In recent months, over 30 Chinese companies have severed ties with a prominent auditor under significant pressure from Beijing. This shift is part of a larger strategy aimed at reducing Western influence and promoting local auditors.
As Beijing intensifies its scrutiny of foreign auditing firms, numerous state-owned enterprises have opted to end their longstanding relationships. This move follows the fallout from a major scandal involving one of China’s largest property developers.
Beijing’s Influence on Audit Firms
Over the past few months, the Chinese Ministry of Finance has issued ‘window guidance’—informal, verbal instructions—to some of the largest state-owned financial institutions. These directives have urged them to terminate their relationships with PwC.
This guidance has led to prominent clients such as Bank of China, China Life Insurance, PICC, China Taiping Insurance, and China Cinda Asset Management ending their engagements with the auditing giant.
PwC’s Financial Impact
Recent corporate filings reveal that these departures have resulted in PwC losing over 30 companies listed on China’s stock market in 2023 alone. These exits have caused significant financial losses for the firm, amounting to hundreds of millions of dollars in lost fees.
For example, Bank of China paid PwC $28 million last year for auditing services. In response to these lost revenues, PwC China has initiated cost-cutting measures, including reducing headcount and partner pay.
Regulatory Pressure
The Ministry of Finance holds significant shares in many of China’s largest financial institutions and regulates auditors. It is believed to be the driving force behind these changes, however, PwC partners in China remain uncertain whether these client losses are regulator-driven or independent decisions by the companies.
PwC China has refrained from commenting on the situation, adding to the uncertainty surrounding the firm’s future in the region.
PwC China is the third-largest network firm within the group, with around 20,000 employees. The firm has been under intense scrutiny for its 14-year tenure as Evergrande’s auditor.
Evergrande Scandal
Evergrande, once China’s largest property developer, defaulted on over $300 billion in debt in 2021. This default caused widespread market panic and resulted in a series of defaults across the property sector.
Chinese regulators declared this year that Evergrande had committed fraud by overstating its sales by tens of billions of dollars between 2019 and 2020, ordering the company to be liquidated.
Broader Strategy by Beijing
In 2022, the Ministry of Finance advised Chinese firms to be ‘extremely cautious’ about hiring auditors with recent fines or penalties. This directive is part of a broader strategy by Beijing to reduce reliance on the Big Four global accounting firms.
The push aims to promote local auditors from China or Hong Kong, enhancing data security and diminishing Western influence.
By promoting local auditors, China seeks to ensure greater control over financial data, potentially limiting the risk of sensitive information being exposed to foreign entities.
PwC’s Response and Future Outlook
PwC China’s response has included various cost-cutting measures, such as reducing staff and partner pay, to mitigate the impact of these lost clients.
The firm is navigating a complicated landscape, balancing between adhering to local directives and maintaining its global standards.
The long-term outlook for PwC in China remains uncertain, especially if the regulatory pressures continue to intensify.
Conclusion
The departure of over 30 Chinese firms marks a significant shift in the auditing landscape, influenced heavily by Beijing’s regulatory stance.
As China seeks to diminish Western influence in its financial sector, the impact on firms like PwC will be profound, necessitating strategic adjustments to sustain their operations in the region.
In summary, Beijing’s pressure has significantly affected PwC’s client base, leading to substantial financial losses and necessitating strategic readjustments.
The broader move towards local auditors signifies China’s intent to reduce foreign influence, promoting greater control over domestic financial data and operations.
