China’s ban on PricewaterhouseCoopers' local unit has stalled the fundraising plans of Chinese issuers, including IPOs and follow-ons.
The China Securities Regulatory Commission is encouraging some issuers to replace PwC Zhong Tian, the accounting firm’s Chinese unit, with other auditors before their listings, according to people with knowledge of the matter.
But some issuers cannot press ahead with follow-ons as PwC Zhong Tian is unable to issue comfort letters regarding their financial condition and certain information related to the offerings, said other people familiar with the situation.
The ministry of finance and the CSRC on September 13 fined PwC Zhong Tian Rmb441m (US$62m) for its auditing work between 2018 and 2020 for failed property developer China Evergrande Group and banned it for six months. PwC's Guangzhou branch was ordered to be shut down.
The MoF said in a statement that PwC Zhong Tian and its Guangzhou branch were aware of major errors in the accounts of Evergrande's main operating unit, Hengda Real Estate Group, but did not report them, and published "inappropriate" auditing opinions. It said PwC came to false conclusions, lost its independence and failed to identify and flag errors in the financial reports.
The ban has left the IPOs of some PwC Zhong Tian clients in limbo.
According to four sources with knowledge of the matter, the CSRC has suggested to some IPO candidates that they switch auditors to ensure a smooth listing.
“Compared with listed companies, the impact of changing auditors for private companies is definitely smaller. I’m not surprised the CSRC is telling them to do so,” said one of the sources.
“Even if the CSRC doesn’t ask the issuers, they may still want to change the auditors, given deals handled by PwC are likely to be put under a microscope by the regulator in the future,” said another source.
The CSRC had not responded to questions from IFR at time of going to press.
The US$50m–$100m Nasdaq IPO of insurance broker Yuanbao is one of the deals affected, according to the sources.
The company started pre-marketing on September 19, just a few days after the PwC ban, and was originally aiming to wrap up the transaction in October.
PwC Zhong Tian is Yuanbao’s accountant and audited the consolidated balance sheets of Yuanbao and its subsidiaries as of December 31 2022 and 2023, according to Yuanbao’s IPO filing.
Yuanbao is now in the process of changing auditor, which is expected to delay its IPO by four to six months, said the people.
Yuanbao could not be reached for comment.
Goldman Sachs, Citigroup and CICC are leading the transaction.
Founded in 2019, Yuanbao employs big data/AI to provide personal life and health insurance through a network of insurance carriers.
The company generated a net profit of Rmb329m (US$46m) for the first half of 2024, up 321% from a year earlier.
Comfort letter
PwC Zhong Tian’s ban has also affected some US-listed Chinese issuers considering follow-on offerings on the back of the recent improved sentiment towards Chinese stocks.
Currently, if companies want to sell shares within 135 days after the last audit cut-off date, they need a negative assurance comfort letter regarding their financial condition and certain financial information contained in the offering documents.
“Some issuers can’t get the comfort letters from PwC Zhong Tian since their audit business is suspended, and hence can’t push ahead their equity fundraising plans,” said one of the sources.
Asked by IFR how PwC Zhong Tian’s ban has affected Chinese issuers’ fundraising plans, PwC said: “It’s an ongoing regulatory matter and we are working with the relevant stakeholders to support our clients' business needs.”