AFRC hits PwC with $38.3m fine and curbs over Evergrande audits

The Accounting and Financial Reporting Council (AFRC) in Hong Kong has ordered PricewaterhouseCoopers (PwC) to pay a HK$300m ($38.3m) penalty over failures linked to its audits of China Evergrande Group.

The watchdog said PwC’s audit work contained serious shortcomings that enabled “material misstatements” in the property developer’s accounts to remain unchallenged.

In its disciplinary decision, the AFRC also issued a public reprimand against the company and two former partners, Cheung Siu Cheong and Chow Sai Keung.

Each of the two ex-partners has been fined HK$5m.

Alongside the financial sanctions, the regulator has imposed a six‑month restriction on PwC from taking on new public interest entity (PIE) audit mandates.

PwC must also implement remedial measures and provide progress reports to the AFRC for 12 months, with updates required at intervals of no more than three months. The company was also directed to arrange additional staff training.

The case centres on PwC’s audits of Evergrande’s consolidated financial statements for the years ended 31 December 2019 and 2020.

It also covers the 2020 audits of Evergrande Property Services Group and China Evergrande New Energy Vehicle Group.

PwC had been Evergrande’s group auditor from the company’s listing in 2009 until early 2023.

According to the AFRC, PwC “failed to exercise professional scepticism” in the face of heightened risks and did not obtain “sufficient appropriate audit evidence” in key areas.

The regulator further concluded that there had been a “significant loss of audit independence”.

The AFRC found that PwC’s audit team disregarded evidence from its own site inspections showing some properties were still under construction, while accepting the group’s records that the properties were completed and ready for handover.

The decision also stated that PwC knowingly permitted unsupported consolidation adjustments, which the AFRC described as “unjustified accounting entries”, even though the engagement team knew of management’s intention to hit profit targets.

The AFRC said PwC went further by helping to prepare financial statements used for consolidation, effectively taking on management’s responsibilities and placing itself in a position where it was “auditing its own work”.

According to the regulator, these failings contributed to Evergrande recognising revenue too early, overstating profits and misstating major asset balances.

Those asset categories were reported at 1.33tn yuan ($190bn) for 2019 and 1.41tn yuan for 2020, representing around 60% and 61% of the group’s total assets for the respective years.