CORRECTED-BREAKINGVIEWS-Evergrande fraud can draw yet more PwC blood

By Ka Sing Chan

HONG KONG, April 24 (Reuters Breakingviews) - PwC may appear to be getting off lightly for its role in the China Evergrande scandal. On Thursday, two Hong Kong regulators slapped its local unit with a HK$1.3 billion ($166 million) fine and a six-month ban on signing new clients. But a bigger risk looms: the lawsuit being brought by Evergrande’s liquidators, Eddie Middleton and Tiffany Wong of Alvarez & Marsal. If that looks set to grind on for years, PwC would be best to settle quickly.

Securities watchdogs in the Asian financial hub on Thursday said PwC had agreed to set aside HK$1 billion to compensate minority shareholders of Evergrande, whose market value peaked above $50 billion in 2017 before collapsing into court‑ordered liquidation in 2024 with $300 billion of liabilities. The city’s accounting regulator also slapped PwC with a HK$300 million fine along with the partial ban, citing failures to flag falsified Evergrande accounts in 2019 and 2020.

This marks a rare precedent of an auditor of a defunct company compensating minority shareholders, who normally rank well behind creditors in any recovery. Those owed money, though, are soon to have their day in court, with the Alvarez and Marsal duo’s case due for a public hearing on May 18.

There is no guarantee the liquidator will win in court. PwC has neither admitted liability nor agreed with Hong Kong regulators’ conclusions, despite accepting the penalties. One thing seems certain: Evergrande’s sheer complexity and its messy cross‑border winding-up would ensure a long, grinding legal fight. That would keep PwC mired in negative headlines and compound its reputational damage. Contracts with blue‑chip clients such as CK Hutchison 0001.HK and HSBC HSBA.L are at stake, not least as shareholders in public companies often vote to reappoint auditors every year.

PwC has already paid a record 441 million yuan ($62 million) fine to mainland authorities in 2024 for its Evergrande audit debacle. Since then, it has been rebuilding ties with Beijing authorities, drawing on a relationship that stretches back to its role in state‑owned enterprise reforms in the 1980s.

The coordinated timing of Hong Kong’s sanctions, which landed less than a month after former Evergrande Chair Xu Jiayin pleaded guilty to financial crimes, suggests regulators are content to move on. PwC must surely want the same. Unless it gets lucky and the judge throws out the case next month, the best option would be to strike a swift and comprehensive settlement.

CONTEXT NEWS

Hong Kong’s Securities and Futures Commission on April 23 said PricewaterhouseCoopers Hong Kong will set aside HK$1 billion ($128 million) to compensate minority shareholders of property developer China Evergrande. An earlier investigation showed the auditor had committed serious breaches of its professional duties related to Evergrande’s falsified 2019 and 2020 financial statements.

Also on April 23, the city's Accounting and Financial Reporting Council said it will impose a HK$300 million fine and forbid PwC from taking on new clients for six months.

In March 2024, China Evergrande liquidators Eddie Middleton and Tiffany Wong of Alvarez and Marsal filed a lawsuit in Hong Kong against PwC. The first public court hearing will take place on May 18.