An Open Letter from partners of PwC
Who brought PwC into the pit of Evergrande?
The issue of PwC auditing Evergrande has drawn considerable attention. While many have criticized PwC, no one has asked, at PwC, who is responsible for the failure of Evergrande's audit?
The ultimate person responsible for PwC's failed audit of Evergrande is Raymund Chao.
Raymund Chao currently serves as Chairman, Senior Partner, and CEO of PwC's Asia Pacific and China region. In terms of time periods: from 2005 to 2013, Raymund Chao served as the head of PwC's audit business line (Evergrande was a client under Raymund's watch); from 2014 to the present, Raymund Chao has served as the top executive of PwC.
The financial fraud of Evergrande is so serious that PwC turned a blind eye to it for over a decade, making PwC complicit in the fraud. How did PwC, with its long history and experience, end up in this situation today? How did Raymund Chao lead PwC into the pit of Evergrande? Based on our close observation and experience, we summarize the reasons as follows, which are worth reflecting on by every accounting firm and regulatory authority.
1 - Pursuit of high partner income. Raymund Chao's slogan is: "The EPEP — Earnings Per Equity Partner — of PwC led by me is the highest in history and the highest among the Big Four." Raymund Chao's annual income from PwC is HK$50 million (note that he also pays low personal income tax of less than 7.5% through tax arrangements). In the pursuit of high partner income, Evergrande is indeed a good client. In 2014, the previous generation of PwC's leadership partners proposed to dismiss Evergrande, but Raymund Chao rejected it, saying: "Selling houses in the Mainland is as fast as selling cakes; PwC needs to keep up with good service to meet the pace of clients." Within PwC, there is a famous Raymund Chao inner circle, internally known as the "Two Billion Club," consisting of fewer than 10 people who take two billion away from PwC annually. Once the management partners of an accounting firm and their cronies make money their top priority, it's no wonder they end up in the pit of Evergrande.
2 - Quality management of audits in PwC becomes a means of suppressing opponents in political struggles. Although PwC is a brand, in China, it is formed by the merger of PwC, EY, and Andersen. It is well known that within PwC, out of every 300 yuan, 130 yuan (43%) goes to EY people, 90 yuan (30%) goes to old PwC people, and 80 (27%) yuan goes to old EY people. Raymund Chao is a partner from EY. He arranged his cronies from EY as the internal quality management partner. Almost all quality management positions in PwC's audits are controlled by partners from EY, and they even retain retired partners from EY. There is a female partner with the surname Huang who came from EY, nearly 70 years old, still serving as a quality consultant for PwC's audits, working every day at the Taiping Tower. Then, Raymund Chao suppressed those who opposed him under the pretext of audit quality. One partner who was experienced in real estate audits was Guo Zhiping (former head of real estate industry audit), originally from old PwC. He opposed the radical actions of EY partners but ended up being suppressed by Raymund Chao, leading to a halving of his salary before retirement and unfortunately being diagnosed with cancer. Another partner who opposed issuing audit reports for Evergrande was Wu Weilun, the partner in charge of PwC's South China audit. He was taken down by Raymund Chao, Sun Baoyuan, and Cai Chuqing, and a partner from EY took over as the partner in charge of the South China audit.
3 - Evading quality checks from international networks. PwC's international network regularly inspects the audit quality of its member firms. Raymund Chao hired retired senior PwC partners from the United States at high salaries to act as spokespersons for the China and Hong Kong offices, covering up the actual audit quality of PwC China. These retirees, who previously held leadership positions in international network audit quality checks, took money from PwC China and spent their days praising the audit quality of PwC China. However, when the U.S. regulatory agency PCAOB later inspected Alibaba's audit working papers, a retired international quality control partner from PwC who participated in the inspection said they did not expect the audit quality of PwC China to be so poor. PwC is a leader in the audit industry, but one role that is not known to the outside world is that Raymund Chao and other PwC partners, under the pretext that audit working papers in mainland China are state secrets, refused inspections by regulatory authorities in Hong Kong and the United States. In fact, they refused inspections to protect the basis of their profit-sharing while making big money and avoiding scrutiny of audit quality. It is precisely this reason that has led to distrust in the capital markets of China and the United States.
4 - Basic paralysis of PwC's Asia Pacific management. PwC's Asia Pacific management consists of three major markets: China (including Hong Kong), Australia, and Southeast Asia (including Singapore). In the past decade, Raymund Chao has served as the Chairman of PwC's Asia Pacific region. However, under Raymund Chao's philosophy of pursuing the highest EPEP, management in the Asia Pacific region was not effective. Besides PwC China, another disaster was that PwC Australia engaged in serious illegal activities because several PwC partners leaked Australian government secrets. The Australian government has terminated all contracts with PwC Australia (terminating all contracts) and initiated an investigation into PwC Australia. Subsequently, PwC's international network intervened in the investigation of PwC Australia, removed Raymund Chao from his position as Chairman of the Asia Pacific region, and PwC Australia dismissed 37 partners and nearly 500 employees, an unprecedented move in history. Due to his responsibility for managing the Asia Pacific region, Raymund Chao is currently unable to enter Australia, otherwise, he will face the risk of being detained and investigated by the Australian government. As of now, management of PwC's Asia Pacific region is completely paralyzed.
5 - Regarding audit independence and other services provided by PwC to Evergrande and the Xu Jiayin family office. Currently, people are generally concerned about PwC's audit services, but another question that must be asked is whether PwC, in providing tax advisory services and cross-border transaction services to Evergrande and the Xu Jiayin family office, assisted Evergrande and Xu Jiayin in tax evasion, tax avoidance, and transferring money overseas illegally. This question must be investigated by the Ministry of Finance and regulatory authorities. PwC's service to Evergrande is definitely not limited to audit services alone.
The lesson that is worth reflecting on by the next generation of PwC partners and industry insiders is:
Firstly, PwC advises clients on "checks and balances" in corporate governance. Who within PwC can check Raymund Chao? Who can challenge Raymund Chao? The governance issues of Chinese accounting firms have already been put on the agenda. For example, should the personal income of senior executives of Chinese accounting firms be disclosed? Once, when regulatory agencies investigated PwC, PwC's response to the regulators was that the supervision of Raymund Chao was the responsibility of someone named Sun Baoyuan, which is itself a joke. Sun Baoyuan is well known within PwC as someone without a backbone when it comes to money. It was Sun Baoyuan who helped Raymund Chao take down Wu Weilun, who opposed the Evergrande audit project.
Secondly, because the financial fraud of Evergrande was so severe, the audit work on the two accounting items of "real estate" and "cash/bank deposits" was not done properly. Legally, should PwC be considered complicit in the fraud? Did PwC assist the Xu Jiayin family in transferring funds overseas? Clarifying these questions, holding the responsible partners of PwC accountable, and rooting out the troublemakers (while exonerating those honest partners) may be a short-term pain for PwC, but in the long run, it is beneficial for PwC and the industry's long-term stability.
Thirdly, the management power of PwC was originally held by the Hong Kong partners. For the sake of money, Raymund Chao has been seeking re-election for the 3.5th term (which has already been completed for 10 years, 2.5 terms). Now, he reluctantly relinquished his position and handed over the position of Chairman and Senior Partner of PwC China to mainland Chinese partner Li Dan. This is the first time, and also the first time that the management power of a Big Four firm has been held by mainland partners. But will Li Dan take the blame? Should the other members of the Two Billion Club, including Yang Zhiwei, Cui Zhiyi, and Cai Chuqing, return the two billion they take away each year to the company as compensation for Evergrande? This is something the partners' contract should seriously consider. After retiring, these people are still bargaining with Li Dan to stay in the company as consultants and continue to receive money. As of today, Li Dan has not even appointed his Chief Financial Officer. By doing this, are they being fair to the next generation of PwC partners?
Fourthly, the most important consideration for choosing a leader in a partnership enterprise is still character. Raymund Chao covered up his greed and jealousy at a certain period, but once he gained power, his true colors were revealed, leading PwC into the pit of Evergrande for his own gain. This inevitability is determined by Raymund Chao's character. The painful lesson of PwC is a reminder that in the future elections (including nominations) of the Chief Partners of the next several terms, considering the character of the leading partners should be paramount.
Fifthly, we do not want PwC to collapse; most of PwC's partners are outstanding and dedicated professionals. The market also needs PwC. But how should Raymund Chao and the members of his Two Billion Club be held accountable? Every year, at the end of June/beginning of July, PwC holds its partner meeting at the Venetian in Macau, which is publicly known; a little-known fact is that Raymund Chao holds a meeting of former Andersen partners first, less than three tables, to discuss the overall plan for Andersen's people to take power. This is done behind the scenes. Raymund Chao stays in the presidential suite, holding meetings during the day and gambling at night.
This year, where will the PwC China partner meeting be held, and will Raymund Chao's unscrupulous retirement celebration also be held? We wait and see. At least the Venetian is no longer a recommended venue.
Furthermore, what is the budget for Raymund Chao's retirement celebration? As mentioned earlier, Guo Zhiping, the former head of real estate audit who was suppressed by Raymund Chao, entered China in 1992 to help establish the old PwC. Thirty years later, in 2022, he retired. His apprentices at PwC (including Li Dan) held a retirement celebration for him, which was actually a farewell to life (Guo Zhiping was diagnosed with cancer). More people attended this event than expected (in fact, it was a group gathering expressing dissatisfaction with Raymund Chao and his Andersen small circle partners), exceeding the budget by RMB 30,000. It is said that Li Dan, in order to show loyalty to Raymund Chao, did not approve this expenditure of RMB 30,000, and it was later paid by Guo Zhiping himself. History is educating people in this way. We suggest that a retirement celebration should not be held for Raymund Chao, because the money should be saved to compensate Evergrande's investors and banks.
Raymund Chao made a request to Li Dan: after retirement, he wants to serve as the Honorary Chairman of PwC. Cai Chuqing's request is that he wants to serve as a consultant to PwC in Hong Kong. Both of them are in it for the money (more importantly, to cover their own backs). Referring to the remuneration of retired partners who served as consultants in the company, it was HKD 800 per person per year. If this is the arrangement, our suggestion to the partners of PwC is: Raymund and the members of his Two Billion Club should not retire at all until PwC finishes the legal battle with Evergrande.
Final words:
Firstly, PwC is under investigation by the Ministry of Finance in China and facing lawsuits from the liquidators of Evergrande in Hong Kong. These are challenges that PwC must confront. However, at the same time, PwC must muster the courage to, just like in Australia, engage independent experts to conduct an independent investigation into PwC's governance, culture, and accountability, and publicly disclose the findings of the investigation to the public. PwC exists for the public interest, and establishing social credibility is its most important responsibility. If an independent investigation cannot be conducted, it owes the market an explanation. This is also the only way for PwC to restore market confidence in itself.
Secondly, during Raymund Chao's tenure as the leader of PwC for 10 years, the Chief Financial Officer he used was Cui Zhiyi, unchanged for 10 years. However, everyone within PwC knows that Cui Zhiyi is a person who fundamentally lacks moral standards. PwC in China is a company with an annual turnover exceeding HK$20 billion and annual profits for distribution to partners exceeding HK$5 billion. The finances of such a company are controlled by a small circle of two people, and the financial accounts are not transparent (note that they are not even disclosed to the partners). The audit department of PwC's international network must conduct internal audits of the finances during Raymund Chao's tenure as the leader, including the expenses in the Cayman Islands controlled by Raymund Chao and Cui Zhiyi, and publicly disclose the results of the internal audit to all partners. The whistleblower letters against Raymund Chao over the past 10 years must be seriously reviewed and re-examined to reveal the truth to the partners of PwC.
Please have Ewan Clarkeson, the partner responsible for professional ethics at PwC, allocate resources to translate this open letter into English and submit it to PwC International and its network leaders.
Thirdly, from July to September 2024, these three months are when PwC partners assess performance and determine the basis for profit sharing. If there is any retaliation against any partners, especially against former PwC and former Andersen partners, we will issue a second open letter and publicly disclose relevant work documents.
Some of the partners at PwC
March 2024
