Hong Kong, mainland Chinese regulators cooperate on probes of PwC's Evergrande bookkeeping

China's Ministry of Finance and Hong Kong's audit regulators are assisting each other in their separate investigations of PwC's audit work of the now-liquidated China Evergrande Group.

"Under the memorandum of understanding (MOU) signed between the Ministry of Finance and Hong Kong's Accounting and Financial Reporting Council [AFRC] in 2019, the two regulators are mutually reliant on each other regarding investigations," said AFRC chairman Kelvin Wong Tin-yau.

The Evergrande investigation should fall under the purview of cooperation between the two regulators under the MOU, as Wong noted that the agreement allows the two sides to provide assistance to each other in their investigations. He, however, did not allude to any particular case.

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The MOU calls for the Ministry of Finance to assist the AFRC in its investigation involving audit papers on the mainland, while Hong Kong's regulator will extend the same courtesy to the other side, according to Wong.

Evergrande, which was ordered to undergo liquidation by a Hong Kong court in January, had inflated its sales by US$78 billion in the years leading up to its downfall in 2021, China's securities regulator said in March.

The AFRC and the Ministry of Finance have conducted separate investigations into the Hong Kong and mainland units of PwC, respectively, on the quality of the company's audit work related to Evergrande.

The largest accounting firms in Hong Kong audit the books of the biggest companies listed on the city's stock exchange, which account for 89 per cent of the market capitalisation. Photo: Jelly Tse alt=The largest accounting firms in Hong Kong audit the books of the biggest companies listed on the city's stock exchange, which account for 89 per cent of the market capitalisation. Photo: Jelly Tse>

On Wednesday, the AFRC issued a statement saying that after examining the internal investigation carried out by PwC, it had determined that the evidence does not support some of the allegations made by anonymous whistle-blowers concerning the auditing firm's quality controls.

The Hong Kong regulator cleared three allegations against PwC as it found no evidence the auditor had failed to establish and maintain effective quality controls, failed to adhere to professional standards regarding its client relationship with Evergrande, and failed to assign appropriate personnel to key positions.

However, a separate investigation by the AFRC into the quality of PwC's audit work related to Evergrande is still under way.

"There may be some individual cases of audit failures in Hong Kong, but the overall audit work in the city is of good quality," Wong said. "I am not worried about the quality of the accounting or auditing standards."

The AFRC on Thursday published the results of its fourth annual inspection of the quality of accounting firms in Hong Kong.

The overall quality control of accounting firms in Hong Kong is satisfactory, said Janey Lai, CEO of AFRC, noting that most of them have stepped up efforts to make improvements.

She said the largest accounting firms, which audit listed companies that account for 89 per cent of the Hong Kong stock market's capitalisation, show they have strong internal controls and systems in place with regard to their auditing work.

"We expect to see better results in future as these large accounting firms continue their journey on audit quality improvements," Lai said.

Smaller accounting firms, which represent firms accounting for about 3 per cent of the market cap in the city, are still showing some unsatisfactory results, but they have improved from last year.

"Last year, our report described the situation as 'unacceptable' but this year has improved to mostly 'below satisfactory' level," Wong said.

"Reputation is important for the financial sector and we would like to see more improvement in the auditing quality to strengthen Hong Kong's role as an international financial centre," she added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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