Hong Kong’s accounting regulator has launched an investigation into PwC’s most recent audit of Evergrande, the world’s most indebted property developer.
The state’s Financial Reporting Council (FRC) cited concerns about the high levels of debt on Evergrande’s balance sheet. It added that the company’s cash reserves did not cover its liabilities, raising questions over whether it should have been given a clean bill of health.
It came as China’s central bank insisted that risks to the financial system stemming from the developer’s struggles are “controllable” and unlikely to spread.
The watchdog said it had identified “questions about the adequacy of reporting on going concern” in Evergrande’s accounts for 2020 and the six months to the end of June this year.
It also said it would consider whether PwC’s audit of Evergrande’s accounts for 2020 “complied with the applicable auditing standards”.
PwC, which audits Evergrande from Hong Kong, signed off the company’s accounts last year as a going concern, which means the firm has necessary resources to continue operating for at least a year.
However, in its half-year results in August, Evergrande said it risked defaulting on its debt.
The regulator said that while the property giant admitted to liquidity issues, it “made no explicit statement” as to whether “material going concern uncertainties existed” in its half-year of full-year reports.
PwC has audited Evergrande since 2009, during which time it has received fees worth $42m (£30.5m), the Financial Times reported.
On Friday, China’s central bank broke its silence on the crisis, with Zou Lan, a senior bank official, saying authorities and local governments were resolving the situation based on “market-oriented and rule-of-law principles”.
He added that the central bank has asked lenders to keep credit to the real estate sector “stable and orderly”.
Concerns are growing that the cash crunch at Evergrande is spilling over to other developers as President Xi Jinping maintains strict measures to cool the property market.
Contagion fears intensified over the past two weeks after surprise warnings from rival firms about impending defaults.
Mr Zou said: “In recent years, the company failed to manage its business well and to operate prudently amid changing market conditions... Instead it blindly expanded and diversified.”
The central bank is urging property firms and their shareholders to fulfill their debt obligations.
Meanwhile, Evergrande’s plans to sell its Hong Kong headquarters for $1.7bn collapsed after a Chinese state-owned developer pulled out of the deal.
The collapse of the talks represents another setback for the cash-strapped company.
Evergrande bought the 345,000 square foot building, which is located in Hong Kong's commercial and nightlife district, from local peer Chinese Estates Holdings for $1.6bn in 2015.
Evergrande has been scrambling to divest some assets to repay creditors. It has more than $300bn in liabilities and has already missed three rounds of interest payments on its international bonds.
PwC declined to comment.