Evergrande liquidators start legal action against PwC for ‘negligence’ in auditing work

PwC, the former auditor of China Evergrande Group, is facing legal action from the collapsed developer’s liquidators, the latest setback for the accounting firm.

The lawyers for the liquidators have started legal action against PwC and its mainland unit PwC Zhong Tian, according to Hong Kong court documents seen by Bloomberg. The lawsuit was filed in March and only recently made public.

Liquidators launched court proceedings against PwC’s “negligence” and “misrepresentation” in auditing work. The claim relates to PwC’s reports on Evergrande’s financial statements for 2017 and the first six months of 2018, according to the Bloomberg report.

That precedes the accounts for 2019 and 2020 when the developer overstated its sales by 564 billion yuan (US$78.9 billion) and profits by 92 billion yuan before its collapse, for which the China Securities Regulatory Commission slapped a fine of 4.2 billion yuan on Evergrande in March.

PwC Zhong Tian, a Shanghai-registered firm that is part of PwC’s global network, was the auditor of Hengda, Evergrande’s onshore unit, during this time. It served as Evergrande’s auditor for more than a decade until its resignation in January 2023 because of audit-related disagreements.

PwC declined to comment on the Post’s queries on Wednesday.

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Evergrande, the world’s most indebted developer with more than US$300 billion in liabilities, was ordered by a Hong Kong court in January to be wound up after some creditors ran out of patience to recover their debts. The court named Eddie Middleton and Tiffany Wong Wing-sze from consulting firm Alvarez & Marsal as liquidators.

“It is very common to see liquidators sue the auditors of the company to seek compensation for any negligence or failure in their auditing, to safeguard the interests of the creditors,” said Edmund Wong, a lawmaker for the accountancy sector in Hong Kong.

China’s Ministry of Finance and Hong Kong Accounting and Financial Reporting Council are assisting each other in their separate investigations of PwC’s audit work for Evergrande, based on an agreement signed between the two regulators in 2019, Kelvin Wong Tin-yau, chairman of Hong Kong’s audit regulator, said last month.

Evergrande’s liquidators are also seeking to claw back about US$6 billion worth of dividends and other benefits paid to founder Hui Ka-yan and several top executives based on misstated financial results before its collapse, according to an exchange filing on Monday.

PwC’s troubles have worsened since authorities on the mainland and in Hong Kong began investigating the auditing firm’s potential involvement in Evergrande’s financial fraud.

Since May, a number of state-owned firms have let go of PwC as their auditors, including China Merchants Group, China Cinda Asset Management, PetroChina and China Railway Group.

The liquidators also started court proceedings against property consultancy CBRE Group and Avista Valuation Advisory over valuation reports they produced for Evergrande and its subsidiaries in 2018, according to a separate court document seen by Bloomberg.

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