(Yicai) April 24 -- PricewaterhouseCoopers' Hong Kong business has been ordered to pay HKD1.3 billion (USD190.2 billion) in fines and compensation by the city’s financial regulators following an investigation of its role as auditor of failed property giant China Evergrande Group.

PwC Hong Kong was fined HKD300 million (USD38.6 million) for its flawed audit work for Evergrande, while two former partners were fined a total of HKD10 million (USD1.3 million), the Hong Kong's Accounting and Financing Reporting Council announced yesterday. Furthermore, it banned PwC Hong Kong from taking on new audit clients for six months.

PwC Hong Kong also agreed to set aside HKD1 billion to compensate eligible independent minority shareholders of Evergrande, who were affected by the developer’s false and misleading financial results, the Hong Kong Securities and Futures Commission said the same day.

Chinese mainland regulators had already penalized PwC over the Evergrande case. In September 2024, the finance ministry imposed an administrative penalty of CNY116 million (USD14.9 million) on PwC -- one of the so-called Big Four accounting firms -- for violations in its 2018 audit of Evergrande Real Estate and confiscated related illegal gains.

Hong Kong’s penalties come after watchdogs there published a report following a four-year investigation into PwC's work relating to Evergrande's financial statements for 2019 and 2020.

PwC Hong Kong committed multiple accounting failures in its audit of Evergrande and its affiliates, including Evergrande Property Services and Evergrande New Energy Vehicle, with the misconduct in the Evergrande audit being “particularly egregious,” the report said.

Enabled by PwC Hong Kong's inadequate audit work, Evergrande overstated operating revenue by more than CNY564 billion (USD72.5 billion) and net profit by more than CNY92 billion (USD11.8 billion) between 2019 and 2020, disguising massive actual losses as huge profits, according to the report.

The report said that PwC Hong Kong had facilitated and enabled improper conduct by Evergrande's management to inflate the builder's reported profits and liquidity, failed to exercise professional skepticism as audit risks increased, suffered significant breaches of audit independence, and issued unqualified audit opinions without obtaining sufficient appropriate audit evidence, and in some cases with clear knowledge that such evidence was lacking.

For example, even though on-site inspections by PwC Hong Kong showed properties were still under construction, the auditor accepted Evergrande's claim that they were completed and ready for delivery without verification or additional procedures, ignoring clear that the developer had recognized revenue prematurely.

Due to multiple audit failures by PwC Hong Kong, Evergrande was also able to materially misstate the values of two key assets -- properties under development and completed properties held for sale -- through practices such as premature revenue recognition and inflated profit reporting, per the report. These two assets accounted for 60 percent and 61 percent of Evergrande's total assets in 2019 and 2020, respectively.

Editors: Tang Shihua, Futura Costaglione