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In September 2024, PwC Chinа (“PwC”) wаs fined 441 milliоn RMB ($86 milliоn CDN) аnd was suspended frоm performing any audit services for six months. The Chinese Ministry of Finance also ordered the closure of the PwC branch office in Guangzhou and barred the firm from performing any work for state-owned enterprises for three years. The penalties were a result of the firm’s involvement with the audit of China Evergrande Group (“Evergrande”), the large property development company that went bankrupt in 2023. The audit firm was found to have performed substandard audits for several years and was even accused of colluding with Evergrande to deceive investors. Evergrande overstated its revenues by $108 billion CDN between 2018 and 2020. The financial misstatements, which resulted in part from Evergrande’s attempts to cover up its financial problems stemming from the softening Chinese real estate market, were not identified by the auditors in their audit reports. The finding against PwC goes beyond mere lack of competence, however, as it was found that the firm actively participated in the misstatements. PwC was the auditor for the Evergrande group for 14 years, and it always issued unqualified audit opinions on the company’s financial statements. The total audit fees earned by PwC from Evergrande over this period totaled $55 million CDN. Some of the specific findings against PwC include the following: Failure to identify violations of revenue recognition principles, whereby deposits paid by customers on unfinished construction projects were recognized as revenue. Failure to identify manipulations in lists of client possession dates of properties. Allowing the client to choose the properties for physical observation, rather than employing a random selection technique. In one instance, 74% of a sample proposed by the auditor was removed and replaced with a different sample selected by the client. In several instances, auditors physically observed vacant land that was being reported as finished inventory, but they did not identify this in their audit report or working papers. In some cases, PwC sent working paper templates to the client and had them fill out the samples with supporting evidence. PwC created certain consolidation journal entries that artificially increased profits. Remarkably, some of the allegations above were initially identified in a “whistleblower” letter posted online, authored by “some PwC partners.” In the letter, the PwC chair, Raymund Chao, was identified as the key partner on the Evergrande file and the instigator of some of the schemes. It was also noted that Chao, before moving to PwC, was a partner at the now-defunct firm, Arthur Andersen. Aside from the penalties applied, PwC is suffering further consequences of its actions, as many of its existing clients have decided to move their work to other accounting firms. REQUIRED: What types of earnings management techniques did Evergrande engage in? What principles of the CPA Rules of Professional Conduct did PwC violate? What threats to PwC’s independence appear to be present in this case? Why would a PwC client who is not associated with the Evergrande case want to move their business to another accounting firm?