Hong Kong's securities watchdog on Thursday said it had reached a deal with PricewaterhouseCoopers (PwC) Hong Kong for the auditor to set aside HK$1 billion to compensate independent minority shareholders of China Evergrande Group.

PwC Hong Kong was also fined HK$300 million and suspended for six months from accepting, performing or issuing auditing reports in respect to new clients of listed firms, according to the Accounting and Financial Reporting Council.

In a statement, the Securities and Futures Commission (SFC) said an investigation found that China Evergrande, currently in liquidation, had substantially overstated its annual revenue and profits in 2019 and 2020.

It also noted that there was "market misconduct" and "serious breaches" of professional duties by PwC Hong Kong, who was the auditor of the indebted developer, which then led in part to Evergrande's falsified financial statements.

SFC also said Evergrande had "manipulated" its annual revenue and profits by "prematurely recognising revenue from property sales before the completion and delivery of properties to buyers".

It concluded that Evergrande's audited annual revenue was overstated by 213.9 billion yuan, or around 45 percent, in 2019, and 350 billion yuan, or nearly 70 percent, in 2020.

As such, its audited profit for those two years of 33.5 billion and 31.4 billion yuan should have been a loss of 7.12 billion and 19.9 billion yuan, respectively.

SFC chief executive Julia Leung said in the statement that it's the first time an auditor of a defunct company is compensating independent minority shareholders, who were harmed by the false and misleading financial statements.

"This will send an unequivocal message to the audit profession and the investing public that the SFC is committed to maintain market integrity and protect investors," she said.

The SFC also noted that under its agreement with PwC Hong Kong, the two sides agreed the matter would be fully and finally resolved without admission of liability, and that the SFC would take no further action against PwC Hong Kong, provided that PwC Hong Kong fulfils the terms of the agreement.

In a statement, PwC Hong Kong said resolving the regulatory matters was important and "it is ⁠pleased to be able to put them behind us."

In 2024, PwC's Chinese unit was penalised by mainland regulators with a six-month suspension and a record fine of ⁠441 million yuan over the firm's audit of Evergrande.

Regulators also called on eligible shareholders as well as their intermediaries to retain records of transactions involving Evergrande's shares. (Additional reporting by Reuters)



Edited by Tony Sabine