The China Evergrande Centre building sign is seen in Hong Kong. File photo
| Photo Credit: REUTERS

China’s Ministry of Finance is conducting more rigorous checks of work done by the Big Four auditing firms for local companies, three people with knowledge of the matter said, amid concerns auditors are not doing enough to uncover corporate wrongdoing.

The tighter scrutiny, which has not been previously reported, is mainly focused on Deloitte, EY, PwC, KPMG and their audits of some financial firms as well as highly leveraged companies, said the people.

It began a couple of months ago and comes in the wake of a regulatory probe into “intermediaries” for property giant China Evergrande Group, which refers to auditors, rating agencies and other providers of financial services.

Evergrande, which defaulted on its debt and has been ordered into liquidation, was found by authorities to have inflated its revenue by $78 billion.

It is only one of scores of property developers to have defaulted on debt – a crisis that has hobbled economic growth and triggered concerns about just how much exposure financial firms have to the sector. Chinese regulators this month pledged a clampdown on financial fraud, seeking to restore confidence in country’s struggling stock markets.

The finance ministry makes routine checks of audits done by the Big Four but this year it has demanded far more documents than previously and the number of queries the audit firms have had to field has jumped, the people said.

According to two of the sources, the ministry is particularly interested in audits of small and weak lenders from debt-laden Chinese provinces.

Audits of Chinese asset management companies are also under the microscope, said one source. Audits for highly leveraged state-owned enterprises and property developers are also being scrutinised, the second person said.

All sources, two of whom had direct knowledge of the scrutiny, declined to be identified due to the sensitivity of the matter.

PwC declined to comment. The Ministry of Finance, Deloitte, EY and KPMG did not respond to Reuters requests for comment.

The Big Four firms have built up a substantial presence in China over the last couple of decades as Chinese companies set their sights on listing in Hong Kong and overseas and as the world’s second-largest economy became more open to foreign investors.

But the problems at Evergrande have highlighted failures on the part of auditors “to catch…issues before it’s too late,” said Francine McKenna, founder of accounting and auditing newsletter The Dig.

“The Ministry of Finance is rightfully concerned about whether China’s financial services firms are vulnerable to the ongoing issues in the real estate sector,” she said.

She added that regulators are probably keen to know if audit firms have captured the true picture about concerns such as bad loan exposure and the extent of leverage at their client companies.

PwC is facing a record fine of at least 1 billion yuan ($138 million) due to failings in auditing Evergrande, Bloomberg reported in May.

One of the sources said the fine was still being finalised and is not likely to be announced this month.

Even before the spotlight fell on PwC’s work for Evergrande, Deloitte was fined $30.8 million last year by Chinese authorities for failing to perform its duty in assessing asset quality at China Huarong Asset Management.

Huarong failed to release its 2020 earnings on time, eventually reporting a huge loss. It then had to submit to a government-led restructuring that saw non-core businesses sold off.

Evergrande is the world’s most heavily indebted real estate developer, at the center of a property market crisis that is dragging on China’s economic growth. File
| Photo Credit: AP

The police in a southern Chinese city said they have detained some staff at China Evergrande Group’s wealth management unit in the latest trouble for the heavily indebted developer.

A statement by the Shenzhen police on Saturday said authorities “took criminal coercive measures against suspects including Du and others in the financial wealth management (Shenzhen) company under Evergrande Group.” It was unclear who Du was. Evergrande did not immediately answer questions seeking comment.

Media reports about investors’ protests at the Evergrande headquarters in Shenzhen in 2021 had listed a person called Du Liang as head of the company’s wealth management unit.

Evergrande is the world’s most heavily indebted real estate developer, at the center of a property market crisis that is dragging on China’s economic growth.

The group is undergoing a restructuring plan, including offloading assets, to avoid defaulting on $340 billion in debt.

On Friday, China’s national financial regulator announced it had approved the takeover of the group’s life insurance arm by a new state-owned entity.

A series of debt defaults in China’s sprawling property sector since 2021 have left behind half-finished apartment buildings and disgruntled homebuyers. Observers fear the real estate crisis may further slow the world’s second-largest economy and spill over globally.