China Evergrande Group’s (恆大集團) alleged US$78 billion revenue overstatement escalates the legal peril of founder Hui Ka Yan (許家印), who now stands at the center of one of the biggest financial fraud cases in history.
The nation’s top securities regulator said the developer’s onshore unit inflated revenue by recognizing sales in advance in the two years through 2020 that led up to its default. It imposed a 4.18 billion yuan (US$581 million) fine against the unit.
Evergrande’s alleged fraud dwarfs that of Luckin Coffee Inc (瑞幸咖啡) and Enron Corp, dealing a blow to the reputation of its former auditor PricewaterhouseCoopers LLP and the country’s financial oversight. It fuels concern about how widespread such accounting issues are, just as the new China Securities Regulatory Commission (CSRC) chairman is trying to tighten oversight.
Photo: AFP
The fine also means Evergrande, with about US$332 billion in liabilities, will have even less money to pay off global creditors, despite a Hong Kong court ordering the company to be liquidated in late January.
“The alleged fraud is shocking in its scale,” said Brock Silvers, managing director at private equity firm Kaiyuan Capital. “Hui became an expected civil and criminal target as soon as Evergrande was ordered into liquidation.”
The allegations mark the latest blow for Hui, once among Asia’s richest tycoons, who oversaw a sprawling empire that spanned real estate to electric vehicles. Evergrande was one of China’s biggest developers, taking on massive debt to expand across the country as condo sales boomed.
The CSRC’s action may pave the way for more serious charges against Hui, who was detained by police last year due to “suspicion of illegal crimes.” No criminal charges against Hui have been made public and his whereabouts aren’t known. The levies are administrative penalties.
Regulators allege Hui instructed other personnel to “falsely inflate” annual results. The onshore unit Hengda Real Estate Group (恆大地產集團) boosted its 2019 revenue by about 214 billion yuan, and another 350 billion yuan in 2020, the regulator said. The inflated figures accounted for half of Hengda’s total revenue in 2019, and 79 percent in 2020.
As the supervisor in charge, Hui used particularly “egregious” means, the regulator said. Hengda also used these inflated figures in marketing to issue a combined 20.8 billion yuan in bonds, the regulator said.
Evergrande used to recognize revenue from apartments including those that were presold but yet to be delivered. The developer said last year that it changed its approach in 2021 to book revenue after the units were completed or occupied by their owners.
Hengda’s auditor in 2019 and 2020 was PricewaterhouseCoopers Zhong Tian LLP (普華永道中天會計師事務所), a mainland entity affiliated with PwC’s network. PwC resigned as Evergrande’s auditor in January last year due to audit disagreements.
PwC has also resigned as auditor for other Chinese developers including Sunac China Holdings Ltd (融創中國控股) and Shimao Group Holdings Ltd (世茂集團) In Hong Kong, the city’s Financial Reporting Council said in 2022 that it was looking into Evergrande’s financial statements for 2020 and expanding an investigation of an audit carried out by PwC.
“The more alarming question is — given than many other real estate developers have faced financial distress — who else relied on accounting gimmickry to buy them time,” said Joel A. Gallo, an adjunct professor at New York University in Shanghai. “Regulators should pose tough questions to the industry and their auditors.”
“To improve investor confidence in a sector that has weighed down the market, transparency, which has been murky so far, needs to be demonstrated,” Gallo added.
The CSRC’s fine against Hengda, while among the largest ever in China, trails that of the 7.1 billion yuan slapped on fintech giant Ant Group Co (螞蟻集團) for policy violations.
Hui was fined 47 million yuan for the falsified results and other alleged violations, and banned for life from capital markets activities. Other former executives Xia Haijun (夏海鈞) and Pan Darong (潘大榮) were also among people punished with fines and market bans.
Once Asia’s second-richest man, worth US$42 billion at his peak in 2017, Hui has seen his wealth plummet to about US$1 billion after the developer defaulted in 2021. Evergrande’s stock has tumbled and was eventually suspended from trading.
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