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The Hong Kong branch of a major accounting firm has been ordered to pay HKD1.3 billion (approximately USD190.2 million) in fines and compensation by local regulators following its involvement in uncovering financial fraud at China Evergrande Group.
The firm will pay a fine of HKD300 million (around USD38.6 million) and will also provide HKD1 billion to compensate eligible minority shareholders of Evergrande who were harmed by the company’s false and misleading financial statements, according to the Hong Kong Securities and Futures Commission announced yesterday.
In addition, the company faces a six-month professional practice restriction, and two former partners are fined a combined HKD10 million (about USD1.3 million).
Regulators criticized the firm for facilitating and enabling management at Evergrande to manipulate reported profits and liquidity. The firm failed to exercise proper professional skepticism amidst high audit risks, breached standards of audit independence, and issued unqualified audit opinions without sufficient evidence—sometimes knowingly lacking it, the investigation report revealed.
For instance, despite inspections showing that some properties were still under construction, the firm accepted Evergrande’s claims that they were completed and ready for delivery without verification, disregarding evidence of early revenue recognition.
As a result of these audit shortcomings, Evergrande was able to significantly overstate the value of two major asset categories—properties under development and completed properties for sale—by prematurely recognizing revenue and inflating profits. These assets made up about 60% and 61%, respectively, of the company’s total assets in 2019 and 2020.
With the assistance of insufficiently rigorous audits, Evergrande overstated its operating revenue by over CNY564 billion (roughly USD72.5 billion) and net profit by more than CNY92 billion (around USD11.8 billion) during that period, misleading stakeholders by disguising substantial losses as massive profits.
The auditors also failed multiple accounting standards in their audits of Evergrande and related entities, including Evergrande Property Services and Evergrande New Energy Vehicles. The misconduct was described as particularly severe.
Previously, Chinese regulators had already penalized the firm over its role in the Evergrande case. In September 2024, China’s Ministry of Finance imposed a CNY116 million (USD14.9 million) administrative penalty and confiscated illegal gains related to the firm’s 2018 audit of Evergrande Real Estate.
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