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How PwC got burned by China’s big property bust

An unfinished village of colourful houses forms part of Evergrande's derelict theme park in China's eastern Jiangsu province

In an eerie, unfinished village of pink and blue fairytale houses in Eastern China, billboards can be found advertising Evergrande’s once ambitious plans to build a tourism empire bigger than Disney.

The derelict amusement park is among the 800 development projects and scores of vacant homes across China abandoned after the world’s most indebted property developer collapsed two years ago.

As liquidators take over the debt-ridden property giant, which owes more than $300bn to banks and bondholders, critics now question who should take responsibility for Evergrande’s downfall.

According to an anonymous letter shared on Chinese social media platform WeChat last week, much of the blame lies with Evergrande’s former auditor: PwC.


The open letter, which purports to have been signed by unnamed PwC partners, claimed the professional services firm “turned a blind eye” while auditing Evergrande for more than a decade.

The letter accused Raymund Chao, chairman of PwC Asia Pacific and China, of being ultimately responsible for bringing the firm into the “hot pit” of Evergrande, which filed for bankruptcy last year.

It also raised questions about the other services PwC has provided to Evergrande and the family office of its scandal-hit founder, Hui Ka Yan. The businessman last year was subject to “mandatory measures” on suspicion of crimes, the group announced in a regulatory filing.

The open letter, written in Mandarin, urged PwC to hire independent experts to review the firm’s governance, culture and accountability while also ensuring the “bad apples” behind Evergrande’s audit failures are held responsible.

“If it cannot conduct an independent investigation, it owes the market an explanation. This is also the only way PwC can restore market confidence for itself,” the anonymous authors wrote.

PwC has rejected the “inaccurate statements and false allegations” contained in the letter, which the firm argued could tarnish its reputation and infringe its legal rights. The Big Four accountant said it will investigate the letter and has reported the incident to the relevant authorities.

How exactly PwC approaches this investigation will be closely watched, given that anonymous authors threatened to publish a second letter and audit working papers in the event the firm retaliates against any partner.

The outburst is understood to have shocked insiders given that Chao is typically regarded as a well respected figure whom partners look to for direction.

“This is a huge problem for the reputation of PwC and I believe that puts a lot of pressure on him [Chao] to step down,” says one former PwC Hong Kong accountant.

Raymund Chao
The anonymous letter accused Raymund Chao of being responsible for bringing PwC into the 'hot pit' of Evergrande

The strongly-worded letter is the latest headache for PwC since it resigned as Evergrande’s auditor after more than a decade of signing off its books.

The advisory firm, which had audited Evergrande when it listed in Hong Kong in 2009, stepped down last year following disagreements over the developer’s accounts.

PwC has been under investigation by the Accounting and Financial Reporting Council, Hong Kong’s audit watchdog, since 2021.

The watchdog questioned why Evergrande, which also held stakes in US electric vehicle startup Faraday Future and a water bottle brand promoted by movie star Jackie Chan, was given a clean bill of health despite its high debt levels and insufficient cash reserves. The inquiry is ongoing. On Friday, the AFRC announced plans to investigate the “whistleblower allegations” made in the anonymous letter.

The professional services firm has since faced further scrutiny as Chinese authorities investigate PwC’s role in Evergrande’s accounting practices weeks after the developer was accused of fraudulently inflating its revenue by 560bn yuan (£62bn) in the years before defaulting in 2021. Chinese officials have contacted former PwC accountants who audited Evergrande, although have yet to decide whether to penalise PwC, Bloomberg reported.

Meanwhile, Evergrande’s liquidators are reportedly preparing for a potential professional negligence lawsuit against PwC to recoup compensation on behalf of creditors, the Financial Times reported.

The collapse of Evergrande, which is regarded as a symbol of China’s real estate crisis, brings into question the role that auditors played in enabling China’s debt-fuelled property bubble.

Some 800 development projects and scores of homes builds have been abandoned across China since Evergrande collapsed two years ago - Bloomberg

Foreign-linked auditing and consulting firms over the past decade entered China to capitalise on the opportunities thrown up by the country’s booming property market.

However, a combination of overbuilding, Covid restrictions and tighter government controls on debt that China’s property giants could carry on their balance sheets resulted in a wave of bankruptcies that has upended the world’s second largest economy.

Big Four firms, including PwC, now stand accused of failing to spot the early signs.

George Magnus, economist and research associate at the University of Oxford China Centre, says: “In the upcycle in a long-standing property market appreciation, everybody becomes very optimistic. All sorts of behaviour is excused and allowed on the basis that if it makes you rich, it must be good.”

Evergrande, which triggered a cash crunch across China’s property sector after defaulting on its debts in 2021, isn’t the only one to lose their Western accountant in recent years.

Big Four auditors have resigned from heavily indebted Chinese property developers and property management companies en masse after uncertainty around hidden debts has made it increasingly difficult to sign off on their accounts.

It has increased tension between international auditors and developers after being forced to delay their annual results being published, which many attributed to linked to disruption from Covid-restrictions.

This includes Country Garden, once China’s largest developer that is currently audited by PwC, whose shares were suspended from trading on Hong Kong’s stock exchange earlier this month after missing the deadline to release its accounts.

Demand for international auditors could change as China’s debt-ridden private developers give way to the increasing dominance of state-owned and state-backed developers, says Magnus.

“In some ways, China’s property market is reverting to what it was before it became a fully privatised market. In other words, where the state basically built and allocated housing,” he adds.

As Chinese state institutions take on more of the role of private property developers, the narrower the role that international auditing companies will play, Magnus argues.

The prospect of a reduced role for foreign-linked firms plays into recent calls by Beijing for Chinese companies to switch to homegrown auditors once their contracts with Big Four firms end.

It forms part of the Government’s efforts to restrict who has access to Chinese companies’ data, after last year ordering state-owned enterprises and domestically listed companies to increase security checks on their auditors.

Although the Big Four’s global brand recognition and sophisticated reporting has made them more attractive than smaller Chinese rivals, the property crisis and tightening regulation could change this.

Yvette To, an assistant professor at the Hong Kong Polytechnic University, says: “The reputation of PwC (and the other three) might be undermined depending on how the PwC-Evergrande scandal unfolds.”

Yan was contacted for comment.