Hong Kong securities watchdog said it has reached a deal with PwC for HK$1 billion shareholder compensation regarding false financial statements of failed developer China Evergrande.
The Securities and Futures Commission found that Evergrande, currently in liquidation, had substantially overstated its annual revenue and profits for 2019 and 2020, according to a statement on Thursday.
PricewaterhouseCoopers Hong Kong (PwC HK) was Evergrande’s auditor at the time.
The SFC also 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.
China Evergrande, the world’s most indebted developer, manipulated its annual revenue and profits by prematurely recognising revenue from property sales before the completion and delivery of properties to buyers, with the intent to substantially overstate its audited annual revenue and profits, the regulator said.
It concluded that Evergrande’s audited annual revenue was overstated by 213.9 billion yuan or 44.79 percent for 2019 and 350.2 billion yuan or 69.03 percent for 2020.
Consequently, the developer should have recorded a loss of 7.12 billion yuan, instead of a profit of 33.5 billion yuan in 2019, and a loss of 19.9 billion yuan in 2020, versus a profit of 31.4 billion yuan, it said.
A compensation of HK$1 billion has been set aside for allocation to independent minority shareholders through a process overseen by an independent administrator, the SFC said.
The detailed provisions of the process will be published in due course.
These shareholders are reminded to retain records of transactions involving the company’s shares, for the purpose of making claims for compensation.
Under the agreement, both parties have agreed that the matter will be fully and finally resolved without admission of liability.
While not admitted by PwC HK, the SFC considered that the accounting firm failed to maintain auditor independence, exercise adequate professional scepticism in auditing, as well as sufficiently verify the supporting documents and records during the audits.
“For the first time, auditors of a defunct company are providing compensation to independent minority shareholders who were harmed by false and misleading financial statements,” said Julia Leung Fung-yee, the SFC’s chief executive.
This will send an unequivocal message to the audit profession and the investing public that the regulator is committed to maintain market integrity and protect investors by holding companies and their auditors accountable for the accuracy and reliability of financial disclosures, she said.
The SFC also expresses its profound gratitude to the Ministry of Finance and the China Securities Regulatory Commission for their support and assistance during the investigation.
