(This July 16 story has been corrected to fix the revenue year to 2022, not last year, in paragraph 16)

By Julie Zhu

HONG KONG (Reuters) - PricewaterhouseCoopers (PwC) is considering slashing up to half its financial services auditing staff in China, two people with knowledge of the matter said, as a regulatory investigation and an exodus of clients darken business prospects.

The move follows Chinese regulators' scrutiny of PwC this year for its role as the auditor of troubled property giant China Evergrande Group ( EGRNF ), which, in turn, triggered the exit of some clients.

PwC's financial services auditing operation employs at least 2,000 people across mainland China with main hubs in Beijing and Shanghai servicing clients such as banks, insurers, and asset and wealth managers, said the sources, who sought anonymity.

The firm, with 781 partners and nearly 19,000 employees in mainland China as of last September, according to its website, is also mulling laying off about 20% of the staff in other auditing teams and non-auditing business lines, they added.

PwC's China businesses range from consulting to tax services, besides auditing. The size of the cuts in its financial services auditing unit and other business lines is being reported for the first time by Reuters.

PwC China's layoffs started last week, and the overall target is expected to be met over a period of time, said the sources, who declined to be identified as they were not authorised to speak to media.

"In light of changes to the external environment, we are making some adjustments to better optimise our organisational structure to align with market demand," a PwC spokesperson said in an emailed statement.

Chinese authorities have been examining PwC's role in Evergrande's accounting practices after the securities regulator accused the developer in March of a $78-billion fraud over a period of two years through 2020.

PwC had been Evergrande's auditor for almost 14 years until it resigned in early 2023.

The firm faces a record fine of at least 1 billion yuan ($138 million) and a halt to operations of some of its mainland China offices due to failings in auditing Evergrande, Bloomberg said in May.

CLIENTS LEAVE

Over the past few months, a growing number of clients has been leaving PwC, mainly state-owned or -backed enterprises and financial institutions, following the launch of the regulatory investigation into its auditing of Evergrande.

The firm had about 400 Chinese clients, listed at home or in offshore markets such as Hong Kong or New York, by March this year, including tech behemoths Alibaba and Tencent ( TCTZF ).

A Reuters calculation based on filings showed more than 30 listed Chinese firms including state-owned China Life Insurance, China Cinda Asset Management Co Ltd, Bank of China and PetroChina, have dropped PwC as their auditor in recent months.

As client departures cloud revenue prospects, PwC has stepped up cost-cutting measures.

This month the firm asked its 1,000-strong financial services auditing team in Shanghai to take career-break leave of about 15 days in July and August, during which staff can still receive a fifth of their income, one of the sources said.

PwC's onshore arm - PricewaterhouseCoopers Zhong Tian LLP, had revenues of 7.92 billion yuan ($1.1 billion) in 2022, making it China's top-earning auditor that year, official figures show.