PricewaterhouseCoopers (PwC) has been fined HK$300 million by the Hong Kong Institute of Certified Public Accountants for its audit of Evergrande, and its practice has been suspended for six months. Two former executives have also been fined.

The Hong Kong Institute of Certified Public Accountants (HKICPA) has taken disciplinary action against PricewaterhouseCoopers (PwC) and its two former partners and registered responsible persons, Mr. Kenneth Zhang (Mr. Zhang) and Mr. Jack Chau (Mr. Chau), for misconduct in the audit of the following comprehensive financial statements by PwC. This includes a fine of HK$300 million imposed on PwC, an immediate six-month practice restriction, and fines of HK$5 million each for Mr. Zhang and Mr. Chau. (i) EVERGRANDE Group (liquidation) (the Company)(formerly listed under stock code 03333, now delisted) and its subsidiaries for the years ended December 31, 2019 and 2020 (Evergrande Group Audit); (ii) EVERG SERVICES Group Limited (stock code: 06666) and its subsidiaries for the year ended December 31, 2020; and (iii) EVERGRANDE New Energy Vehicle Group Limited (stock code: 00708) and its subsidiaries for the year ended December 31, 2020 (Everg Vehicle Audit) ( collectively referred to as the Evergrande Audits). PwC was the reporting accountant for the Company's IPO in 2009 and had been the Group's auditor since then until early 2023. The Company is a large enterprise group operating mainly in property development and investments, property management, new energy vehicles, and other industries in mainland China. As of the fiscal years ended in December 2019 and 2020, the Group reported revenues exceeding RMB 477 billion and RMB 507 billion, and profits exceeding RMB 33 billion and RMB 31 billion, respectively. As of December 31, 2020, the Group's total assets exceeded RMB 2.2 trillion. After investigation, the HKICPA found several serious audit deficiencies by the reporting accountant in the Evergrande Audits, especially the Evergrande Group Audit - the reporting accountant had facilitated and encouraged management to inflate reported profits and liquidity of the Group. The HKICPA condemned PwC, Mr. Zhang, and Mr. Chau publicly and imposed fines totaling HK$310 million, including a HK$300 million fine on PwC and HK$5 million fines each on Mr. Zhang and Mr. Chau. It also imposed an immediate practice restriction on PwC, prohibiting it from taking on new clients for six months and issuing related reports, and directed PwC to report regularly on its remedial measures and provide progress reports to the HKICPA every three months for a period of twelve months. The HKICPA's investigation found that the reporting accountant had failed in several key areas in each of the Evergrande Audits, particularly in the Evergrande Group Audit, which can be summarized into five categories: (i) Facilitation and encouragement of inflating reported profits and liquidity of the Group: Despite on-site inspections showing that properties were still under construction and no verification or additional procedures were conducted, the reporting accountant accepted the Group's records indicating the properties were completed and ready for delivery, ignoring clear evidence of premature revenue recognition, and allowed the preparation of adjustments without a basis (i.e., unsupported accounting entries). (ii) Despite significant warning signals of increased risk of significant misstatement, failure to apply a professional skepticism attitude and failure to design and perform appropriate audit procedures in several key audit areas to obtain sufficient and appropriate audit evidence. These areas include revenue, properties under development, properties held for sale, restricted cash, going concern assessment, and the "equity refinance" (i.e., debt being misclassified as equity). (iii) Failure to maintain audit independence, including allowing management to influence audit procedures, such as allowing management to replace on-site inspection samples that were not wanting to be examined and even requesting management to select on-site inspection samples for audit testing, and bearing the responsibility for preparing the financial statements on management's behalf, which formed the basis of the Group's financial statements, equivalent to the reporting accountant auditing its own work. (iv) Several failures to comply with professional standards in various audit areas and procedures, including control testing, substantive testing, and detailed testing. (v) Failure to properly supervise and evaluate the quality control system of a member firm of the PwC network (involved firm). These deficiencies ultimately resulted in the premature recognition of revenue, inflated reported profits, and significant misstatements involving the two major assets: properties under development and properties held for sale, which were reported as a total of RMB 1,327.5 billion and RMB 1,406.4 billion for 2019 and 2020, respectively, representing 60% and 61% of the Group's total assets. The HKICPA concluded that PwC, Mr. Zhang, and Mr. Chau had failed to fulfill their professional responsibilities and had not met the reasonable standards of competent auditors, project quality control reviewers, and quality control system responsible persons. Therefore, the HKICPA considered PwC, Mr. Zhang, and Mr. Chau to have committed misconduct under the Professional Accountants Ordinance (Chapter 588) of Hong Kong. In determining appropriate disciplinary measures, the HKICPA considered all relevant factors, including the nature, seriousness, duration, frequency, and impact of the misconduct, as well as relevant aggravating and mitigating factors. Ms. Louisa Leung, head of the HKICPA's Disciplinary Department, stated: "This is the first time that the HKICPA has imposed practice restrictions on a registered public interest entity auditor. Given the serious nature and severity of the audit errors, as well as the significant deficiencies in governance and control, which have far-reaching and wide-ranging impacts on public interest, the imposition of substantial fines and practice restrictions is necessary and appropriate. These sanctions clearly reflect the HKICPA's firm stance against serious departures from professional standards and its commitment to robust enforcement actions." Dr. Patrick Sun, Chairman of the HKICPA, stated: "Upholding professional ethics and conducting high-quality audits are key to ensuring the credibility of financial reporting and maintaining market confidence. Despite the serious nature of the issues involved in this case, the HKICPA remains confident in the credibility and capabilities of the auditing industry in Hong Kong. The HKICPA acknowledges PwC's proactive remedial measures taken after the incident and expects the firm to continue to implement effective reforms and demonstrate a firm commitment to audit quality through its governance, leadership, and actions, meeting the expectations of the public for a leading firm."