(Yicai) April 24 -- PricewaterhouseCoopers' subsidiary in Hong Kong was ordered to pay a total of HKD1.3 billion (USD190.2 billion) in fines and compensation by Hong Kong regulators for the auditing giant's involvement in China Evergrande Group's financial fraud.

PwC Hong Kong will pay a HKD300 million (USD38.6 million) fine for its flawed audit work for Evergrande, Hong Kong's Accounting and Financing Reporting Council announced yesterday. Moreover, the firm received a six-month practice restriction, and two former partners were fined a total of HKD10 million (USD1.3 million).

Moreover, PwC Hong Kong was required to set aside HKD1 billion to compensate eligible independent minority shareholders of Evergrande, who were affected by the Chinese property developer's false and misleading financial results, the Hong Kong Securities and Futures Commission announced yesterday.

PwC Hong Kong facilitated and enabled improper conduct by Evergrande's management to inflate the company's reported profits and liquidity, failed to apply professional skepticism amid heightened audit risks, 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, Hong Kong's Accounting and Financial Reporting Council said in the investigation report released yesterday.

For example, even though on-site inspections by PwC Hong Kong auditors showed relevant properties were still under construction, the firm accepted Evergrande's claim that the properties were completed and ready for delivery without verification, ignoring clear evidence of premature revenue recognition.

Due to multiple audit failures by PwC Hong Kong, Evergrande was 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.

Enabled by PwC Hong Kong's inadequate auditing 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.

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 noted.

Chinese mainland regulators had already penalized PwC over the Evergrande case. In September 2024, China's Ministry of Finance imposed an administrative penalty of CNY116 million (USD14.9 million) on PwC for violations in its 2018 audit of Evergrande Real Estate and confiscated related illegal gains.

Editors: Tang Shihua, Futura Costaglione