Evergrande and PwC investigated over $2 billion loan scheme

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

Hong Kong’s accounting watchdog has launched an investigation into the property services arm of embattled developer China Evergrande and its former auditor PricewaterhouseCoopers, over a 13.4 billion RMB ($2 billion) loan scheme that has led the developer to fire its CEO and CFO last month.

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

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The watchdog said in the statement that the probe represents an extension of an investigation launched in October that reviewed the same records to determine whether China Evergrande had honestly reported its ability to continue in business, as well as the review of PwC’s inability to note any material uncertainties regarding the developer’s going concern in its audit of the 2020 accounts.

The inspections add to the challenges facing Evergrande, the world’s most indebted property developer, after failing last month to deliver a promised plan to restructure $300 billion in debt. It also raises questions about PwC, which in 2021 ranked second among accounting firms in the world and repeatedly gave Evergrande’s accounts a healthy bill of health until the developer defaulted on its offshore bonds in December last year.

The watchdog raises questions

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

Xia Haijun, CEO of Evergrande

Evergrande chief executive Xia Haijun fired for role in loan scandal

The watchdog raised questions about how the Evergrande subsidiary and PwC had classified ‘bank deposits and other restricted loans‘ in the company’s records, the measurement of pledge guarantees granted and the disclosure of transactions between related parties.

In July, Evergrande forced its CEO Xia Haijun and its chief financial officer Pan Darong to resign, citing their involvement in a scheme by which loans secured by $2 billion in deposits owned by the real estate services unit were funneled to the indebted promoter. Evergrande Real Estate then used the funds to support its loss-making operations.

The sum given as collateral to the lenders was later seized when the subsidiary failed to meet its obligations, wiping out most of the real estate services company’s net cash.

The FRC cited the emergence of the loan program as requiring an extension of the review it launched in October, about a month after dozens of unpaid staff stormed Evergrande’s headquarters. in Shenzhen and long-time financial backer Chinese Estates has decided to liquidate its stake in the developer.

Audit work reviewed

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

Last September, however, Evergrande announced it was at risk of defaulting on its debt amid plummeting property sales, sending its stock and bond prices plummeting. The developer began missing interest payments on its dollar bonds in November.

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PwC has been Evergrande’s auditor since the promoter listed on the Hong Kong Stock Exchange in 2009. After Evergrande’s problems emerged, the accountancy giant reportedly phased out its audit work on behalf of Chinese private real estate groups as a liquidity crisis grips the real estate market.

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

In late April, PwC resigned as auditor of Guangzhou R&F Properties and ceased acting for Shimao Services Holdings, according to documents filed separately with the Hong Kong Stock Exchange.

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

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