HK's accounting watchdog looks into China Evergrande's financial statements

Hong Kong's accounting watchdog has initiated an investigation into financial statements of China Evergande and Evergrande property services. According to the press statement of the Financial Reporting Council (FRC) on 15 August 2022, the council has launched an enquiry into the financial statements of Evergrande Property Services for both the year ended 31 December 2020 and the six months ended 30 June 2021.

It has also started looking into the audit carried out by PricewaterhouseCoopers (PwC) on the Evergrande Property Services 2020 Annual Accounts.On the other hand, the FRC has extended the scope of an existing enquiry into the financial statements of China Evergrande for both the year ended 31 December 2020 and the six months ended 30 June 2021, and an existing investigation of the audit carried out by PwC on the China Evergrande 2020 Annual Accounts. 

Evergrande Property Services is a major subsidiary of China Evergrande. The financial position and performance of Evergrande Property Services and its subsidiaries are consolidated in the financial statements of China Evergrande. 

Based on public announcements made by China Evergrande and Evergrande Property Services on 22 July 2022 respectively, the FRC identified questions about the classification of restricted bank deposits and other loans, the measurement of pledge guarantees given and the disclosure of related party transactions in the accounts, and related questions about the audits. Hence it is launching an investigation into the the company’s financial statements.

The FRC added that it finds the need to publicly announce the initiation or extension of the scope of enquiries and investigations as to protect the interests of shareholders and the investing public, in order to maintain public confidence in our financial markets and independent auditor regulation.

Back in June this year, China Evergrande has expressed its “vigorous” opposition against a winding-up petition filed by one of its creditors on 28 June 2022. The petition was filed with Hong Kong’s High Court by Top Shine Global, an investment holding group, and is related to an obligation worth HK$862.5mn (US$109.9mn), according to Evergrande’s statement. 

Evergrande said in the public notice that it did not expect the petition to affect its restructuring plan or timetable, which it plans to release by the end of next month. Investors have closely watched for signs of progress in Evergrande’s drawn out default and restructuring process, with international groups making various plays to recover their debts, including seizing property and threatening legal action.

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