Key clients desert PwC China as Big Four rivals circle

PwC China has been shunned by more high-profile clients in the country as the Big Four accounting firm braces for penalties related to its audit of distressed property developer Evergrande.

China Merchants Bank, a top retail lender, said it planned to change its accounting firm to EY from Deloitte for its 2024 onshore and offshore audit, according to an exchange filing on Monday. The appointment of Deloitte was a reversal of the bank’s decision last September to hire PwC China.

Also this week, China Railway Group, a major government-owned construction conglomerate, changed its 2024 auditor and internal control auditors to Deloitte from PwC, according to another filing. China Railway said this was due to the “company’s existing business status, development needs and overall audit needs”.

The two are the latest to ditch PwC in recent months, as companies take into consideration its uncertain future in China, with a leadership change and potential penalties being imposed by the authorities. Regulators also reiterated last year that state-owned enterprises and listed companies should not typically hire auditors who have suffered significant fines or other punishment within three years.

China’s securities regulator in March accused Evergrande of inflating its mainland revenues by almost $80bn in the two years before the developer defaulted on its debts in 2021. This was despite PwC giving the accounts a clean bill of health, leading to fears that it could face one of the largest fines ever imposed on a Big Four accounting firm in China, as well as other sanctions.

Earlier in May, the state-owned insurance group PICC said it had axed PwC as auditor after just three years, hiring EY instead. In the same week, the Shanghai-listed Eastroc Beverage cancelled a shareholder vote that would have reappointed the firm as its auditor, saying it needed to “further verify related matters surrounding the accounting firm”.

Chinese state-owned enterprises need to change their auditor once every eight years, according to current regulations. Listed companies need to change auditors once every 10 years at most. In recent weeks, Hong Kong-listed China Taiping Insurance, China Electronics Huada Technology, Qingdao Port International and Shanghai-listed National Silicon Industry Group and Tsingtao Brewery changed auditors from PwC as they reached these limits, according to exchange filings. PwC China had not reached the maximum eight or 10 years for PICC, China Railway or Eastroc. 

PICC, Eastroc, China Merchants Bank and China Railway did not respond to requests for further comment. PwC China declined to comment on client matters.

However, PwC China has been reappointed or won fresh business in some instances. China Merchants China Direct Investments chose the firm as auditor after its annual meeting last week, while Hong Kong-listed tech companies Meituan and Kanzhun both reappointed PwC as auditor at their recent board meetings. Listed companies still have months to decide on auditors for 2024 accounts.

In recent weeks, China rivals, including other Big Four accounting firms, have been looking at bids to win PwC clients, two people familiar with the matter said. 

PwC has a “very can-do attitude” in China, more than the other members of the Big Four, said one former China partner at the firm.

It also has a size advantage after its merger with Arthur Andersen in 2002, a senior figure from a rival firm said. PwC counts dozens of large Chinese companies among its clients, including another significant property developer Country Garden, which became distressed after China’s real estate liquidity crunch began in 2021.

PwC China now has a “heightened association risk” following its Evergrande audit, said the former partner. “Losing clients can trigger a domino effect,” the second person added.

Additional reporting by Stephen Foley in New York, Simon Foy in London and Wenjie Ding in Beijing