Hong Kong Securities and Futures Commission reached an agreement with PwC Hong Kong to set aside 1 billion Hong Kong dollars for shareholder compensation in the Evergrande incident.

The Securities and Futures Commission (SFC) of Hong Kong has reached an agreement with PricewaterhouseCoopers Hong Kong (PwC Hong Kong), whereby PwC Hong Kong agreed to set aside HK$1 billion to compensate eligible independent minority shareholders of EVERGRANDE Group. The detailed terms of the compensation process will be announced in due course. Meanwhile, independent minority shareholders of EVERGRANDE and intermediary organizations are required to maintain records of transactions involving the company's shares in order to make claims for compensation. Intermediary organizations should also provide reasonable assistance to these shareholders in making claims. PwC Hong Kong had audited EVERGRANDE's financial statements for the financial years ended December 31, 2019, and December 31, 2020 (the 2019 and 2020 financial years, respectively). The SFC's investigation focused on EVERGRANDE's performance announcements and annual reports, revealing significant overstatement of annual revenue and profits for the two financial years in question. The SFC also reviewed PwC Hong Kong's role and concluded that due to EVERGRANDE disseminating false and misleading financial information, as well as the auditors severely breaching their professional responsibilities, market misconduct had occurred. Under the agreement reached, the SFC and PwC Hong Kong agreed that, without admission of any legal liability, the matter will be fully and finally resolved, and the SFC will not take any further action against PwC Hong Kong, provided that PwC Hong Kong fulfills the terms of the agreement. False and misleading financial statements of EVERGRANDE The SFC determined that EVERGRANDE's annual reports and performance announcements for the 2019 and 2020 financial years contained materially false or misleading information, particularly in revenue recognition. EVERGRANDE prematurely recognized property sales revenue before completion and delivery to buyers, manipulating its annual revenue and profits to significantly inflate audited annual revenue and profits. The SFC's conclusion was that for the 2019 and 2020 financial years, EVERGRANDE overstated audited annual revenue by RMB 213.9 billion or 44.79% and RMB 350.2 billion or 69.03%, respectively. Consequently, the audited annual profits of RMB 33.5 billion and RMB 31.4 billion for the 2019 and 2020 financial years, respectively, should have been losses of RMB 7.12 billion and RMB 19.9 billion. Role of the auditors and deficiencies For the 2019 and 2020 financial years, PwC Hong Kong served as EVERGRANDE's auditors, with PricewaterhouseCoopers Zhong Tian Certified Public Accountants LLP (a special general partnership) assisting PwC Hong Kong in auditing EVERGRANDE's financial statements. Although PwC Hong Kong did not admit to the following, the SFC believed that PwC Hong Kong: - Was involved in disclosing false or misleading information as defined in section 277 of the Securities and Futures Ordinance while serving as EVERGRANDE's auditors; - Did not maintain independence as auditors during the audits of EVERGRANDE's financial statements for the 2019 and 2020 financial years; - Did not approach the audits with sufficient and professional skepticism in audit planning, execution, and addressing audit irregularities; - Did not design and execute effective site visits to determine the construction and delivery status of properties for proper revenue recognition; - Tacitly allowed EVERGRANDE's management to manipulate audit samples and on-site visits, leading to concealment of premature revenue recognition; - And did not adequately verify the accuracy of relevant documentary evidence and records. In pursuit of the ultimate goal of seeking compensation for shareholders, the SFC concluded that reaching an agreement with PwC Hong Kong was in the best interests of EVERGRANDE's independent minority shareholders. According to the agreement, HK$1 billion has been set aside for distribution to these independent minority shareholders as compensation under a process overseen by an independent administrator. The detailed terms of the compensation process will be announced in due course. Ms. Ashley Alder, CEO of the SFC, stated, "This is the first time that the auditors of a collapsed company have compensated independent minority shareholders who suffered losses due to false and misleading financial statements. This sends a clear message to the auditing profession and the investing public: the SFC is committed to holding listed companies and their auditors accountable for the accuracy and reliability of financial information to maintain a fair and orderly market and protect investors' interests." Mr. Michael Duignan, Executive Director of the Enforcement Division of the SFC, said, "Auditors not only play a necessary role as gatekeepers but are also a crucial element in strengthening public confidence in Hong Kong's financial system. When auditors actively undermine the monitoring measures designed to ensure the accuracy of reporting, it not only impacts investor confidence and undermines the integrity and stability of the market, but also undermines the foundation of Hong Kong's successful accountability system. In such circumstances, the SFC will take action to protect the interests of affected shareholders."