In a significant shakeup, PwC China have seen 66 partners exit their roles in the wake of a regulatory audit ban linked to the firm’s handling of the Evergrande audit, approving inflated financials. As a result, Chinese regulators imposed a RMB 441 million fine and a six-month business ban on PwC China. This was disclosed in updates to the finance ministry’s database of certified public accountants in December and January 2024 as reported by Arbiterz. The exact status of these former partners, whether they have left PwC entirely or transitioned to different roles within the firm, remains unclear.
Regulatory Consequences and Client Loss
The audit ban, which came with a fine exceeding $60 million, was due to PwC’s alleged failure to detect or report fraud in Evergrande’s financial statements. Evergrande, once China’s largest real estate developer, became embroiled in one of the country’s most significant financial scandals, with accusations of financial misstatements amounting to over $78 billion in inflated revenues between 2018 and 2020.
Chinese regulations prohibit state-owned and mainland-listed companies from engaging auditors who are fined within the last three accounting years. This has led to PwC losing substantial business from state-owned enterprises and the finance sector. According to Fan Zhongwen, an accounting professor at the City University of Hong Kong, the firm has seen a significant client exodus, particularly from these sectors.
Impact on Partnership Structure
The mainland China branch of PwC now lists 277 registered equity partners, a decrease from the previous count, indicating a reduction of over 20% from its partner ranks. This is the largest partner reduction in five years, signaling a significant restructuring effort following the regulatory slap. Before the ban in September 2023, PwC China boasted 1,048 partners across mainland China and Hong Kong.
Key Departures and Business Realignment
Among the notable exits are Raymund Chao, former chair of PwC Asia-Pacific and China, Gavin Chui, the former finance chief, Jim Chen, who managed state-owned enterprise clients, and Bur Chan, who led the audit division in northern China. Additionally, the Guangzhou branch, which faced direct repercussions from the Evergrande scandal, has seen multiple partner departures.
Strategic Response and Recovery Efforts
In response to these challenges, PwC has been actively reshaping its business model. A spokesperson from PwC noted, “Over the past several months, PwC China has been reshaping its business. As we have gone through this process, some partners have retired from the firm.” The firm has also brought in Hemione Hudson, a senior UK partner, to oversee operations in China, aiming to stabilize and potentially expand its client base among privately held companies and Hong Kong-listed entities like Alibaba and Tencent.
Competitive Shifts and Legal Battles
The fallout has not only affected PwC’s structure but also seen a shift in the competitive landscape with several former PwC partners joining rivals such as EY and RSM, following their clients. PwC also faces legal challenges, including a lawsuit from Evergrande’s liquidators, contributing to further financial and reputational costs.
Financial Impact
The financial repercussions are stark, with PwC China losing about two-thirds of its accounting revenues from mainland-listed clients in the first half of 2024, according to the Financial Times. This financial hit underscores the urgency for PwC to adapt and recover from the regulatory and reputational damage incurred.
The situation at PwC China illustrates the profound effects that regulatory actions can have on global firms operating in regulated industries, emphasizing the need for stringent internal controls and adherence to local laws to safeguard business continuity and client trust.
