PwC in trouble over Evergrande audit negligence

A Hong Kong court has ruled that the liquidators of Evergrande - a collapsed Chinese property developer - can legally pursue PwC for audit negligence (failure to properly examine the company's financial records). This legal pursuit can happen against the umbrella company PwC International and PwC’s Hong Kong / China affiliates. Specifically, close to $6 billion is being pursued against PwC by the liquidators.

Evergrande defaulted back in 2021, with around $300 billion in liabilities, and it was found that the company had fraudulently inflated its revenues in the years prior to this collapse. Whilst PwC’s Hong Kong / China affiliates have already paid out large sums to settle regulator claims due to staff that had concealed or condoned the stated fraud at Evergrande, the current Hong Kong ruling allows pursuit of PwC International now too.

This is significant because a network structure of companies like the way PwC is arranged is purposefully done so to ensure national operations are kept separate, ensuring that liability arising from one jurisdiction does not affect the rest of the network. That has clearly not held up in this instance, and PwC International disagrees with the ruling, evaluating its legal options.

This could have consequences for PwC's UK and US operations, as PwC International does not hold significant assets, so mandated damages could mean the liability flows through to PwC’s UK/US operations.

What does this mean for the sector?

• Companies with a similar network structure, especially professional firms, will be reviewing this structure to see whether the planned legal separation holds up anymore
• This ruling increases the attractiveness of pursuing umbrella organisations like PwC in the future, since this gives liquidators and lenders a strong option in insolvency / business collapses
• International regulators may use this case to discuss the implications of network structures on audit quality