PwC’s China arm lost about two-thirds of its accounting revenue from mainland Chinese-listed clients this year, underscoring the scale of the fallout from the audit of bankrupt real estate group Evergrande.
PwC Zhong Tian, the Chinese entity commonly known as PwC China, has lost at least RMB561 million ($77 million) out of the RMB869 million in 2023 from audit revenues of Chinese companies listed on Chinese stock exchanges in the past six months, according to Chinese database Wind Info.
Major clients including state-owned China Life Insurance, which paid an audit fee of Rmb65 million in 2023, and China Railway Group, which paid Rmb33 million last year, are among more than 20 mainland Chinese-listed companies that have switched firms as PwC braces for a fine over its Evergrande audit.
The exodus shows that even the threat of fines is changing the audit landscape in China. Client losses were significant enough to force layoffs and trigger cost-cutting measures in the country.
The 107 companies listed in mainland China account for a portion of PwC China’s total revenue in 2023. According to the Chinese Institute of Certified Public Accountants, the unit generated Rmb7.9 billion in 2022, of which Rmb6.8 billion was recorded as accounting revenue from clients in mainland China, Hong Kong, the US and other markets.
The accounting firm has faced 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 departing clients.
“It is not typical of PwC, nor is it common practice among its main rivals such as KPMG, EY or Deloitte,” he said. “The company documents 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 the loss of clients, but internal communications seen by the Financial Times show that executives are trying to limit the fallout. The firm told partners in a recent email to “stay calm” and “prepare for the turbulence ahead.”
Chinese regulations require state-owned and mainland-listed companies to retire and rotate their auditors every eight and 10 years respectively. But PwC has come under intense pressure following the collapse of Evergrande in 2021 and the authorities’ subsequent scrutiny of the real estate sector.
PwC China, which audited Evergrande for 14 years until 2023 and gave the developer a clean slate, is expected to face a fine after China’s securities regulator accused the developer’s Chinese arm of inflating revenues by nearly $80 billion in 2019 and 2020 and fined it $577 million in May.
According to data from the CICPA, PwC was China’s largest accounting firm by revenue in 2022 and a preferred auditor for central government-owned companies, followed by EY.
Wind data shows that the Big Four firms paid 32 percent of the total audit fees for companies listed in mainland China, while they audited only 7 percent of the companies themselves.
Mainland-listed companies are those with A-shares, which are denominated in renminbi and traded on exchanges in mainland China. It does not include H-shares or B-shares listed in Hong Kong, which are traded in foreign currencies.
According to PwC China, losses of A-share listed companies in the past six months accounted for 7 percent of total accounting income in 2022.
The expected fine comes after PwC China made its first Asia Pacific leadership change in nine years in July, with Daniel Li replacing Raymund Chao, chairman of PwC Asia Pacific and China. Li also oversees separate legal entities in Hong Kong and Macau.
PwC China recently laid off staff in Guangzhou, Shenyang and Shanghai, two people familiar with the matter said. PwC Zhong Tian had 23 offices and 1,693 certified public accountants in 2022.
In Shanghai, most staff at PwC China’s financial services division were ordered earlier this month to take career breaks between July and August, with salaries cut by about 80 percent, a source familiar with the decision said.
Staff in Hong Kong have also been asked to take several days of unpaid leave over the past year, two sources familiar with the situation said.
PwC China said it is “making some adjustments to better optimize our organizational structure and align with market demands,” in light of changes in the external environment.
Other Big Four firms and leading professional services firms, such as Lixin, part of the BDO network, and the Chinese arm of RSM, are taking advantage of the turmoil at PwC by hiring former employees and acquiring clients.
Many PwC employees, including partners in Hong Kong and China, have been actively seeking other opportunities and planning to leave the firm in recent weeks, according to a senior partner in China at one of PwC’s rivals.
“I believe the other big [firms] will benefit from it in the short to medium term,” the partner said.
Additional reporting by Wenjie Ding in Beijing
This story has been updated to reflect that mainland-listed companies refer to companies with A-shares