Following a record fine imposed on PricewaterhouseCoopers LLP’s China operations over their audit of the failed real estate giant China Evergrande Group, the investigation into the firm now shifts its focus to Hong Kong.

The Accounting and Financial Reporting Council (AFRC) of Hong Kong announced that its review of PwC’s Hong Kong practice, distinct from the China investigation, is still ongoing, as confirmed in a statement on Friday. The AFRC spokesperson declined to provide additional comments.

This latest development underscores that PwC’s challenges in Greater China are far from resolved. The firm was recently fined 441 million yuan (approximately $62 million) and faced a six-month suspension by Chinese authorities, who accused Evergrande of inflating revenues by 564 billion yuan over two years, marking one of China’s largest accounting scandals.

Although Evergrande is regulated by Hong Kong’s authorities due to its stock listing, PwC could face further penalties from Hong Kong’s regulators. The AFRC has the authority to issue fines of up to HK$10 million ($1.3 million) if disciplinary actions are warranted.

“The substantial penalty from mainland China will put additional pressure on Hong Kong regulators,” said Pingyang Gao, a professor of accounting and law at HKU Business School. Gao noted that Chinese regulators characterized the audit failure not just as a serious lapse in auditing, but potentially as collusion with Evergrande.

PwC’s China operation, which also covers Hong Kong, audited Evergrande, while its mainland branch, PwC Zhong Tian, worked with Evergrande’s subsidiary Hengda Real Estate Group.

In response to the scandal, PwC acknowledged its shortcomings, stating that the Hengda audit “did not meet our own high standards,” and issued an apology for the impact on clients and employees.

PwC also faces a lawsuit filed by Evergrande’s liquidators in Hong Kong, as they seek to recover investments lost by creditors. The accounting firm is accused of negligence and misrepresentation during its audit of the troubled developer.

PwC’s business in China could face lasting impacts from these probes, as the firm had previously been the top revenue earner among the Big Four accounting firms in the region. Amid regulatory scrutiny, some listed companies have severed ties with PwC, and Chinese authorities have encouraged domestic firms to reduce reliance on the Big Four over data security concerns.

“We might see a mass departure of clients from PwC,” added Gao. “This could spell disaster for PwC’s future in China.”

PwC noted that the staff involved in the problematic audit are no longer with the firm. In related moves, Daniel Li has stepped down from his position as senior partner for PwC China, while Hemione Hudson, the firm’s global chief risk and regulatory officer, will step in on an interim basis.

PwC Hong Kong is also considering restructuring to mitigate future risks. According to sources, the firm is exploring partnerships to separate new income from potential fines and legal liabilities, although this strategy is still in its early stages.

Several clients, particularly those who engaged PwC for the first half of the financial year, are reportedly seeking advice from regulators and other Big Four firms about switching auditors without disrupting their ability to publish financial statements.

Additionally, some senior PwC partners, particularly those outside the real estate sector, are contemplating early retirement to avoid being financially liable for any future penalties, sources added. The Evergrande case could prompt further lawsuits from other struggling property developers and their creditors.

Audit firms typically bear the cost of regulatory fines themselves, as professional indemnity insurance rarely covers these penalties, according to Clement Chan, chairman of the Hong Kong Association of Registered Public Interest Entity Auditors. In Hong Kong, where PwC operates under unlimited liability, the burden on partners could be significant.

In 2022, PwC China generated revenue of 7.9 billion yuan from approximately 400 clients across Shanghai, Hong Kong, and New York. The Asia-Pacific region accounted for nearly one-fifth of PwC’s global revenue in 2023.