The Hong Kong Securities and Futures Commission (SFC) has reached an agreement with PricewaterhouseCoopers Hong Kong (PwC HK) under which PwC HK has agreed to set aside HK$1 billion to compensate eligible independent minority shareholders of China Evergrande Group.

PwC HK audited China Evergrande’s financial statements for the fiscal years ended 31 December 2019 and 31 December 2020. The SFC’s investigation, which focused on China Evergrande’s results announcements and annual reports, found that the company, currently in liquidation, had substantially overstated its annual revenue and profits for these two fiscal years.

The SFC also examined the role of PwC HK and concluded that there was market misconduct due to China Evergrande’s dissemination of false and misleading financial information and serious breaches of auditors’ professional duties.

Under the agreement, the SFC and PwC HK have agreed that the matter will be fully and finally resolved without admission of liability, and that the SFC will take no further action against PwC HK, provided that PwC HK fulfils the terms of the agreement.

The SFC concluded that China Evergrande’s audited annual revenue was overstated by RMB213.9 billion or by 44.79% for FY2019 and RMB350.2 billion or by 69.03% for FY2020. Consequently, the company’s audited annual profit of RMB33.5 billion and RMB31.4 billion for FY2019 and FY2020, respectively, should have been a loss of RMB7.12 billion and RMB19.9 billion, respectively.

Whilst this is not admitted by PwC HK, the SFC considers that PwC HK:

• in its role as auditor of China Evergrande was concerned in the disclosure of false or misleading information, within the terms of section 277 of the Securities and Futures Ordinance (SFO);
• failed to maintain auditor independence during the audits of China Evergrande’s FY2019 and FY2020 financial statements;
• failed to exercise adequate professional scepticism in audit planning, performing the audit procedures and handling audit irregularities;
• failed to design and perform effective site inspections to ascertain the construction and delivery status of properties for proper revenue recognition;
• actively acquiesced to manipulation by China Evergrande’s management of audit samples and site inspections which facilitated the concealment of the premature revenue recognition; and
• failed to sufficiently verify the authenticity of supporting documents and records.

With the ultimate objective of securing compensation for shareholders, the SFC has determined that the best interests of China Evergrande’s independent minority shareholders are served by reaching an agreement with PwC HK, under which HK$1 billion has been set aside for allocation to compensate these independent minority shareholders through a process overseen by an independent administrator.

In the meantime, China Evergrande’s independent minority shareholders and their intermediaries are reminded to retain records of transactions involving the company’s shares, for the purpose of making claims for compensation. Intermediaries are also reminded to provide reasonable assistance to such shareholders to file their claims.