Material #12: Auditing Evergrande
The collapse of Evergrande, China’s former largest property developer, is a cautionary tale in real estate taking up too large a part of an economy (a third, in China’s case), and of overbuilding, leading to blocks upon blocks of empty and uncompleted apartment towers - with an accompanying waste of physical resources, and decimation of people’s savings, as many had put money down for apartments before they were completed.
The story has global dimensions. For example international investors such as BlackRock, Goldman Sachs and HSBC had invested over $20 billion in the company.
As the bankruptcy proceedings advance, attention has turned to its auditors. PwC was Evergrande’s auditor when it first listed in 2009, until resigning from the account in January last year. As the Financial Times puts it, PwC “signed off [Evergrande’s] books as it expanded rapidly using eye-watering leverage during China’s real estate boom”.
Hong Kong’s Accounting and Financial Reporting Council is investigating PwC’s audit of Evergrande’s 2020 accounts, given that PwC “made no reference to going concern material uncertainties”.
PwC could face a lawsuit from Evergrande’s liquidators; it has not commented on the investigation. In the latest development this week, regulators have accused Evergrande and its founder of inflating its 2019 and 2020 revenues by almost $80 billion.
A narrow focus on bottom-line materiality is often seen, rightly, as providing an incomplete view of a company’s impacts in the real world. But it is still a crucial part of the picture and tells an important story. Financially material considerations are closely linked to governance: failing to identify key risks within them puts other dimensions at risk too – risks to people, risks to the environment, and risks to the wider economy.
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Through 2024, It’s Material is sharing one use of the word “material” each week, on Tuesdays.