the troubled real estate firm’s s 2020 financial statements, as well as PwC’s audit report, where “questions about the adequacy of reporting” have been identified.

Citing one instance of concern, the FRC said Evergrande had mentioned in the report that financial activities were being conducted to “properly manage the group’s liquidity risk”. However, at the end of 2020 it only had cash equivalents of Rmb159 billion ($24.8 billion), far short of its current liabilities of Rmb1,507 billion. The FRC went on to note that PwC had expressed an “unmodified audit opinion” in its assessment of Evergrande’s financial position and so it would also investigate whether PwC’s work had met applicable standards.

According to the state-owned National Business Daily, PwC is the leading accounting firm in China, auditing 32 of the 100 most valuable firms on Chinese bourses. Hence the local press ruminates that if Evergrande implodes, there will be fallout for PwC too. “PwC is now facing a serious confidence crisis,” the Shanghai-based National Business Daily opined.

In the meantime Evergrande continues to fight for survival against a tide of worsening news. Talks on asset disposals have collapsed in the last few months, most notably when a plan fell through for Hopson to acquire a stake in Evergrande’s property management unit. Chinese regulators are also said to have asked Evergrande boss Xu Jiayin to pay back some of his company’s loans with personal cash.

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