An unfinished village with colorful houses is part of the abandoned Evergrande theme park in eastern China's Jiangsu province
In a creepy unfinished village of pink and blue fairy houses billboards can be found across eastern China touting Evergrande's once-ambitious plans to create a tourism empire larger than Disney.
The abandoned amusement park is among 800 development projects and scores of empty houses across China that have been abandoned since , how the world's largest developer went bankrupt two years ago.
As liquidators take over the debt-ridden real estate giant, which owes more than $300 billion to banks and bondholders, critics are now questioning who should take responsibility for Evergrande's collapse.
According to allegations in an anonymous letter published in China social networks On the WeChat media platform last week, questions related to the role of the former auditor of Evergrande: PwC.
The open letter, which was allegedly signed by unnamed PwC partners, alleged that the professional services firm “turned a blind eye” to auditing Evergrande for more than a decade.
In the letter, Raymund Chao, chairman of PwC Asia Pacific and China, was accused of being solely responsible for sending the firm into the hot hole of Evergrande, which filed for bankruptcy last year.
It also raised questions about other services PwC provided to Evergrande and the family office of its controversial founder Hui Ka Yang. Last year, “coercive measures” were taken against the businessman on suspicion of committing crimes, the group said in a regulatory document.
In an open letter written in Chinese, PwC called for the hiring of independent experts to review the firm's governance, culture and accountability, and to ensure that the “bad guys” behind Evergrande's audit failures are brought to justice.
“If he cannot conduct an independent investigation, he must give the market an explanation. This is also the only way PwC can regain market confidence,” write the anonymous authors.
PwC rejected the letter's “inaccurate statements and false allegations” which the firm said could tarnish its reputation and violate its legal rights. The Big Four accountant said it was investigating the letter and reported the incident to the appropriate authorities.
How exactly PwC approaches this investigation will be closely watched, given that the anonymous authors have threatened to publish a second letter and conduct an audit. working papers in case the firm retaliates against any partner.
The outburst is believed to have shocked insiders, given that Chao is generally considered a respected figure whom partners look to for guidance.
“It's a huge problem for PwC's reputation and I think it puts a lot of pressure on him [Chao] to resign,” says one former PwC accountant in Hong Kong.
< img src="/wp -content/uploads/2024/04/12b077be81aba284751b8bc0ac8999b4.jpg" />Anonymous letter accuses Raymund Chao of being responsible for PwC's “hot pit”; from Evergrande
The scathing letter was the latest headache for PwC since it stepped down as Evergrande's auditor after more than a decade of signing its books.
The advisory firm that audited Evergrande when it listed in Hong Kong in 2009 resigned last year amid controversy over the developer's reporting.
Since 2021, PwC has been under investigation by the Accounting and Financial Reporting Council, Hong Kong's audit oversight body.
The watchdog questioned why Evergrande, which also held stakes in US electric vehicle start-up Faraday Future and a water bottle brand promoted by film star Jackie Chan, was given a clean bill of health despite high debt levels and insufficient cash reserves. The investigation is ongoing. On Friday, the AFRC announced plans to investigate the “whistleblower allegations” contained in the anonymous letter.
The professional services firm faces further scrutiny as Chinese authorities probe PwC's role in Evergrande's accounting practices, weeks after the property developer was accused of fraudulently inflating revenue by 560bn yuan (£62bn) in the years before it defaulted 2021. Chinese officials contacted former PwC accountants. who conducted an audit of Evergrande, but have not yet decided whether to punish PwC, Bloomberg reports.
Meanwhile, the Financial Times reports, Evergrande's liquidators are preparing for a potential professional negligence claim against PwC to seek compensation on behalf of creditors.
The collapse of Evergrande, seen as a symbol of China's property crisis, calls into question the role auditors played in creating China's debt-fueled property bubble.
Some 800 construction projects and scores of homes have been abandoned across China since the Evergrande collapsed two years ago. Photo: Bloomberg
Accounting and consulting firms with foreign connections have flocked to China over the past decade to capitalize on the opportunities presented by the country's booming real estate market.
But a combination of overbuilding, Covid restrictions and tightening government controls over the debt Chinese property giants were able to carry on their balance sheets led to a wave of bankruptcies that upended the world's second-largest economy.
The Big Four firms, including PwC, are now accused of missing the early signs.
George Magnus, an economist and fellow at Oxford University's China Centre, says: everyone becomes very optimistic. All behavior is justified and permitted on the basis that if it makes you rich, it must be good.”
Evergrande, which triggered a financial crisis in China's property sector after defaulting on debt in 2021, is not the only one to lose a Western accountant in recent years.
Big Four auditors have left Chinese developers and property management companies in droves. heavily indebted after uncertainty over hidden debts made it difficult to sign off on their accounts.
This has increased tensions between international auditors and developers. after they had to delay the publication of annual results, which many blamed on disruption caused by Covid restrictions.
These include Country Garden, once China's largest property developer, which is currently being audited by PwC, whose shares were suspended from trading on the Hong Kong Stock Exchange earlier this year month due to missing the deadline for reporting disclosure.
Demand for international auditors could change as China's debt-ridden private developers give way to the growing dominance of state-owned and state-backed developers, Magnus says.
“In some ways, China's real estate market is returning to what it was before it became a fully privatized market. That is, where the state mainly built and distributed housing,” he adds.
As Chinese government agencies take on an increasing role as private developers, so too will the role that international audit firms will play, argues Magnus.
The prospect of a diminishing role for firms with foreign ties has recently played an important role. Beijing's calls for Chinese companies to switch to domestic auditors after their contracts with Big Four firms end.
It is part of the government's efforts to restrict access to Chinese company data after it last year ordered state-owned enterprises and domestically listed companies to step up security checks on their auditors.
While the Big Four's global brand recognition and sophisticated reporting have made them more attractive than smaller Chinese rivals, the real estate crisis and tighter regulation could change that.
Yvette To, an associate professor at the Hong Kong Polytechnic University, said: “The reputation of PwC (and three others) could be damaged depending on how the scandal between PwC and Evergrande develops.”
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I have contacted Ian for comment.
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