For decades, the Big Four have had a highly effective Janus face: they present themselves to clients as global brands, able to assemble teams across borders; while simultaneously maintaining the status of separate national entities, connected, but generally responsible for their own liabilities.
The collapse of China Evergrande Group, and the many findings of improper conduct by PwC auditors in China and Hong Kong, may now provide one of the most consequential tests yet of how robustly that distinction will hold up in court.
On Wednesday, 26 August, a Hong Kong court rejected an attempt by PricewaterhouseCoopers International Limited (PwCIL) — PwC’s global coordinating entity — to remove itself from litigation brought by Evergrande’s liquidators.
The liquidators, Edward Middleton and Tiffany Wong of Alvarez & Marsal, are seeking approximately RMB57 billion (approximately US$8.4 billion) from PwCIL, PwC Hong Kong and PwC’s mainland China firm over alleged negligence connected with the audits of Evergrande. PwCIL’s potential share of the claim might reach RMB38 billion (approximately US$5.6 billion).
This is shaping up to be a test case as to whether the organisation sitting at the centre of a Big Four network can be held legally responsible for audit failures occurring inside one of its member firms.
PwC tried to stop that question reaching trial
PwCIL has taken the position that it was not Evergrande’s auditor, and that PwC Hong Kong and PwC China are not its subsidiaries. Its lawyers argued that PwCIL owed Evergrande no duty of care in relation to its audits.
The liquidators, on the other hand, asserted that PwCIL sits at the centre of the PwC network and bears responsibilities relating to the standards maintained by its member firms.
According to the Financial Times, Deputy High Court Judge Patrick Fung has now decided that it was “at least arguable” that PwCIL owed Evergrande a duty of care, and that discovery of documents and interrogatories were needed to throw more light on the case.
So for clarity, it is not the case that the judge has decreed that the global PwC entity is liable for Evergrande’s losses. What has happened is that it has concluded that the liquidators’ case against the global entity should be investigated.
That means that a harsh light is finally going to shine on the murky and convoluted setups of the Big Four firm.
The paradox at the centre of the PwC network
The PwC network is not one firm. Member firms are separate legal entities. This is how the firm describes its structure:
the PwC network consists of firms which are separate legal entities. The firms that make up the network are committed to working together to provide quality service offerings for clients throughout the world. Firms in the PwC network are members in, or have other connections to, PricewaterhouseCoopers International Limited (PwCIL), an English private company limited by guarantee. PwCIL does not practise accountancy or provide services to clients. Rather its purpose is to facilitate coordination between member firms in the PwC network.
Member firms are permitted to use the PwC name, resources and methodologies, but they cannot act as agent for PwCIL or another member firm, and each is liable only for its own acts and omissions.
Discovery may matter more than the US$8.4 billion headline
PwC’s public statements tell us how the network is supposed to work. Litigation could establish in considerably greater detail how it actually works.
Questions will undoubtedly arise about the practical relationship between PwCIL and individual member firms, with particular focus on how much authority the international organisation can exercise over individual firms.
It will also expose the complicated structures the firm has put in place over the last few decades to protect partners from liability in cases such as Evergrande: nested companies with similar names, designed to confuse plaintiffs; partners joining the partnership as limited liability companies instead of in their own names; partners hiding assets in their spouse’s or children’s name. The list goes on.
That is potentially uncomfortable territory for all of the Big Four.
The networks derive much of their commercial value from being able to promise consistency across borders. Yet their legal resilience depends substantially on the proposition that the firms providing those services remain separate, and that their complex structures are hard to trace. Many a case has been won on the basis of the plaintiff suing the wrong company in the network.
The liquidators are now going to force a court to examine exactly how these structures operate.
The underlying audit findings are unusually severe
The legal jeopardy is serious, because the findings of regulators in Hong Kong and China have implicated the local PwC firms in severe misconduct.
Hong Kong’s Securities and Futures Commission concluded that Evergrande had overstated audited revenue by RMB213.9 billion, or 44.79%, in 2019, and by RMB350.2 billion, or 69.03%, in 2020.
Profits reported at RMB33.5 billion and RMB31.4 billion for the two years should, the regulator found, instead have been losses of RMB7.12 billion and RMB19.9 billion.
The SFC said PwC Hong Kong did not perform effective site inspections and sufficiently verify supporting evidence, and “actively acquiesced” in management manipulation of audit samples and site inspections that helped conceal premature revenue recognition.
PwC Hong Kong subsequently agreed to set aside HK$1 billion (approximately US$127.6 million) for compensation to eligible independent minority shareholders. The matter was settled without PwC admitting liability.
Hong Kong’s Accounting and Financial Reporting Council also highlighted serious misconduct by the firm’s auditors. It concluded that PwC had facilitated the inflation of Evergrande’s profits and liquidity and issued unmodified audit opinions without sufficient appropriate audit evidence — in some instances despite knowing that such evidence was lacking. The council fined the firm HK$300 million (approximately US$38.3 million) and imposed a six-month restriction on taking new public-interest-entity engagements.
Mainland China’s findings were no less serious. The Chinese Ministry of Finance concluded in 2024 that PwC Zhong Tian had serious deficiencies in its audit procedures and failed to identify material misstatements in Evergrande’s financial statements. Among its findings, the ministry said PwC personnel had lost their independence by participating in the preparation of Evergrande’s consolidated financial statements and preparing adjustment entries that inflated profits.
The Ministry’s decision also found serious failures in audit procedures around revenue recognition.
The China Securities Regulatory Commission separately imposed sanctions after finding that PwC had failed to perform its audit responsibilities diligently in the 2019 and 2020 Evergrande audits.
Together, the mainland penalties against PwC reached RMB441 million (approximately US$65.6 million).
How is PwCIL set up?
PwCIL is registered at Companies House in England as PricewaterhouseCoopers International Limited. It is a private company limited by guarantee without share capital, classified as a non-trading company.
In other words, this is not an asset-rich setup, which raises serious questions as to how it would fund a large payout if the court decides it is liable. What obligations, if any, do member firms have to fund PwCIL? And how would an extreme liability event be distributed through the network?
The firewall has been tested before
Evergrande is not the first case in which plaintiffs have attempted to move beyond the national audit firm and towards the organisation at the centre of a Big Four network.
One of the most important precedents came from the collapse of Italian dairy group Parmalat.
In 2009, a US federal court refused to grant summary judgment to Deloitte Touche Tohmatsu, then Deloitte’s global coordinating organisation, on claims connected with the work of Deloitte Italy.
In the Parmalat ruling, the court found sufficient evidence to question whether Deloitte Italy was acting as an agent of the global Deloitte organisation and whether the latter exercised sufficient control. The issue was never finally decided: after the court refused to certify an interlocutory appeal, the Deloitte defendants settled the investor claims for US$8.5 million in 2009.
PwC itself has also encountered the issue before, in the aftermath of the Satyam accounting scandal in India. A US securities class action was settled in 2011 for US$25.5 million by a group of PwC entities that included Indian PwC firms, PwC US and PricewaterhouseCoopers International Limited.
So the legal firewall surrounding the Big Four networks is not untouchable, and Evergrande is not unprecedented.
What is different is the potential scale. A US$25.5 million settlement is one thing. A claim exposing the global coordinating organisation to as much as US$5.6 billion is something else entirely: a potentially catastrophic event.
So could Evergrande become PwC’s black swan?
The answer to that is yes, but not solely because of the financial exposure. The real risk is that this case could expose, and potentially demolish, one of the foundational risk-management mechanisms architected by the Big Four: the fragile ecosystem that has enabled the firms to sell the advantages of global integration, while evading accountability for work performed by the hundreds of thousands of professionals in their networks.
Lawyers pursuing accounting firms elsewhere will be watching closely. If discovery produces evidence showing a materially greater degree of global control than the networks’ legal descriptions suggest, or if the judge eventually finds PwCIL responsible for failures arising inside a national member firm, the implications could reach beyond Evergrande — and beyond PwC.
The black swan, if there is one, has not landed yet. But a Hong Kong court has just opened the door through which it might arrive.
This article is part of the Big4News Investigations & Analysis series, which examines the structural forces shaping Deloitte, PwC, EY and KPMG.
About Claudine Cassar
I’m a corporate anthropologist and former Deloitte equity partner. I sold my technology business to Deloitte in 2016 and led the Malta Consulting team for five years. I am the founder and editor of Big4News, which provides independent, clear analysis of PwC, Deloitte, EY, and KPMG — free from corporate spin.
Find me on LinkedIn, X, Instagram, or my author website.
Feel free to reply to this newsletter — I read every reply.