China Intensifies Investigation On PwC For Possible Role In Historic $78B Evergrande Fraud: Report

The Chinese authorities are intensifying their scrutiny of PricewaterhouseCoopers LLP (PwC) in connection with the accounting practices of China Evergrande Group, which has been accused of a $78 billion fraud.

What Happened: The Chinese securities regulator has accused Evergrande’s subsidiary, Hengda Real Estate Group, of inflating sales and significantly overstating its revenue from 2019 to 2020 before Evergrande’s default, reported Bloomberg on Friday.

The report, citing people familiar with the matter, said authorities are now investigating PwC in connection with the case. They are in contact with former PwC accountants who handled Evergrande’s audit. The authorities have not decided whether to penalize the auditor, as they are still investigating other suspected crimes of Evergrande’s founder, Hui Ka Yan.

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This development comes at a challenging time for PwC, which is already dealing with the repercussions of scandals in other parts of its global network. The firm’s practices in Australia and the UK have been under fire for various issues.

"There are serious questions about PwC's role in the Evergrande fraud, specifically what it knew about the improper revenue recognition," said Nigel Stevenson, an analyst at accounting research firm GMT Research Ltd. in Hong Kong.

By inflating revenue, Hengda overstated over 91.9 billion yuan ($12.7 billion) in profit, which is more than three-quarters of its reported income between 2019 and 2020. This figure is about 20 times the inflated profit of Enron Corp.’s 2001 scandal, which ultimately led to the downfall of its auditor, Arthur Andersen.

"The issue is that the auditing process is fundamentally broken, conflicted, and at times corrupted." said Tom Kirchmaier, professor at the Centre of Economic Performance at the London School of Economics. "Hence, the problem might be bigger than PwC."

PwC did not immediately respond to Benzinga's request for comment.

Why It Matters: This investigation into PwC’s role in the Evergrande fraud comes amidst a larger crisis in China’s real estate sector. The country’s second-largest property giant, Evergrande, has been accused of a $78 billion fraud, with its founder, Hui Ka Yan, at the center of the controversy. The company’s onshore unit, Hengda, allegedly inflated its revenue by $78 billion, leading to its default in 2020.

China’s real estate crisis has significantly affected the country’s economic downturn. As the crisis unfolded, Chinese President Xi Jinping grappled with a $7 trillion downturn as the country’s debt levels soared, real estate collapsed, and markets pulled back over 21% from their 2021 highs.

Earlier, China's housing minister, Ni Hong, has made it clear that the country's struggling real estate developers will not receive a significant bailout. The warning comes amid a backdrop of increasing defaults and a declining property market.

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