PricewaterhouseCoopers is evaporating

South wind window

2024-06-29 18:19Nanfeng Window official account

Author | Nanfeng window reporter Ren Zaoyu

Edit | Jiang Jiang

The customer is lost. The hearts of the people are scattered. Afraid of one's own shadow.

PricewaterhouseCoopers, the head of the world's four largest accounting firms and the "gatekeeper" of the capital market, is now entering the fog of mountains and rains and windy buildings.

We see that at this moment, PwC, which has not yet ushered in the implementation of regulatory treatment, has to face the consequences of losing trust in it from the outside world, such as being "refunded" by many companies.

On the evening of June 21, Shanghai Electric issued an announcement saying, "In view of the fact that the recent matters related to the audit industry need to be further verified, the company (Shanghai Electric) decided to cancel the "Proposal on the Renewal of the Appointment of PricewaterhouseCoopers Zhongtian Certified Public Accountants (Special General Partnership) as the Company's 2024 Audit Institution" originally scheduled for consideration at the 2023 Annual General Meeting of Shareholders.

Source: Shanghai Electric Group Co., Ltd.'s announcement on the cancellation of the proposal for the 2023 annual general meeting of shareholders

Interestingly, three months ago, Shanghai Electric, which was supposed to rotate its auditors, had just re-appointed PricewaterhouseCoopers as its auditor for 2024, and the two sides were about to start their 10th year of cooperation.

In the renewal announcement at that time, Shanghai Electric also wrote that the audit fee it paid to PricewaterhouseCoopers in 2023 reached 24.5 million yuan, and the audit service fee in 2024 will not be higher than in 2023 under the premise that the scope of audit services in 2024 has not changed significantly compared with 2023.

In other words, PwC's lost order is a big order of more than 20 million.

This is not the first order that PwC has lost in recent times, and it may not be the last.

What happened?

The source of everything was a "scandal" of audit failure, that is, the financial fraud of Evergrande Real Estate.

PwC has acted as the auditor of Evergrande Real Estate since its listing in 2009 until 2023, and has issued unqualified audit reports for Evergrande Real Estate for many consecutive years, including 2019 and 2020, when financial fraud occurred.

On May 31, 2024, the China Securities Regulatory Commission (CSRC) officially issued the Administrative Decision on Evergrande Real Estate. According to the document, in 2019, Evergrande's inflated revenue was 213.989 billion yuan, accounting for 50.14% of the current operating income; In 2020, the inflated income was 350.157 billion yuan. Accounting for 78.54% of the current operating income, Evergrande fraudulently issued corporate bonds with false data.

Source: China Securities Regulatory Commission Administrative Penalty Decision (Evergrande Real Estate and its responsible personnel)

PwC's role here is supposed to be to act as an impartial third party to build trust between shareholders and the company through audit reports, warn of possible financial risks, and maintain market order.

At this moment, PwC's crisis also stems from its failure to warn the public of the risks in a timely manner, and its certified public accountants still signed an "unqualified" audit report.

Screenshot of the "independent auditor" section of Evergrande Group's 2020 annual report

One has to doubt the professional judgment of this audit agency and even speculate whether there are any flaws in the audit process. PricewaterhouseCoopers, which already lives on credibility, has fallen into the whirlpool of credibility crisis and has become one of the protagonists in the aftermath of the fraud case. 

01

Seventy percent of the big order was lost

On the night of June 21, PwC actually lost two orders. The other order is from Bank of Ningbo, and the order amount is expected to be 3.23 million yuan.

Bank of Ningbo said in the announcement that in view of the fact that the relevant matters in the near future need to be further verified, based on the principle of prudence, the "Proposal on Hiring an External Audit Institution" deliberated and approved by the 2023 Annual General Meeting of Shareholders will be cancelled.

Source: Bank of Ningbo announcement

What's more coincidental is that, like Shanghai Electric, Bank of Ningbo has just announced the renewal of PwC's employment shortly after - 2 months.

Overnight, the loss of two huge orders and two major customers can be seen as a microcosm of PwC's current situation.

Since May, clients have terminated their contracts with PwC.

According to Flush iFinD data, in 2023, PwC will audit a total of 107 A-share annual report audit clients, with a total audit fee of about 880 million yuan. Among them, Bank of China was the largest customer of PricewaterhouseCoopers that year, and its audit fees reached 193 million yuan.

However, Bank of China has announced on the evening of June 7 that it will adjust the original arrangement of re-hiring PricewaterhouseCoopers to provide 2024 annual audit services to hiring it to provide 2024 interim financial report review services, with related fees of 35 million yuan. At the same time, Bank of China has launched the bidding and selection of external auditors in 2024.

According to the statistics of salt financial reporters, as of June 23, 2024, 7 of PwC's top 10 customers in 2023 have announced the cancellation of re-employment or the replacement of other audit institutions, with a cumulative loss of more than 400 million yuan. In other words, the top 10 customers alone have caused PwC to almost lose more than half of its market share.

The marked yellow part is the customers who will be dismissed or rehired in 2024 / Source: Company announcement, statistics from salt financial reporters

The losses don't stop with big customers. According to incomplete statistics, among the 107 A-share annual review clients served by PwC in 2023, more than 30 companies have cancelled their re-employment or re-hired, including many large enterprises.

Most of the orders lost by PwC went to the three major accounting firms of Deloitte, KPMG and Ernst & Young, and the competitive landscape of the industry is changing.

For PwC's internal staff, the most immediate impact of lost orders is the possibility of unpaid leave and layoffs, which are the norm in the industry.

A former employee of the "Big Four" (the Big Four international accounting firms) told Yancai, "If you don't have a project, you don't have a job to do, and it will force you to 'no pay leave'."

It is easy to understand that under the project-based audit model, when the absolute number of projects decreases, the number of employees required by the audit organization to flow between projects will decrease, and the audit organization will adjust accordingly. If an employee does not accept no-pay leave, he or she runs the risk of being "dissuaded".

But even if you accept unpaid leave, how long can an individual last in the situation of not being paid and paying social security by himself?

PwC is not without precedent. Its UK office implemented a round of layoffs that could affect 600 people in late 2023, requiring employees who received severance pay to leave voluntarily. One of the triggers for this incident was "weak business growth".

PricewaterhouseCoopers / Source: Unsplash

Don't forget, 2023 is no longer a good year for the branches of the "Big Four" in China, "basically since last year, the four major audit lines have begun to lay off employees", a financial industry practitioner mentioned to Yan Finance.

At a time when the industry is not doing well, losing orders one after another, and waiting for regulatory boots to land, it is not surprising that PwC's internal employees are anxious, but it still seems to be in a state of "calm before the storm".

A former PwC employee told Yan Finance, "PwC's loss of orders has indeed affected the audit line, but there are still some existing businesses that need to be carried out, and a certain number of employees are still needed." And the consultation line and the tax line have not been affected much so far. ”

02

A transaction about trust

PwC, Ernst & Young, KPMG and Deloitte, who is stronger?

There is essentially no difference between several families. From several relevant practitioners, salt financial reporters have received similar personal answers. Compared with Deloitte, KPMG and Ernst & Young, PwC's only advantage may only lie in its "brand effect".

"I personally think that compared with the other three, PwC's biggest advantage before the Evergrande incident should be that it has the most business. However, after the incident, PwC's credibility has declined. A former employee of PricewaterhouseCoopers revealed to Salt Finance.

In the Chinese market, PwC's order volume was larger than that of the other three firms in the past, and it had the largest market share.

According to the "2022 Comprehensive Evaluation of 100 Accounting Firms (Publicity Draft)" released by the Chinese Institute of Certified Public Accountants in September 2023, the annual business income of four foreign accounting firms in 2022 was 7.925 billion yuan, 6.646 billion yuan, 5.117 billion yuan and 5.15 billion yuan respectively.

Source: "2022 Accounting Firm Comprehensive Evaluation Top 100 Ranking Information"

More shareholders have more trust in companies audited by PwC; More companies that need to be audited believe that PwC can maintain their reputation at a certain level. This was the consensus of the industry in the past.

It can be said that in such an industry that relies on "maintaining trust" and making profits by "information integrity and reliability", more orders have polished PwC's signboard brighter.

So this incident first seriously hurt the "reputation" of PwC, which is also one of the reasons for the wave of contract termination.

But PwC may be more concerned about possible regulatory penalties than "reputation".

In 2023, the Ministry of Finance imposed a heavy penalty on Deloitte on the grounds of serious audit deficiencies - suspending the business of Deloitte Beijing Office for 3 months, and two Deloitte-related CPAs were revoked from their CPA certificates, confiscated the illegal income of Deloitte Beijing Office, and imposed a total fine of about 210 million yuan.

The reason for the punishment was the lightning explosion of China Huarong Asset Management Co., Ltd., but Deloitte has always claimed that there is no dishonest behavior in its work.

Deloitte Building / Source: pixabay

Conversely, reflecting PwC, it may face a more dire situation than Deloitte at the time. After all, the China Securities Regulatory Commission has adopted the highest penalty ratio in the administrative penalty against Evergrande Real Estate, and the "penalty name" imposed by the Ministry of Finance on Deloitte is still "seriously flawed".

In contrast, the fines are minor, and at this time, we still don't know whether PwC will face restrictions on mainland practice.

This incident is reminiscent of Arthur Andersen, which broke up a few years ago due to the bankruptcy of the American energy company Enron.

Interestingly, Arthur Andersen was also an internationally renowned accounting firm, and after its collapse due to financial fraud, many of its clients and employees went to PricewaterhouseCoopers.

What is certain is that once the trust dominoes fall, it will set off a chain reaction. Industry leader PwC has not yet reached the other side of the "dereliction of duty".

This article was first published in Salt Finance, a new financial media under Nanfeng Window

-END-

Editor-in-Chief on Duty | Zhao Jinghan

Typography | Lin Xi Qianwen

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