Hong Kong accounting watchdog launches second probe into Evergrande and PwC

Hong Kong’s accounting watchdog has launched an investigation into Evergrande Property Services, a major subsidiary of the embattled Chinese property developer, and its auditor PwC over a $2bn loan scheme that led to an executive clear-out last month.

The investigation will put more scrutiny on Evergrande, the world’s most indebted real estate developer, after it failed to meet a self-imposed deadline to restructure its $300bn in liabilities at the end of July.

It also adds pressure on Big Four auditor PwC, which repeatedly gave Evergrande’s accounts a clean bill of health before the developer defaulted on its international debts late last year.

Hong Kong’s Financial Reporting Council said on Monday it had identified potential concerns in the 2020 accounts of Evergrande Property Services, which is listed in Hong Kong.

The investigation is connected to how the Evergrande subsidiary and PwC classified “restricted bank deposits and other loans”, the guarantees provided on those loans, and the disclosure of related party transactions, the FRC said.

The FRC said it would investigate the financial statements of the property services unit for the year ending 31 December 2020 and the six months ending 30 June 2021, as well as PwC’s audit on the 2020 annual accounts of Evergrande Property Services.

In July, Evergrande replaced its chief executive and chief financial officer after an internal investigation found they had allowed $2bn in deposits that belonged to the property services unit to be pledged as collateral to lenders. The sum was subsequently seized by banks when the unit did not meet its obligations, wiping out most of the subsidiary’s net cash.

The seizure threatened to hit the remaining value of Evergrande’s international bonds, which are trading at a fraction of their value following the company’s default late last year.

The company said at the time that the loans secured by the pledges “were transferred and diverted back to the group via third parties and were used for the general operations of the group”.

Evergrande has around $300bn of liabilities, including $20bn of international bonds, and is expected to undergo the largest corporate restructuring in China’s history.

The FRC also said on Monday that it had “extended the scope” of a probe announced last October into Evergrande’s group accounts and PwC’s audit work on them after it had identified “questions about the adequacy of reporting on going concern”. The FRC has expanded the October probe to include the impact of the $2bn transaction at the group.

PwC signed off Evergrande’s 2020 accounts as a going concern, an accounting term that shows a company has the resources to continue operating for at least 12 months.

But in Evergrande’s interim financial statements for the first half of 2021 released in August last year, the developer said it risked defaulting on its debt. It started missing interest payments on its international bonds in November.

PwC has audited Evergrande since it listed in Hong Kong in 2009. It has been reducing its exposure to Chinese real estate groups this year as a liquidity crisis grips the property market.

PwC has resigned from the audits of developers Hopson Development, Shimao and Guangzhou R&F in recent months, stoking fears of an auditor exodus from the industry as groups face payments on their debts and shrinking options to raise funds.

Evergrande’s Hong Kong-listed shares have been suspended from trading since March after it failed to file its overdue annual report.

PwC and Evergrande did not immediately respond to a request for comment.

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