Chinese regulators recently suspended PwC China for six months. They fined the company a record 441 million yuan ($62 million) for audit failures related to Evergrande—the most significant penalty ever for a Big Four accounting firm in China.

Evergrande, one of China's largest property developers, became massively indebted as it borrowed money to build massive high-rises nationwide. In 2021, Evergrande defaulted on its debts and filed for bankruptcy in 2023.

For years, PwC, Evergrande's auditor, "turned a blind eye" and even tolerated fraudulent activities during audits in 2019 and 2020. Evergrande overstated its revenues by $78 billion between 2018 and 2020, and PwC issued false audit reports portraying a healthy financial state. Auditors reported properties as completed when they were still vacant land during inspections.

The Chinese regulator found that 88% of PwC's observations about Evergrande's projects were fabricated or inaccurate, and PwC excluded specific properties from audits at Evergrande's request. This goes beyond negligence - it's aiding and abetting fraud.

What are the consequences for PwC? A fine and suspension were issued, and several partners and staff were fired. But hundreds must have been complicit, and no individuals face real accountability. PwC China's future is uncertain, but the lack of personal repercussions is alarming.

As we discussed on The Accounting Podcast, the misaligned auditing incentives are a severe issue. This case with PwC and Evergrande illustrates how badly things can go when auditors fail to uphold their duties. It's a stark reminder of the importance of auditor independence and skepticism.