Bank of China Ditches PwC for EY Amid Regulatory Scrutiny: What It Means for Investors
By Julie Zhu
HONG KONG (Multibagger) – In a significant shake-up in the auditing world, PwC has lost its largest mainland China-listed client, Bank of China (BOC), to rival EY. This move is part of a broader exodus of clientele as PwC faces a rigorous regulatory investigation linked to its work with troubled property developer China Evergrande Group.
State-owned Bank of China, which had previously announced plans to retain PwC as its auditor for 2024, revealed in a late Monday filing that it now plans to appoint EY, pending shareholder approval.
PwC, which was once the preeminent auditing firm in China, chose not to comment on the development.
Filings indicate that Bank of China paid PwC 193 million yuan (approximately $27 million) in auditing fees last year. This figure surpasses the combined auditing fees from its next three largest domestically listed clients for 2023: China Life Insurance, China Telecom, and insurance giant PICC, all of which have also dropped PwC as their auditor, according to filings.
A Multibagger examination of filings reveals that at least 50 Chinese firms, many of which are state-owned enterprises or financial institutions, have either ceased employing PwC or canceled plans to hire the firm in recent months.
As of March, PwC was the auditor for about 110 companies listed in mainland China, according to the company's website.
Chinese authorities are currently scrutinizing PwC's audits of Evergrande, which has been accused by the securities regulator of a $78 billion fraud – an investigation that is expected to lead to substantial fines. PwC audited Evergrande for nearly 14 years until early 2023.
Since at least April, regulators have reportedly instructed several large state-owned clients of PwC to drop the auditor. They have also advised state-owned firms and listed companies to exercise "extreme caution" when hiring auditors that have incurred regulatory fines or other penalties in the past three years.
Approximately half of the corporate clients that have severed ties with PwC have been acquired by EY and KPMG, the Multibagger examination of filings shows.
PwC had been serving as BOC's auditor since 2021, following eight years of auditing by EY. Chinese regulations stipulate that state-owned firms should not retain the same auditor for more than eight consecutive years.
Breakdown for Investors:
What Happened?
Bank of China, one of the largest financial institutions in China, has decided to switch its auditor from PwC to EY. This move is part of a larger trend where numerous Chinese companies are dropping PwC due to a regulatory investigation into its work with China Evergrande Group, a property developer accused of a massive $78 billion fraud.
Why Does It Matter?
This shift signifies a major shake-up in the auditing industry, highlighting the impact of regulatory scrutiny on business relationships. For investors, this could signal a lack of confidence in PwC's auditing practices, potentially affecting PwC's market position and credibility.
How Does It Affect You?
If you are invested in Chinese companies, this development suggests that regulatory oversight is tightening, which could lead to more transparency and potentially fewer financial irregularities in the future. However, it also indicates that companies historically associated with PwC might face increased scrutiny, affecting their stock performance and market perception.
In summary, the move by Bank of China to switch from PwC to EY amidst regulatory investigations is a pivotal event. It underscores the importance of compliance and transparency in financial auditing and could have far-reaching implications for investors in the Chinese market.