PwC Faces Major Overhaul in China Amid Evergrande Fallout

PricewaterhouseCoopers (PwC) is confronting significant turmoil in China due to its decade-long association with the beleaguered real estate developer China Evergrande Group. Regulatory probes into PwC's audit of Evergrande have precipitated a mass departure of clients, compelling the firm to implement stringent cost-cutting measures and organizational restructuring.

MASSIVE STAFF REDUCTIONS

In a drastic response to the scrutiny, PwC is contemplating cutting up to 50% of its financial services auditing staff in China. This potential reduction, affecting approximately 1,000 employees in Beijing and Shanghai, follows a regulatory investigation into PwC's audit role concerning Evergrande's $78 billion fraud. As of last September, PwC's overall workforce in mainland China includes 781 partners and nearly 19,000 employees.

SIGNIFICANT PAY CUTS FOR PARTNERS

Additionally, PwC has initiated substantial pay cuts for its Chinese partners. Senior partners are expected to see their compensation halved, while other partners will face 20% to 40% reductions. These austerity measures underscore the gravity of the situation as PwC endeavours to stabilize its operations amidst declining revenues and escalating regulatory pressure.

DEPARTING CLIENTS

PwC's association with Evergrande, which defaulted on $300 billion in debt in 2021 and was ordered to liquidate earlier this year, has led to significant reputational damage. The firm had audited Evergrande for nearly 14 years until early 2023. Following the revelations of Evergrande's financial misrepresentations, more than 30 Chinese listed companies, predominantly state-owned enterprises and financial institutions, have terminated their engagements with PwC.

REGULATORY FINDINGS AND POTENTIAL FINES

The Chinese regulatory bodies have been particularly stringent, with the China Securities Regulatory Commission uncovering that Evergrande had overstated its revenue by 564 billion yuan ($78 billion) over two years. Consequently, PwC faces potential fines exceeding 1 billion yuan ($138 million) and possible suspension of operations at certain mainland offices.

LEADERSHIP CHANGE

Amid these challenges, PwC has appointed Daniel Li as the new head of its China operations, effective July 1. Li, a seasoned executive with over 30 years at PwC, succeeds Raymund Chao, who retired on June 30. Li's extensive experience in initial public offerings, mergers and acquisitions, and cross-border transactions positions him to steer PwC through this tumultuous period.

FUTURE PROSPECTS

Despite the adverse circumstances, PwC remains a significant player in China's auditing sector, with its onshore arm, PwC Zhong Tian LLP, reporting revenues of 7.92 billion yuan ($1.1 billion) in 2022, making it the top-earning auditor in the country. However, with the ongoing investigations and loss of significant clients, PwC's future in China hangs in the balance as it seeks to regain trust and stabilize its business operations amidst the Evergrande fallout.

SOURCE/RECOMMENDED READ: 

• Exclusive: PwC weighs halving of China financial services audit staff, say sources | Reuters
• PwC Slashes China Partners' Pay by 50% Amid Evergrande Fallout (asiafinancial.com)
• PwC names new China head amid Evergrande audit scrutiny - Nikkei Asia