The decision by the Hong Kong High Court allows the liquidators of China Evergrande to extend the negligence lawsuit against PwC beyond the entities in Hong Kong and mainland China, also involving PwC International, the structure at the center of the group's global network. According to the Financial Times, the case could have significant consequences for the entire organizational model of the Big Four.
The Evergrande crisis, one of the largest corporate collapses in recent Chinese history, thus shifts from the real estate and financial sectors to that of international professional responsibility. The group, once among China's largest real estate developers, defaulted in 2021 with about $300 billion in liabilities and was later accused of fraudulently inflating revenues before the collapse.
The liquidators are seeking a total of $8.5 billion in damages from various PwC entities, claiming there were serious failures in the auditing activities. Of this amount, $5.6 billion is attributed to PwC International.
Link to The Issue of PwC's Global StructureThe Issue of PwC's Global Structure
The central point of the dispute concerns the very architecture of PwC. As the Financial Times notes, PwC does not operate as a single global partnership but through a network of legally separate national firms.
PwC International, a company registered in England and Wales, coordinates this network by managing the brand, setting common strategies, establishing global standards, and overseeing quality programs.
This legal separation has always been one of the key elements of the Big Four model: it allows different national entities to operate in compliance with local regulations and theoretically limits the risk that legal or reputational issues in one jurisdiction automatically transfer to others.
However, Evergrande's liquidators are attempting to prove that PwC International exercised a sufficient level of control and oversight to be held accountable for the alleged shortcomings of the local entities.
Link to The Decision of the Hong Kong JudgeThe Decision of the Hong Kong Judge
Judge Patrick Fung ruled that it is "at least arguable" that PwC International might have had a duty of care towards Evergrande. Therefore, the request to dismiss the proceedings was rejected, and the case can proceed.
The immediate consequence mainly concerns the disclosure phase. According to the Financial Times, the liquidators could now gain access to internal documents on network governance, quality control systems, and the relationships between PwC International and the operating companies in Hong Kong and China.
This material could be crucial in determining how involved the global center of the network was in supervision and standardization activities.
Link to Why the Case Concerns All the Big FourWhy the Case Concerns All the Big Four
The issue goes beyond PwC. Deloitte, EY, KPMG, and PwC have built their international model on networks integrated from a commercial and operational perspective but formally separate legally.
This balance allows them to present themselves to clients as global organizations while maintaining a compartmentalization of responsibilities among individual countries.
If the Evergrande case strengthens the idea that global structures can be held accountable for the activities of local associates, the legal risk could increase for all the Big Four, especially in cases involving multinational groups with complex corporate structures.
Link to A Potentially Important Precedent, but Not AutomaticA Potentially Important Precedent, but Not Automatic
The Financial Times notes that there are precedents, but none have so far established a general rule.
In 2009, after the collapse of Parmalat, a U.S. federal court found there were sufficient grounds to examine the role played by Deloitte's global structure on the Italian company. The case ended with an $8.5 million settlement.
PwC International has also been involved in disputes related to local entities, such as the Satyam case in India, which concluded in 2011 with a total settlement of $25.5 million.
However, these cases have always depended on specific circumstances and the laws of individual jurisdictions.
Link to The Real Risk Lies in Internal TransparencyThe Real Risk Lies in Internal Transparency
Even though the Hong Kong decision does not assign any definitive responsibility to PwC International, its impact can be significant.
Access to internal documentation could clarify the extent to which PwC's global center is involved in setting standards, quality control, and risk management of individual national entities.
It is precisely this gray area that is central to the Big Four model: the stronger the substantial integration among the various companies in the network, the more difficult it becomes to argue that responsibility is completely separate.
The Financial Times notes that the dispute could thus become an important test for the future structure of large international auditing firms. If Evergrande's liquidators achieve significant results, other law firms might be encouraged to initiate similar actions in transnational cases.
(Associated Medias) - All rights reserved