Hong Kong’s accounting watchdog has launched an investigation into Evergrande Property Services, a major subsidiary of the embattled Chinese property developer, and its auditor PwC over a $2 billion loan scheme that led to the evacuation of an executive last month.
The investigation will put more scrutiny on Evergrande, the world’s most indebted real estate developer, after it failed an interview Self-imposed deadline to restructure its $300 billion commitments at the end of July.
It also adds stress to the Big Four Checker PricewaterhouseCooperswhich repeatedly gave Evergrande accounts a clean bill of health before the developer defaulted on its international debt late last year.
Hong Kong’s Financial Reporting Board said Monday it has identified potential concerns in the 2020 accounts of Hong Kong-listed Evergrande Property Services.
The investigation is related to how Evergrande The subsidiary and PwC classify “restricted bank deposits and other loans,” the guarantees provided on those loans, and the disclosure of related party transactions, the Fed said.
The company’s board of directors said it will investigate the real estate services unit’s financial statements for the year ended December 31, 2020 and the six months ended June 30, 2021, as well as PwC’s audit of the 2020 annual accounts of Evergrande Property Services.
In July, Evergrande replaced its chief executive and chief financial officer after an internal investigation found that it had allowed $2 billion in deposits belonging to the Real Estate Services unit to be pledged as collateral to lenders. The amount was subsequently confiscated by the banks when the unit did not meet its obligations, eliminating most of the subsidiary’s net cash.
The forfeiture threatened to damage the residual value of the Evergrande international bond, which is trading at a fraction of its value after the company defaulted late last year.
The company said at the time that the loans secured by the pledges were “transferred and transferred back to the group via third parties and used in the group’s general operations”.
Evergrande has nearly $300 billion in liabilities, including $20 billion in international bonds, and is expected to undergo the largest corporate restructuring in China’s history.
The Fed also said on Monday it had “extended the scope” of the investigation announced last October into Evergrande Group accounts and PwC audit work after it identified “questions about the adequacy of continuity reporting.” The Federal Reserve expanded the investigation in October to include the impact of the $2 billion deal in the group.
PwC has signed the 2020 Evergrande accounts as a going concern, an accounting term that shows the company has the resources to continue in business for at least 12 months.
But in Evergrande’s interim financial statements for the first half of 2021 released in August last year, the company said it risks defaulting on its debt. It started losing interest payments on its international bonds in November.
PricewaterhouseCoopers has audited Evergrande since its Hong Kong listing in 2009. It has reduced its exposure to Chinese property groups this year as the liquidity crunch grips the property market.
PwC has quit its developer audits Hopson Development, Shimao and Guangzhou R&F in recent months, raising fears of an auditor exit from the industry as groups face debt payments and fundraising options dwindle.
Hong Kong-listed shares of Evergrande have been suspended since March after it failed to submit its overdue annual report.
PricewaterhouseCoopers and Evergrande did not immediately respond to a request for comment.