In a development that could see one of the Big Four accounting firms embroiled in a high-stakes legal battle, the liquidators of the now-defunct Chinese property giant Evergrande are reportedly exploring the possibility of filing a negligence lawsuit against PricewaterhouseCoopers (PwC). This potential legal move comes in light of PwC‘s role as the auditor for Evergrande for more than a decade, during which the property developer spiraled into the world’s most indebted property crisis.
Eddie Middleton and Tiffany Wong, restructuring experts from Alvarez & Marsal appointed as liquidators for Evergrande‘s Hong Kong-listed holding company, have initiated discussions with at least two law firms about the feasibility of bringing a claim against PwC, as per sources familiar with the matter. According to a Financial Times report, the focus of the potential lawsuit would be to establish that PwC‘s auditing missteps significantly contributed to the financial damages suffered by creditors.
Evergrande‘s financial unraveling, marked by over $300 billion in liabilities and a default in 2021, has sent shockwaves through China’s property sector, highlighting the gravity of the situation and the potential repercussions for involved global firms like PwC. This exploration of legal avenues by the liquidators signifies the beginning of a new phase in the collapse saga, potentially culminating in substantial liabilities for PwC.
The discussions about a possible lawsuit are still in preliminary stages, with caution being advised about interpreting these early talks. It is emphasized that the presence of discussions does not necessarily imply that any wrongdoing by PwC has been discovered, nor does it guarantee that a lawsuit will proceed.
PwC, which resigned from its auditing role with Evergrande last year, has been a significant player in auditing Chinese real estate groups, including other developers that have faced financial struggles. The legal considerations for the liquidators include the statute of limitations under Hong Kong law, which generally allows six years from the alleged wrongdoing to initiate a lawsuit, barring any prior agreement to a different timeframe.
The complexity of the situation is underscored by PwC‘s resignation as Evergrande‘s auditor in the previous year, citing difficulties in obtaining necessary information for the 2021 audit. This resignation followed an unmodified audit opinion for Evergrande‘s 2020 accounts, which did not reference any material uncertainties related to the company’s ability to continue as a going concern. The Hong Kong Accounting and Financial Reporting Council has since announced an investigation into PwC‘s audit of Evergrande’s 2020 financial statements.
