PwC loses two-thirds of accounting revenues from clients listed in mainland China

PwC’s China unit has lost about two-thirds of its accounting revenues from mainland-listed clients this year, exposing the scale of the fallout from its audit of failed property giant Evergrande.

PwC Zhong Tian, the mainland entity commonly known as PwC China, has lost at least Rmb561mn ($77mn), out of Rmb869mn in 2023 auditing income from Chinese companies listed on mainland exchanges in the past six months, according to China database Wind Info.

Major clients, including state-owned China Life Insurance, which paid an accounting fee of Rmb65mn in 2023, and China Railway Group, which paid Rmb33mn last year, are among more than 20 mainland-listed companies that have switched firms as PwC braces for a fine in connection with its Evergrande audit.

The exodus shows that even the threat of penalties is reshaping the audit landscape in China. The client losses have been significant enough to force lay-offs and trigger cost-cutting measures in the country.

The 107 mainland-listed companies represent part of PwC China’s total revenue in 2023. The unit made Rmb7.9bn in 2022, of which Rmb6.8bn was booked as accounting income from clients in the mainland, Hong Kong, the US and other markets, according to the Chinese Institute of Certified Public Accountants.

The accounting firm has suffered “an unusual exodus” of mainland clients this year, said Fan Zhongwen, an accounting professor at City University of Hong Kong, who has independently analysed PwC China’s client departures.

“It is not typical for PwC, nor is it common among its main rivals like KPMG, EY or Deloitte,” he said, “Company filings were vague in stating the reasons but changes are apparently being made in the wake of the Evergrande scandal.”

PwC China declined to comment on losing clients, but internal communications seen by the Financial Times show executives trying to contain the fallout. The firm told partners in a recent email that they should “stay calm” and “prepare to embrace the turbulence that is coming”.

Chinese regulations require state-owned enterprises and mainland-listed companies to retire and rotate auditors every eight and 10 years, respectively. But PwC has come under acute pressure following Evergrande’s collapse in 2021 and subsequent scrutiny of the property industry from authorities.

PwC China, which audited Evergrande for 14 years until 2023 and gave the developer a clean bill of health, is expected to be penalised after China’s securities regulator accused the developer’s mainland business of inflating revenues by almost $80bn over 2019 and 2020 and fined the company $577mn in May.

PwC was China’s biggest accounting firm in terms of revenues and was a preferred auditor for central government-owned firms in 2022, followed by EY, according to data from the CICPA.

The Big Four firms took 32 per cent of total audit fees of mainland-listed companies, while auditing just 7 per cent of the companies, Wind data shows.

The expected fine comes after PwC China in July changed its Asia Pacific leadership for the first time in nine years, with Daniel Li replacing Raymund Chao, chair of PwC Asia Pacific and China. Li also oversees separate legal entities in Hong Kong and Macau.

PwC China has laid off staff in Guangzhou, Shenyang and Shanghai recently, according to two people familiar with the matter. PwC Zhong Tian had 23 branches and 1,693 certificated accountants as of 2022.

In Shanghai, most staff in PwC China’s financial services department were instructed earlier in the month to take a career break between July and August with a pay cut of about 80 per cent, one person familiar with the decision said.

Staff in Hong Kong have also been asked to take several days unpaid leave over the past year, said two people familiar with the situation.

PwC China said it was “making some adjustments to better optimise our organisational structure to align with market demand,” in light of changes to the external environment.

Other Big Four firms and leading professional services firms — such as Lixin, which is part of BDO’s network, and RSM’s China unit — are benefiting from the turbulence at PwC by hiring its former employees and taking over its clients.

Many PwC employees including partners in Hong Kong and mainland China have been actively looking for other opportunities and planning their exit from the firm in recent weeks, said a senior China-based partner at one of PwC’s rivals.

“I believe the other big [firms] will benefit in the short to medium term,” said the partner.

Additional reporting by Wenjie Ding in Beijing