CSRC: PwC will be fined the maximum penalty of 2.97 billion yuan according to law, totaling 3.25 billion yuan in fines.

On September 13th, the China Securities Regulatory Commission issued a statement saying that PricewaterhouseCoopers (PwC) did not fulfill its duties diligently in auditing Evergrande's annual report and bond issuance, and will be punished according to the law. In accordance with the Securities Law of the People's Republic of China, PwC will be fined 297.4 million yuan, and a maximum fine of 2.97 billion yuan, totaling a penalty of 3.25 billion yuan. The relevant person in charge of the China Securities Regulatory Commission answered questions from reporters regarding the handling of the case. The original text is as follows: China Securities Regulatory Commission punishes PricewaterhouseCoopers for auditing Evergrande Recently, the China Securities Regulatory Commission issued an administrative penalty for PricewaterhouseCoopers not fulfilling its duties diligently in auditing Evergrande's annual report and bond issuance, confiscating all business income of 27.74 million yuan during the period of PricewaterhouseCoopers' involvement in the case, and imposing the maximum fine of 2.97 billion yuan, totaling a penalty of 3.25 billion yuan. In May 2024, the China Securities Regulatory Commission issued strict administrative penalties for fraudulent financial statements and fraudulent issuance by the corporate bond issuer Evergrande Real Estate, concluding that Evergrande Real Estate's 2019 and 2020 annual reports contained false records and that 5 corporate bond issuances constituted fraudulent issuances. PricewaterhouseCoopers was the audit firm for Evergrande Real Estate during the above-mentioned period, and the China Securities Regulatory Commission conducted an investigation to determine whether PricewaterhouseCoopers violated the Securities Law of the People's Republic of China during the period they provided audit services to Evergrande Real Estate and produced relevant documents. The investigation found that PricewaterhouseCoopers did not fulfill its duties diligently in auditing Evergrande Real Estate's 2019 and 2020 annual reports, violated multiple audit standards, failed to meet several audit requirements, had multiple audit procedures On procedures failure, loss of professional suspicion, incorrect professional judgments, and failure to detect large-scale financial fraud by Evergrande Real Estate. In review procedures, on-site visits failed, many buildings that were considered to be delivered were not completed, and some were still under construction when investigated, even being "a vacant lot." Sample selection was out of control, allowing Evergrande Real Estate to replace samples and exclude properties marked as "do not visit" from the visit sample. Document verification procedures were ineffective, with many homeowners signing confirmation dates later than the balance sheet date. Review procedures were neglected, with on-site visit procedure review work being more form than substance, and reviewers issuing review conclusions based on "trust" in the visitors. PricewaterhouseCoopers issued standard unqualified opinion audit reports for Evergrande Real Estate's 2019 and 2020 annual reports, and provided guarantees for the financial data truthfulness, accuracy, and completeness of 5 bond issuances by Evergrande Real Estate (20 Hengda 02, 20 Hengda 03, 20 Hengda 04, 20 Hengda 05, 21 Hengda 01), in its reports. PricewaterhouseCoopers' documents contained false information. PricewaterhouseCoopers' above-mentioned actions violated Article 163 of the Securities Law of the People's Republic of China and constituted the situation described in Article 213(3) of the Securities Law of the People's Republic of China as "not fulfilling its duties diligently and producing documents with false information", for which the China Securities Regulatory Commission ordered corrections and determined that all business income of 27.74 million yuan earned by PricewaterhouseCoopers in audits for 1 bond issuance, 2 annual reports, 2 semi-annual reviews, and 6 special purpose audits conducted for Evergrande Real Estate during the above-mentioned period was illegal income. It was confiscated in full accordance with the law, and a maximum fine of 277 million yuan was imposed as per the "one confiscation, ten fines" principle. Additionally, fines were imposed at the upper limit of 20 million yuan for 4 non-charged bond issuance audit services, totaling fines of 3.25 billion yuan for PricewaterhouseCoopers. During the case investigation process, the China Securities Regulatory Commission strengthened communication and cooperation with the Ministry of Finance, shared information, intensified joint efforts, and cooperated closely. For penalty discretion, the China Securities Regulatory Commission confiscated all business income of PricewaterhouseCoopers over the two years and imposed the maximum fine, totaling 4.41 billion yuan in fines in coordination with the Ministry of Finance; In terms of qualification penalties, given that the Ministry of Finance has already imposed an administrative penalty of suspending the business operations on PricewaterhouseCoopers, which includes the securities field, the China Securities Regulatory Commission will not separately impose administrative penalties on the suspension of securities services. Next, the China Securities Regulatory Commission will continue to resolutely implement regulatory measures with "long teeth and sharp edges," emphasizing strict and comprehensive supervision, continuing to intensify efforts in investigating and combating financial fraud and negligence by audit institutions on the capital market, fully safeguarding the stable operation of the capital market, protecting the legitimate rights and interests of investors, and providing strong guarantees for the high-quality development of the capital market. Officials of the China Securities Regulatory Commission answered questions from reporters about the administrative penalty case against PricewaterhouseCoopers. Recently, the China Securities Regulatory Commission made an administrative penalty decision regarding the case of PricewaterhouseCoopers Zhongtian Accounting Firm (Special General Partnership) (hereinafter referred to as PricewaterhouseCoopers) involving the negligence of the Evergrande Real Estate annual report and bond issuance audit work. Officials of the China Securities Regulatory Commission answered questions from reporters about the handling of the case and related information. Q: The China Securities Regulatory Commission recently imposed an administrative penalty on PricewaterhouseCoopers. Can you introduce the relevant details of the case? A: In recent years, the China Securities Regulatory Commission has maintained a high-pressure situation against illegal activities in the securities market, focusing on and cracking down harshly on financial fraud, fraudulent issuance, and other behaviors, and enhancing the responsibilities of issuers and intermediaries. Earlier, the China Securities Regulatory Commission imposed strict administrative penalties for the false records in Evergrande Real Estate's 2019 and 2020 annual reports and the fraudulent issuance of corporate bonds. PricewaterhouseCoopers was the audit firm for Evergrande Real Estate during the period mentioned above. The China Securities Regulatory Commission conducted in-depth investigations to determine whether PricewaterhouseCoopers violated the Securities Law of the People's Republic of China in providing audit services to Evergrande Real Estate and producing relevant documents. The investigation focused on key audit issues and diligent due care, gathering evidence through on-site investigations, comprehensive interviews, the collection of relevant documents and materials, and seeking support and assistance from relevant parties to efficiently complete the investigation. It was found that PricewaterhouseCoopers did not fulfill its duties diligently in auditing Evergrande Real Estate's 2019 and 2020 annual reports and bond issuance services, violating multiple audit standards and failing in multiple audit procedures. The audit work papers were inaccurate, with about 88% of observations in real estate projects not matching the actual situation, making the records in the work papers unreliable. On-site inspection procedures failed, as many buildings considered to have been delivered were mostly unfinished or even just empty land when the China Securities Regulatory Commission conducted real-time investigations. The sample selection was out of control, allowing Evergrande Real Estate to replace samples and exclude projects labeled "do not visit". Document review procedures were ineffective, with many homeowner signatures on delivery lists confirming dates later than the balance sheet date. Review procedures were not diligently observed, as the review of the on-site inspection procedures was largely a formality, with reviewers issuing conclusions based on trust in the inspection personnel. PricewaterhouseCoopers issued standard unqualified opinions for Evergrande Real Estate's 2019 and 2020 annual reports and provided guarantees for the truthfulness and accuracy of the financial data in 5 bond issuances by Evergrande Real Estate. However, PricewaterhouseCoopers' documents contained false records. PricewaterhouseCoopers' actions violated Article 163 of the Securities Law of the People's Republic of China and constituted the situation described in Article 213(3) of the Securities Law of the People's Republic of China as "not fulfilling its duties diligently and producing documents with false information." The China Securities Regulatory Commission ordered corrections and determined that all business income of 27.74 million yuan earned by PricewaterhouseCoopers in audits for 1 bond issuance, 2 annual reports, 2 semi-annual reviews, and 6 special audits conducted for Evergrande Real Estate during the above-mentioned period was illegal income. It was confiscated in accordance with the law, and a maximum fine of 277 million yuan was imposed as per the "one confiscation, ten fines" principle. Additionally, fines were imposed at the upper limit of 20 million yuan for 4 non-charged bond issuance audit services, totaling fines of 3.25 billion yuan for PricewaterhouseCoopers. During the case investigation process, the China Securities Regulatory Commission strengthened communication and cooperation with the Ministry of Finance, shared information, intensified joint efforts, and cooperated closely. For penalty discretion, the China Securities Regulatory Commission confiscated all business income of PricewaterhouseCoopers over the two years and imposed the maximum fine, totaling 4.41 billion yuan in fines in coordination with the Ministry of Finance; In terms of qualification penalties, given that the Ministry of Finance has already imposed an administrative penalty of suspending the business operations on PricewaterhouseCoopers, which includes the securities field, the China Securities Regulatory Commission will not separately impose administrative penalties on the suspension of securities services. Next, the China Securities Regulatory Commission will continue to resolutely implement regulatory measures with "long teeth and sharp edges," emphasizing strict and comprehensive supervision, continuing to intensify efforts in investigating and combating financial fraud and negligence by audit institutions on the capital market, fully safeguarding the stable operation of the capital market, protecting the legitimate rights and interests of investors, and providing strong guarantees for the high-quality development of the capital market.The records are inconsistent with the actual implementation, and the draft record content is extremely unreliable. Secondly, the on-site visit procedure is ineffective, and the on-site visit found that most of the properties that were deemed ready for delivery were actually not completed. Some were still under construction or even just an empty lot when we conducted an on-site investigation. Thirdly, the range of sample selection is out of control, allowing Evergrande Real Estate to replace samples and exclude projects labeled as "not allowed to visit" from the on-site visit samples. Fourthly, the document checking procedure is faulty, for example, verifying the handover list without any abnormalities, when in fact, many owners signed to confirm the date after the balance sheet date. Fifthly, the rechecking procedure is neglected, the on-site visit procedure's rechecking work is confined to formality, and the rechecking personnel completely rely on "trust" in the on-site visit personnel to issue rechecking conclusions. According to the Securities Law, I am responsible for the regulation of the trading activities of Evergrande Real Estate Company's bond issuance and its auditing firm PwC Securities Services. Investigating Evergrande Real Estate for fraudulent issuance, illegal information disclosure, and PwC's lack of diligence in their duties is not only within my authority, but also my responsibility.Evergrande Group is a foreign legal entity listed on the stock exchange in Hong Kong, China. Evergrande Group's issuance of securities and listing for trading in Hong Kong, China, as well as the auditing agency's professional conduct, are subject to the laws of Hong Kong, China. We have noted that the relevant regulatory authorities in Hong Kong, China, have recently stated that they are conducting an independent investigation into the auditing of Evergrande Group's auditing agency. If the relevant authorities in Hong Kong, China, make a request in the future, I will coordinate with the Ministry of Finance through cross-border law enforcement cooperation mechanisms and channels to actively assist in the investigation and handling of any relevant illegal activities. This article was selected from the official website of the China Securities Regulatory Commission. Editor: Jiang Yuanhua.