By Julie Zhu and Xie Yu
HONG KONG (Reuters) – Ernst & Young (EY) and KPMG have acquired more than half of PwC’s corporate clients in China who have fled the market-leading accounting firm as it faces regulatory scrutiny.
Chinese authorities have been investigating PwC’s role in the China audit Evergrande (HK:) Group, after the securities regulator accused the troubled property developer in March of a $78 billion fraud. PwC audited Evergrande for almost 14 years until early 2023.
The regulator has also asked some of PwC’s big country clients to put in auditors from at least April.
“Compared to previous years, what we have seen this year is certainly an unusual exodus of clients from PwC,” said Fan Zhongwen, a professor of accounting at the City University of Hong Kong.
A Reuters calculation based on filings shows more than 40 Chinese companies, many of which are state-owned companies or financial institutions, have either dropped PwC as auditors or canceled plans to hire companies in a few months.
Among them are some of PwC’s biggest clients, including Bank of China (BOC), China Life Insurance and PetroChina, which last year paid accounting fees of nearly 200 million yuan ($28 million), 64 million yuan and 46 million yuan, respectively. filings are shown.
PwC declined to comment for this story. EY and KPMG did not respond to requests for comment.
Last year, domestic regulators reiterated that state-owned and listed companies should be “extremely cautious” about hiring auditors who have received regulatory fines or other fines in the past three years.
The advisers and possible fines for PwC have worried some existing clients that they are considering alternatives, sources said.
“PwC’s client losses are likely to continue in the short term as Evergrande’s audit has caused significant damage to its reputation,” Fan said. “It will take time for PwC to restore its reputation.”
PwC’s main onshore arm PwC Zhong Tian LLP recorded revenue of 7.92 billion yuan in 2022, becoming China’s biggest auditor that year, followed by EY, Deloitte and KPMG, according to official figures.
The Big Four companies control 12% of companies listed on the Shanghai Stock Exchange and 5% of companies on the Shenzhen exchange as of this March, according to PwC’s calculations displayed on its website.
EY AND KPMG GAIN
A Reuters tally found that EY has won at least 12 clients from PwC, including state-backed financial institutions China Life, PICC and China Cinda Asset Management.
The total combined audit cost of 12 companies was more than 230 million yuan last year.
Among non-state companies, Hong Kong-listed Fuyao Glass and Shenzhen-listed Mindray Bio-Medical Electronics canceled plans to re-appoint PwC as auditors and hire EY in early August and May, respectively, according to filings.
With the company joining EY, it can reduce spending to attract new business and offer a 10%-20% reduction in audit fees to former PwC clients, two sources said.
It also plans to raise the salary rate by 10% for new employees hired through campus recruitment this fall as the company needs more staff to cope with the sudden increase in workload, said one of them.
KPMG has taken over at least 12 companies from PwC paying a total of 160 million yuan in audit fees by 2023.
They include China Telecom (NYSE: ) and China Taiping Insurance as well as eight subsidiaries of state-owned conglomerate China Merchants Group that released plans to PwC and to KPMG, according to the filing.
PwC’s biggest client, Bank of China, said in June it was speeding up its service agreement. It has not mandated a new auditor.
Other accounting firms that have taken over PwC’s audit clients include BDO’s land arm Lixin and domestic firm Pan-China, filings show.
Before the spotlight fell on PwC’s work for Evergrande, Deloitte’s Beijing branch in March last year was fined 211.9 million yuan by the Chinese authorities and its operations were suspended for three months after serious deficiencies were found in the audit of China’s Huarong Asset Management.
Penalty, although imposed on the Beijing Deloitte branch instead of Deloitte China, has left the auditor in a disadvantaged position to take on new clients, especially large state-backed, said two separate sources.
A Deloitte spokesperson cited a previous statement, which said: “To be clear, there is no suggestion from the MOF (Ministry of Finance) that Deloitte Hua Yong, the Beijing branch, or anyone else has done anything unethical,” adding that the firm is committed to “the highest standards high quality audit”.
The source declined to be named because he is not authorized to speak to the media.
($1 = 7.1476 renminbi)
($1 = 7.7883 Hong Kong dollars)
