EY, KPMG benefit most from PwC China’s regulatory woes

By Julie Zhu and Xie Yu

HONG KONG (Reuters) – Ernst & Young (EY) and KPMG have snapped up over half of PwC’s corporate clients in China that have fled the market’s leading accounting firm as it faces a regulatory probe, filings show.

Chinese authorities have been investigating PwC’s role in auditing China Evergrande (HK:) Group, after the securities regulator accused the troubled property developer in March of a $78-billion fraud. PwC audited Evergrande for almost 14 years until early 2023.

Regulators have also asked several large state-owned clients of PwC to drop the auditor since at least April.

“Compared to previous years, what we’re seeing this year is certainly an unusual client exodus from PwC,” said Fan Zhongwen, an accounting professor at City University of Hong Kong.

A Reuters calculation based on filings showed more than 40 Chinese firms, many of which are state-owned enterprises or financial institutions, have either dropped PwC as their auditor or canceled plans to hire the firm in recent months.

Among them are some of PwC’s largest clients, including Bank of China (BOC), China Life Insurance and PetroChina, which last year paid accounting fees of nearly 200 million yuan ($28 million), 64 million yuan and 46 million yuan, respectively, the filings showed.

PwC declined to comment for this story. EY and KPMG did not respond to requests for comment.

Last year, domestic regulators reiterated state-owned firms and listed companies should be “extremely cautious” about hiring auditors that have received regulatory fines or other penalties in the past three years.

Those advisories and potentially hefty penalties for PwC have worried some existing clients, prompting them to consider alternatives, said sources.

“PwC’s client losses will likely continue in the short term as its audit of Evergrande has caused great damage to its reputation,” Fan said. “It will take time for PwC to restore the reputation.”

PwC’s main onshore arm PwC Zhong Tian LLP recorded revenues of 7.92 billion yuan in 2022, making it China’s top-earning auditor that year, followed by EY, Deloitte and KPMG, according to official figures.

The Big Four firms audited 12% of the companies listed on the Shanghai Stock Exchange and 5% of companies on the Shenzhen exchange as of this March, per a PwC calculation shown on its website.

EY AND KPMG GAIN

A Reuters calculation found EY had won at least 12 clients from PwC, including large state-backed financial institutions China Life, PICC and China Cinda Asset Management.

The 12 companies’ total combined audit fees were over 230 million yuan last year.

Among non-state companies, Hong Kong-listed Fuyao Glass and Shenzhen-listed Mindray Bio-Medical Electronics canceled plans to reappoint PwC as their auditor and hired EY instead in early August and May, respectively, according to filings.

With companies flocking to EY, it has been able to cut spending on attracting new business and is offering a 10%-20% reduction in audit fees to former PwC clients, said two sources.

It also plans to raise pay rates by 10% for new employees hired through campus recruitment this fall as the firm needs more staff to cope with the sudden increase in workload, said one of them.

KPMG has taken on at least 12 companies from PwC that paid total audit fees of about 160 million yuan in 2023.

They include state-owned China Telecom (NYSE:) and China Taiping Insurance as well as eight subsidiaries of state conglomerate China Merchants Group that dropped plans to go to PwC and went to KPMG, according to filings.

PwC’s biggest client, Bank of China, said in June it shortened a services agreement. It has yet to mandate a new auditor.

Other accounting firms that have taken over PwC’s audit clients include BDO’s onshore arm Lixin and domestic firm Pan-China, filings show.

Before the spotlight fell on PwC’s work for Evergrande, Deloitte’s Beijing branch in March last year was fined 211.9 million yuan by Chinese authorities and its operations were suspended for three months after serious deficiencies were found in its audit of China Huarong Asset Management.

The penalties, despite being imposed on Deloitte’s Beijing branch rather than Deloitte China, have left the auditor in a disadvantaged position to take on new clients, in particular large state-backed ones, said two separate sources.

A Deloitte spokesperson referred to a previous statement, which said: “To be clear, there is no suggestion by the MOF (Ministry of Finance) that either Deloitte Hua Yong, its Beijing branch, or any of its people have done anything unethical,” adding the firm is committed to “the highest standards of audit quality”.

Sources declined to be named as they were not authorised to speak to the media.

($1 = 7.1476 renminbi)

($1 = 7.7883 Hong Kong dollars)