Evergrande's liquidators are preparing for a potential lawsuit against PricewaterhouseCoopers, which has been auditing the now-defunct Chinese property group for more than a decade, a move that could lead to high-profile negligent allegations against the Big Four accounting firm.
Alvarez & Marsal, restructuring experts Eddie Middleton and Tiffany Wong, who were appointed liquidators of Evergrande's Hong Kong-listed holding company last month, have spoken with at least two law firms about the possibility of filing claims with audit firms, according to three people familiar with the matter.
According to people familiar with the matter, the claim requires the liquidator to provide evidence to prove that PwC's mistake has harmed the interests of creditors.
One of the people said the liquidators were "taking steps to protect their ability to make legal claims against the auditors".
Evergrande, the world's most indebted property developer with more than $300 billion in debt, defaulted in 2021, triggering a broader cash crunch in China's real estate sector. Repeated attempts to agree on a restructuring plan have failed.
The liquidator's negotiations with lawyers are an early indication that the latest phase of Evergrande's bankruptcy, which began last month when a Hong Kong court ordered its liquidation, could impose significant costs on multinationals.
Discussions about possible litigation were still in the early stages, the people warned and added that the presence of the talks did not suggest that the Evergrande liquidators had found any evidence of PwC's wrongdoing, nor that litigation would certainly occur.
A bankruptcy expert who was not involved in the Evergrande case said: "In the last decade, suing auditors has become the norm as a way [for creditors] to recover value. They said claims against auditors and other professional advisers "have become something liquidators take for granted when dealing with multibillion-dollar cases."
When Evergrande went public in 2009, PwC was Evergrande's auditor and signed its books when it used jaw-dropping leverage to expand rapidly during China's property boom. Big Four companies resigned from the role last year.
Two of them said liquidators usually act quickly and reserve the right to bring proceedings against professional advisers so that they are not hindered by the statute of limitations at a later date. Under Hong Kong law, liquidators typically have six years to file a lawsuit after alleged misconduct, unless a different time period has been agreed in advance, according to people familiar with the matter.
They added that any litigation could take a long time to materialize, as the liquidator would need to gather evidence of any mistakes by the auditors and build a case to prove that creditors suffered losses as a result of those mistakes.
Middleton and Wong, as well as PricewaterhouseCoopers, declined to comment.
PwC has established significant business audits of Chinese real estate groups and advised several other troubled developers, including Country Garden, Sunac, R&F Properties and Shimao. In 2022, he resigned as an auditor of Sunac, Shimao, and R&F.
The documents show that Evergrande's audit was conducted by PricewaterhouseCoopers' Hong Kong business unit. Suing auditors in Hong Kong would be a way for liquidators to try to recover funds for Evergrande creditors outside of Chinese mainland, a process that could be much more difficult in Chinese mainland.
Other audit firms in Hong Kong have also faced negligent charges for work done by Chinese companies. In 2021, KPMG resolved the liquidator's legal claim against its China forestry audit.
PricewaterhouseCoopers signed Evergrande's accounts in 2020 but resigned as Evergrande's auditor last year, saying it could not get the information the company needed for its 2021 audit.
The Hong Kong Accounting and Financial Reporting Council said in 2021 that it was investigating PwC's audit of Evergrande's 2020 accounts.
The announcement said that PwC "issued an unqualified audit opinion" in Evergrande's 2020 accounts report, "but did not mention the material uncertainty of going concern". It added that it considered justified the 2020 audit to "investigate whether PwC's audit of China Evergrande's going concern assessment was in compliance with applicable auditing standards".