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Evergrande, PwC Investigated Over Failure to Report $2B Loan Scheme

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Evergrande Wanchai

China Evergrande’s collapse raises questions about PwC’s audit work (Source: Getty Images)

Hong Kong’s accounting watchdog has launched a probe into the property services arm of embattled developer China Evergrande and its erstwhile auditor PricewaterhouseCoopers, related to a RMB 13.4 billion ($2 billion) loan scheme that led to the developer firing its chief executive and chief financial officer last month.

The investigation is looking into the 2020 annual financial statements and the interim report for the first six months of 2021 for Evergrande Property Services Group Limited, as well as examining audit work carried out by PwC on the company’s 2020 annual accounts, according to a statement by Hong Kong’s Financial Reporting Council (FRC) on Monday.

The watchdog indicated in the statement that the new investigation is in addition to a probe initiated in October which examined the same records to determine if China Evergrande had truthfully reported its ability to continue as a going concern, as well as looking into PwC’s failure to note any material uncertainties regarding the developer’s going concern status in its audit of the 2020 accounts. That existing probe is now being expanded, the authority said.

The inspections add to the challenges facing Evergrande, the world’s most indebted real estate developer, after it last month fell short of delivering a promised plan to restructure $300 billion in debts. It also raises questions regarding PwC, which in 2021 ranked as the world’s second largest accounting firm and repeatedly gave Evergrande’s accounts a clean bill of health until the developer defaulted on its offshore bonds in December last year.

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Watchdog Raises Questions

Among the issues identified by the FRC was Evergrande’s public announcement on 22 July disclosing that $2 billion in bank deposits had been used as pledge guarantees by Evergrande Property Services.

Xia Haijun, CEO of Evergrande

Evergrande chief executive Xia Haijun was fired over his role in the loan scandal

The watchdog raised questions concerning how the Evergrande subsidiary and PwC had classified “restricted bank deposits and other loans” in company records, the measurement of pledge guarantees made, and disclosures of related party transactions.

Evergrande Group and its property services unit both acknowledged the FRC investigation in statements to the stock exchange late Tuesday.

In July, Evergrande forced its CEO Xia Haijun and CFO Pan Darong to resign, citing their involvement in a scheme through which loans secured by $2 billion of deposits belonging to the property services unit were channelled to the debt-wracked developer. Evergrande Real Estate had then used the funds to support its money-losing operations.

The sum pledged as collateral to lenders was subsequently seized when the subsidiary did not meet its obligations, wiping out most of the property services firm’s net cash.

The FRC cited the emergence of the loan scheme as necessitating an expansion of the review it had kicked off in October, around one month after scores of unpaid staff had been storming Evergrande’s Shenzhen headquarters and long-time financial backer Chinese Estates had moved to liquidate its stake in the developer.

Audit Work Examined

By signing off on Evergrande’s 2020 accounts, without raising issues regarding going concern status, PwC had indicated that the developer had the resources to continue operating for at least 12 months.

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By last September, however, Evergrande announced that it was at risk of defaulting on its debt amid plunging property sales, sending prices for its stock and bonds sharply lower. The developer started missing interest payments on its dollar bonds in November.

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PwC has served as Evergrande’s auditor since the developer listed on the Hong Kong exchange in 2009. After Evergrande’s troubles emerged, the accounting giant is said to have been gradually exiting its auditing work on behalf of private Chinese real estate groups as a liquidity crisis grips the property market.

A REDD report in March said PwC had resigned from its auditor role with several Chinese developers in advance of the release of their 2021 financial results, including Powerlong Real Estate, Ronshine China, and Hopson Development.

In late April, PwC resigned as the auditor of Guangzhou R&F Properties and ceased acting for Shimao Services Holdings, according to separate filings to the Hong Kong stock exchange.

Evergrande has yet to release its 2021 financial results, and the trading of its shares, as well as the shares of its Hong Kong-listed property services and electric vehicle units, has been suspended since March.

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