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Customer trust is lost, team stability is frustrated, and market rumors are rife. As a global leader in the accounting industry and known as the patron saint of the capital market, PwC is facing an unprecedented credibility crisis and industry challenges, as if stepping into the center of a storm that is about to come. Before the dust settles on the formal regulatory ruling, PwC has already been hit hard by the slippage of trust, with many companies withdrawing from their cooperation and staging a drama of "ebb and flow of trust". Specifically, on the evening of June 21, Shanghai Electric announced that in view of the recent new situation in the audit field that needs in-depth verification, the company decided to withdraw the proposal on the renewal of PricewaterhouseCoopers Zhongtian as the audit service provider for 2024, which was originally planned to be considered at the 2023 annual general meeting of shareholders, which undoubtedly casts a deeper shadow on the future of PricewaterhouseCoopers.
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Interestingly, only three months ago, Shanghai Electric decided to renew the ten-year partnership with PwC when it was supposed to rotate its audit service providers in accordance with regulations. In the announcement, Shanghai Electric revealed that its audit fee to PricewaterhouseCoopers in 2023 is as high as 24.5 million yuan, and it is expected that the cost will not exceed this year's level if the audit scope remains unchanged in 2024. This means that PwC has lost not only a long-term contract, but also a project worth more than 20 million yuan.
And that's just the tip of the iceberg of PwC's recent loss of business, which portends the uncertainties that more collaborations may face.
Why is this happening? The answer points to a crisis of confidence caused by audit omissions - the financial fraud scandal of Evergrande Real Estate.
From the listing of Evergrande Real Estate in 2009 to 2023, PricewaterhouseCoopers, as its auditor, has issued no-objection audit reports for it for many years, even during the period when Evergrande was exposed to major financial fraud in 2019 and 2020.
Until May 31, 2024, the China Securities Regulatory Commission's "Administrative Decision" on Evergrande Real Estate was made public, revealing that its inflated income in 2019 amounted to 213.989 billion yuan, accounting for half of the year's revenue, and even worse in 2020, falsely reporting income of 350.157 billion yuan, accounting for nearly eighty percent, and using these false data to carry out fraudulent issuance of corporate bonds, which completely ignited the fuse of this audit credibility crisis.
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PwC's role should be to act as an impartial third party in the process, through the issuance of audit reports, to build a bridge of trust between shareholders and the company, and at the same time to be alert to potential financial risks and ensure the stability of the market order.
At present, the root cause of PwC's crisis is that it failed to disclose the existing risk information to the public in a timely manner, and its certified public accountants still issued audit reports indicating "unqualified opinions", which violated its responsibilities.
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The public can't help but question the auditing giant's professional judgment and speculate about whether its audit process is flawed. For PwC, a company that relied on credibility is now mired in a credibility crisis, and unfortunately has become one of the focal points in the aftermath of financial fraud.
Significant losses: PwC lost more than 70% of its large audit contracts
Also on the evening of June 21, PwC suffered far more than that, in addition to the known losses, a contract worth about 3.23 million yuan from the Bank of Ningbo also collapsed. Bank of Ningbo made it clear in the official announcement that in view of the recent circumstances to be further verified, based on the principle of prudence, it decided to revoke the "Proposal on Hiring an External Audit Institution" passed at the 2023 Annual General Meeting of Shareholders. This change has undoubtedly cast a shadow on PwC's future business landscape.
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Coincidentally, Bank of Ningbo and Shanghai Electric also confirmed the renewal of their partnership with PricewaterhouseCoopers just two months ago. The night's double defeat – the loss of two key clients – is undoubtedly a true portrayal of PwC's current predicament.
Since May this year, PwC has been hit by a series of client terminations. According to statistics, by the end of 2023, PwC was responsible for auditing a total of 107 A-share listed companies, and the total cost of audit services was estimated to be about 880 million yuan. Among them, Bank of China, as its largest customer, paid an annual audit fee of up to 193 million yuan. The turning point came on the evening of June 7, when Bank of China announced that it had adjusted its cooperation plan with PricewaterhouseCoopers, from the original re-appointment of it for comprehensive audit services in 2024 to only entrust the review of interim financial reports, and the corresponding fees were reduced to 35 million yuan, and revealed that the selection process of external auditors for the new year had been launched. According to the incomplete statistics of the salt financial reporter, as of June 23, 2024, among the top ten customers of PwC in 2023, seven companies have publicly stated that they will not renew their contracts or switch to other audit service providers, which directly leads to the loss of more than 400 million yuan in revenue. This means that at the top 10 largest customers alone, PwC has lost almost half of its market share.
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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".
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Don't forget, as early as 2023, the branches of the "Big Four" in China have felt the chill, and a person in the financial industry revealed to Yan Finance, "In fact, since the previous year, the audit department of the 'Big Four' has entered the track of layoffs." ”
Against the backdrop of a general industry downturn, a series of client churns, and awaiting regulatory clarity, it seems not surprising that anxiety is rife within PwC, although there is still a "calm on the eve of the storm" on the surface.
A former PwC employee shared to Yan Finance, "PwC's lost orders did have an impact on the audit department, but the ongoing operation of the existing business still requires a certain size of workforce. At the same time, the advisory and tax authorities appear to be relatively limited at this time. ”
A measure of the value of trust
Between the four foreign accounting firms, PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte, who is better? Judging from the feedback of industry insiders, there is no significant difference between them in terms of core competitiveness. Salt financial reporters have received the same answers from a number of relevant practitioners. Compared with the other three, PwC's biggest advantage in the past may have been its "brand influence". "I personally believe that before the Evergrande incident, PwC's most prominent advantage over the other three was that it had the most business volume. However, its credibility did decline after the incident. A former PwC employee revealed to Salt Finance. Historically, PwC has long been ahead of the other three companies in terms of order volume in the Chinese market, occupying the largest market share. According to the "2022 Comprehensive Evaluation of 100 Accounting Firms Ranking Information (Publicity Draft)" released by the Chinese Institute of Certified Public Accountants in September 2023, in 2022, the business income of four foreign-funded accounting firms, PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte, reached 7.925 billion yuan, 6.646 billion yuan, 5.117 billion yuan and 5.15 billion yuan respectively.
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In the past, many shareholders have had a deeper trust in the companies audited by PwC; Many companies seeking audit services are confident that PwC can effectively protect their reputation and strengthen their position. This was once widely recognized in the industry. In an industry that relies on "trust maintenance" and "high integrity of information" to win the market, PwC has further polished its brand with its huge business volume. Therefore, this incident is the first and foremost damage to the "credibility" of PwC, which is also one of the important factors that triggered a series of contract termination waves. However, PwC may be more concerned than "credibility damage" about the potential for tough regulatory sanctions. In 2023, the Ministry of Finance imposed severe penalties on Deloitte for serious audit errors, including suspending the business operations of Deloitte Beijing Office for three months, revoking the practice certificates of the two CPAs involved, confiscating illegal gains and imposing fines totaling about 210 million yuan. The penalty stemmed from significant financial problems with China Huarong Asset Management Co., Ltd., although Deloitte has maintained that it had not committed any dishonest conduct at work.
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Conversely, PwC may be facing an even more dire situation than Deloitte was back then. After all, the CSRC has imposed a maximum fine on Evergrande Property's administrative sanctions, and the Ministry of Finance's earlier action against Deloitte was based on the grounds of "serious audit deficiencies". By contrast, the amount of fines may not be the primary issue, and the question remains over whether PwC will face a more serious challenge of being restricted from its business activities in Chinese mainland. This turmoil can't help but remind people that many years ago, the bankruptcy case of the American energy giant Enron directly led to the dissolution of Arthur Andersen. Interestingly, Arthur Andersen was also a world-renowned accounting firm before its collapse, and a significant part of its client base and large number of employees were absorbed by PricewaterhouseCoopers after Arthur Andersen's collapse. It cannot be ignored that once the dominoes of trust begin to fall, an unstoppable ripple effect ensues. Even industry leaders such as PricewaterhouseCoopers have so far failed to find a safe haven to completely escape the "crisis of trust in dereliction of duty".