By Julie Zhu and Xie Yu
HONG KONG (Reuters) -Chinese regulators on Friday hit PwC's auditing unit in mainland China with a six-month business suspension and a record fine of 441 million yuan ($62 million) over the firm's audit of troubled property developer China Evergrande Group.
Delivering a strong rebuke to the Big Four firm, China's securities regulator said its investigation found that PwC Zhong Tian LLP "turned a blind eye" to and "even condoned" Evergrande's fraud while auditing the annual results of the developer's onshore flagship unit - Hengda Real Estate - in 2019 and 2020.
"PwC has seriously eroded the basis of law and good faith, and damaged investors' interest," said the China Securities Regulatory Commission (CSRC) in a statement.
Chinese authorities have been examining PwC's role in Evergrande's accounting practices since the CSRC accused the developer in March of a $78-billion fraud over a period of two years through 2020.
PwC audited Evergrande for almost 14 years until early 2023.
The business suspension and fines are the toughest ever penalty received by a Big Four accounting firm in China, and come against the backdrop of an exodus of clientele and layoffs at the firm in recent months.
The move is set to cloud PwC's prospects in the world's No.2 economy. PwC Zhong Tian, the registered accounting entity and the main onshore arm of PwC in China, was the country's top-earning auditor in 2022, according to the latest official data.
"The cost is enormous in reputation, affecting the ability to get new business in China beyond the fine. In the short run, PwC's market share will decline in China, benefiting the other big three auditing firms," said Gary Ng, Asia-Pacific senior economist at Natixis.
As part of the penalties, PwC Zhong Tian will be barred from signing off on certain key documents for clients in mainland China such as results and IPO applications in the next six months.
The business suspension will also affect the unit as a whole from taking on new state-owned or domestically-listed clients in the next three years, in accordance with Chinese regulations.
Last year, domestic regulators reiterated state-owned firms and mainland China-listed companies should be "extremely cautious" about hiring auditors that have received regulatory fines or other penalties in the past three years.
"We are disappointed by PwC Zhong Tian's audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network," PwC network, the alliance of PwC's global member units, said in a statement.
The firm said as part of its "accountability and remedial actions", PwC China's territory senior partner Daniel Li had stepped down and Hemione Hudson, the firm's global risk and regulatory leader, had taken over from him.
'CONDONED FRAUD'
The business suspension was imposed by China's Ministry of Finance (MOF) which also ordered the closure of PwC Zhong Tian's branch in Guangzhou - which according to sources led the audit work on Evergrande.
The ministry also imposed a fine of 116 million yuan on the firm for its auditing failure of Hengda in 2018, according to an MOF statement.
The CSRC said in its statement it had fined PwC Zhong Tian 325 million yuan, close to the total amount of penalties imposed by the regulator on over 50 auditors in the past three years.
The CSRC probe found that 88% of PwC's observation records on Evergrande's real estate projects in 2019 and 2020 were inauthentic or untrue, making its audit working papers "severely unreliable".
The regulator pointed out PwC's on-site inspection of the developer's properties failed to flag problems - some residential properties that the auditor considered ready for home deliveries still remained as "vacant land" when the CSRC inspected later.
PwC also deliberately excluded properties that Evergrande marked as "not allowed to visit" from audit samples, it added.
"PwC has, to a certain extent, covered up and even condoned Evergrande's financial fraud and fraudulent issuance of corporate bonds," said the CSRC statement. "It (PwC) has to be severely punished according to law."
A Reuters calculation based on filings showed more than 50 Chinese firms have in recent months either dropped the firm as their auditor or cancelled plans to hire it, following the launch of the regulatory investigation into the firm.
PwC had about 400 Chinese clients, listed at home or in offshore markets such as Hong Kong or New York, in March this year, including tech behemoths Alibaba and Tencent.
($1 = 7.0942 Chinese yuan renminbi)
(Reporting by Julie Zhu and Xie Yu in Hong Kong; Additional reporting by Ziyi Tang and Beijing newsroom; Editing by Sumeet Chatterjee and Mark Potter)
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