*

PwC loses over 40 Chinese firms as audit clients

*

EY, KPMG each snare at least 12 companies from PwC

*

EY offers audit fee discounts to ex-PwC clients, sources

say

By Julie Zhu and Xie Yu

HONG KONG, Aug 15 (Reuters) - Ernst & Young (EY) and

KPMG have snapped up over half of PwC's corporate clients in

China that have fled the market's leading accounting firm as it

faces a regulatory probe, filings show.

Chinese authorities have been investigating PwC's role in

auditing China Evergrande Group ( EGRNF ), after the securities

regulator accused the troubled property developer in March of a

$78-billion fraud. PwC audited Evergrande for almost 14 years

until early 2023.

Regulators have also asked several large state-owned clients

of PwC to drop the auditor since at least April.

"Compared to previous years, what we're seeing this year is

certainly an unusual client exodus from PwC," said Fan Zhongwen,

an accounting professor at City University of Hong Kong.

A Reuters calculation based on filings showed more than 40

Chinese firms, many of which are state-owned enterprises or

financial institutions, have either dropped PwC as their auditor

or canceled plans to hire the firm in recent months.

Among them are some of PwC's largest clients, including Bank

of China (BOC), China Life Insurance and PetroChina, which last

year paid accounting fees of nearly 200 million yuan ($28

million), 64 million yuan and 46 million yuan, respectively, the

filings showed.

PwC declined to comment for this story. EY and KPMG did not

respond to requests for comment.

Last year, domestic regulators reiterated state-owned firms

and listed companies should be "extremely cautious" about hiring

auditors that have received regulatory fines or other penalties

in the past three years.

Those advisories and potentially hefty penalties for PwC

have worried some existing clients, prompting them to consider

alternatives, said sources.

"PwC's client losses will likely continue in the short term

as its audit of Evergrande has caused great damage to its

reputation," Fan said. "It will take time for PwC to restore the

reputation."

PwC's main onshore arm PwC Zhong Tian LLP recorded revenues

of 7.92 billion yuan in 2022, making it China's top-earning

auditor that year, followed by EY, Deloitte and KPMG, according

to official figures.

The Big Four firms audited 12% of the companies listed on

the Shanghai Stock Exchange and 5% of companies on the Shenzhen

exchange as of this March, per a PwC calculation shown on its

website.

EY AND KPMG GAIN

A Reuters calculation found EY had won at least 12 clients

from PwC, including large state-backed financial institutions

China Life, PICC and China Cinda Asset Management ( CCGDF ).

The 12 companies' total combined audit fees were over 230

million yuan last year.

Among non-state companies, Hong Kong-listed Fuyao Glass and

Shenzhen-listed Mindray Bio-Medical Electronics canceled plans

to reappoint PwC as their auditor and hired EY instead in early

August and May, respectively, according to filings.

With companies flocking to EY, it has been able to cut

spending on attracting new business and is offering a 10%-20%

reduction in audit fees to former PwC clients, said two sources.

It also plans to raise pay rates by 10% for new employees

hired through campus recruitment this fall as the firm needs

more staff to cope with the sudden increase in workload, said

one of them.

KPMG has taken on at least 12 companies from PwC that paid

total audit fees of about 160 million yuan in 2023.

They include state-owned China Telecom and China Taiping

Insurance ( CINSF ) as well as eight subsidiaries of state conglomerate

China Merchants Group that dropped plans to go to PwC and went

to KPMG, according to filings.

PwC's biggest client, Bank of China, said in June it

shortened a services agreement. It has yet to mandate a new

auditor.

Other accounting firms that have taken over PwC's audit

clients include BDO's onshore arm Lixin and domestic firm

Pan-China, filings show.

Before the spotlight fell on PwC's work for Evergrande,

Deloitte's Beijing branch in March last year was fined 211.9

million yuan by Chinese authorities and its operations were

suspended for three months after serious deficiencies were found

in its audit of China Huarong Asset Management.

The penalties, despite being imposed on Deloitte's Beijing

branch rather than Deloitte China, have left the auditor in a

disadvantaged position to take on new clients, in particular

large state-backed ones, said two separate sources.

A Deloitte spokesperson referred to a previous statement,

which said: "To be clear, there is no suggestion by the MOF

(Ministry of Finance) that either Deloitte Hua Yong, its Beijing

branch, or any of its people have done anything unethical,"

adding the firm is committed to "the highest standards of audit

quality".

Sources declined to be named as they were not authorised to

speak to the media.

($1 = 7.1476 Chinese yuan renminbi)

($1 = 7.7883 Hong Kong dollars)