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.
People familiar with the situation said the case is not over and that court proceedings will continue next month. The regulator's decision shows a positive impact on the case for the liquidator.
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.
The settlement reached this time to compensate shareholders is a common practice overseas but relatively rare in Hong Kong, compared to administrative sanctions or fines for such issues in the past, said Billy Mak Sui-choi, an associate professor of the Department of Accountancy, Economics and Finance at Hong Kong Baptist University.
"If auditors have doubts about a listed company's results, they should first query the company and request corrections. Should the company refuse, the auditors can issue a 'qualified opinion' in the financial statements to alert investors," he said.
If the company is found to have committed financial fraud, yet the auditors failed to raise any queries, they would be deemed to have failed in their duties, he added.
