Aurelia Butler

HONG KONG (Reuters) -Chinese regulators on Friday hit PwC’s auditing unit in mainland China with a six-month business suspension and a record fine of 441 million yuan ($62 million) over the firm’s audit of troubled property developer China Evergrande (HK:3333) Group.Delivering a strong rebuke to the Big Four firm, China’s securities regulator said its investigation found that PwC Zhong Tian LLP “turned a blind eye” to and “even condoned” Evergrande’s fraud while auditing the annual results of the developer’s onshore flagship unit – Hengda Real Estate – in 2019 and 2020. “PwC has seriously eroded the basis of law and good faith, and damaged investors’ interest,” said the China Securities Regulatory Commission (CSRC) in a statement.Chinese authorities have been examining PwC’s role in Evergrande’s accounting practices since the CSRC accused the developer in March of a $78-billion fraud over a period of two years through 2020. PwC audited Evergrande for almost 14 years until early 2023.The business suspension and fines are the toughest ever penalty received by a Big Four accounting firm in China, and come against the backdrop of an exodus of clientele and layoffs at the firm in recent months.The move is set to cloud PwC’s prospects in the world’s No.2 economy. PwC Zhong Tian, the registered accounting entity and the main onshore arm of PwC in China, was the country’s top-earning auditor in 2022, according to the latest official data. “The cost is enormous in reputation, affecting the ability to get new business in China beyond the fine. In the short run, PwC’s market share will decline in China, benefiting the other big three auditing firms,” said Gary Ng, Asia-Pacific senior economist at Natixis. As part of the penalties, PwC Zhong Tian will be barred from signing off on certain key documents for clients in mainland China such as results and IPO applications in the next six months.The business suspension will also affect the unit as a whole from taking on new state-owned or domestically-listed clients in the next three years, in accordance with Chinese regulations.Last year, domestic regulators reiterated state-owned firms and mainland China-listed companies should be “extremely cautious” about hiring auditors that have received regulatory fines or other penalties in the past three years.”We are disappointed by PwC Zhong Tian’s audit work of Hengda, which fell unacceptably below the standards we expect of member firms of the PwC network,” PwC network, the alliance of PwC’s global member units, said in a statement. The firm said as part of its “accountability and remedial actions”, PwC China’s territory senior partner Daniel Li had stepped down and Hemione Hudson (NYSE:HUD), the firm’s global risk and regulatory leader, had taken over from him.’CONDONED FRAUD’ The business suspension was imposed by China’s Ministry of Finance (MOF) which also ordered the closure of PwC Zhong Tian’s branch in Guangzhou – which according to sources led the audit work on Evergrande. The ministry also imposed a fine of 116 million yuan on the firm for its auditing failure of Hengda in 2018, according to an MOF statement.The CSRC said in its statement it had fined PwC Zhong Tian 325 million yuan, close to the total amount of penalties imposed by the regulator on over 50 auditors in the past three years. The CSRC probe found that 88% of PwC’s observation records on Evergrande’s real estate projects in 2019 and 2020 were inauthentic or untrue, making its audit working papers “severely unreliable”. The regulator pointed out PwC’s on-site inspection of the developer’s properties failed to flag problems – some residential properties that the auditor considered ready for home deliveries still remained as “vacant land” when the CSRC inspected later.PwC also deliberately excluded properties that Evergrande marked as “not allowed to visit” from audit samples, it added. “PwC has, to a certain extent, covered up and even condoned Evergrande’s financial fraud and fraudulent issuance of corporate bonds,” said the CSRC statement. “It (PwC) has to be severely punished according to law.”A Reuters calculation based on filings showed more than 50 Chinese firms have in recent months either dropped the firm as their auditor or cancelled plans to hire it, following the launch of the regulatory investigation into the firm.PwC had about 400 Chinese clients, listed at home or in offshore markets such as Hong Kong or New York, in March this year, including tech behemoths Alibaba (NYSE:BABA) and Tencent.($1 = 7.0942 Chinese yuan renminbi) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyThere is virtually no doubt that the Federal Reserve will initiate an interest rate-cutting cycle next Wednesday. Indeed, recent data has supported the view that the central bank would have been better off doing so in July, at the prior meeting of the policy-setting Federal Open Market Committee.Yet the sure expectation of next week’s rate cut comes with considerable analytical uncertainty about the endpoint for rates, the journey to that destination, the impact on the economy and for international spillovers. This uncertainty could easily catch bond investors off guard if liquidity conditions fail to loosen significantly.While US economic growth has repeatedly proved to be much more robust than many had expected, the potential for continued “economic exceptionalism” must be weighed against the intensifying pressures felt by lower-income households. Many have exhausted their pandemic savings and incurred more debt, including maxing out their credit card. There is no agreement on whether this weakness will remain concentrated at the bottom end of the income ladder or migrate up.And American exceptionalism is just one of the rugs that have been pulled from under the once-comforting anchors in analysing the US economy. The economy has also been robbed of the stabilising effects of unifying policy frameworks.What was a long-term embrace of the “Washington Consensus” — the road to sustained economic prosperity involves deregulation, fiscal prudence and liberalisation — has given way to the expansion of industrial policy, persistent fiscal imbalances, and the weaponisation of trade tariffs and investment sanctions. Internationally, the consensus on ever-closer integration of goods, tech and finance has had to cede to a fragmentation process that is now part of a much bigger gradual rewiring of the global economy.At the same time, the influence of the Fed’s forward policy guidance, another traditional analytical anchor, has been eroded by a mindset of excessive data dependency — this started to affect policymakers after the central bank’s big 2021 mistake of characterising inflation as transitory. The resulting volatility in the consensus view on markets, which has been moving back and forth like “narrative table tennis”, has fuelled a misalignment between the central bank and markets on basic policy influences.Top Fed officials emphasise the continued relevance of both parts of the central bank’s dual mandate: to promote price stability and maximum employment. But markets have shifted violently in the past few weeks to price the Fed as a single mandate central bank, with a focus that has now pivoted from battling inflation to minimising any further labour market weakness.At the same time, there is no agreement on how policy formulation should be affected by risk mitigation considerations typically associated with periods of economic uncertainty. Finally, there are many views on how and when senior Fed officials will transition from their excessive data dependency to a more forward-leaning view of policy.While such uncertainties relate mainly to the inputs of interest rate decision-making, they have consequential effects on outcomes in three key areas: the terminal interest rate where policy is neither restrictive nor stimulative of the economy and the journey there; the extent to which rate cuts will translate into a bigger non-inflationary growth impetus for the economy; and the degree to which the Fed’s cutting cycle will open the door for an aggressive global cycle that also includes emerging countries.This complicated analytical landscape is not reflected in how the US fixed income markets, which serve as global benchmarks, are pricing expectations for Fed policy. Government bonds markets are signalling high recession risk, looking for the Fed to lower rates by 0.50 percentage points next week or shortly thereafter, and to cut by a total of 2 points in the next 12 months. Yet credit markets are priced confidently for a soft landing.These asset pricing inconsistencies can be resolved in an orderly manner as long as a significant further loosening of financial conditions, including sideline cash being put to work, offsets substantial bond issuance from the government and the ongoing contraction of the Fed’s balance sheet known as quantitative tightening. The power of this was evident on Wednesday by the reversal of the large 0.10 percentage point rise in the two-year US yield caused by a slightly hotter monthly reading for core inflation. Yet this “technical” influence is a poor substitute for the restoration of growth and policy anchors. It is also an inherently volatile one. More

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