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Liquidators for China’s Evergrande prepare to sue PwC over audits

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Evergrande’s liquidators are preparing for a potential lawsuit against PwC, which audited the now-collapsed Chinese property group for over a decade, in a move that could lead to the Big Four accounting firm facing a high-profile negligence claim.

Eddie Middleton and Tiffany Wong, the Alvarez & Marsal restructuring specialists appointed as liquidators of Evergrande’s Hong Kong-listed holding company last month, have spoken to at least two law firms about the prospect of bringing a claim against the audit firm, according to three people with knowledge of the conversations.

Bringing a claim would require the liquidators to build a case that PwC made mis-steps that have harmed creditors, the people said.

The liquidators were “taking steps to protect [their ability to bring] legal claims against auditors”, one of the people said.

Evergrande, the world’s most indebted property developer with more than $300bn in liabilities, defaulted in 2021, triggering a broader cash crunch across China’s property sector. Several attempts to agree a restructuring plan failed.

The liquidator’s talks with lawyers are an early sign of how this latest phase of Evergrande’s collapse, which began when a Hong Kong court last month ordered it to be wound up, could result in significant costs for global firms.

The conversations about a possible lawsuit were at an early stage, the people cautioned, adding that the existence of the talks did not indicate Evergrande’s liquidators had unearthed any evidence of wrongdoing by PwC, nor that a lawsuit was certain to take place.

“In the last decade, suing the auditor has become somewhat normalised as a way of recovering value [for creditors],” said an insolvency specialist not involved in the Evergrande case. They said claims against auditors and other professional advisers had “become something a liquidator looks at as a matter of course when you’ve got a multibillion-dollar case”.

PwC was Evergrande’s auditor when the developer listed in 2009, and signed off its books as it expanded rapidly using eye-watering leverage during China’s real estate boom. The Big Four firm resigned from the role last year.

Two of the people said it was common for liquidators to move quickly to preserve their right to bring a lawsuit against professional advisers, so that they were not thwarted later by the statute of limitations. The people said that under Hong Kong law, liquidators usually had six years from any alleged wrongdoing to bring a case, unless a different time period had been agreed in advance.

They added that it could take a long time for any lawsuit to materialise because the liquidators would need to collect evidence of any mis-steps by the auditors and build a case that creditors have lost out as a result of those mis-steps.

Middleton and Wong, and PwC, declined to comment.

PwC has built up a significant business auditing Chinese real estate groups, and has acted for several other developers that have struggled, including Country Garden, Sunac, R&F Properties and Shimao. It resigned as auditor of Sunac, Shimao and R&F in 2022.

The Evergrande audits were carried out by PwC’s Hong Kong business, filings show. Suing the auditors in the territory would be one way for the liquidators to try to recoup money for Evergrande’s creditors outside of mainland China, where the process would probably be far more difficult.

Other audit firms have faced negligence claims in Hong Kong in relation to their work for Chinese companies. In 2021, KPMG settled legal claims brought by liquidators over its audit of China Forestry.

PwC signed off Evergrande’s accounts in 2020, but when it resigned as Evergrande’s auditor last year, it said it had not been able to get the information it needed for the company’s 2021 audit.

Hong Kong’s Accounting and Financial Reporting Council said in 2021 it was investigating PwC’s audit of Evergrande’s 2020 accounts.

It said PwC had “expressed an unmodified audit opinion” in its report on Evergrande’s 2020 accounts, “but made no reference to going concern material uncertainties”. It added it believed there were reasons to “investigate whether PwC’s audit work on China Evergrande’s going concern assessment” in its 2020 audit “complied with applicable auditing standards”.

The AFRC did not respond to a request to comment.

Additional reporting by Thomas Hale

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