A couple of weeks ago I wrote a post about the ongoing Evergrande lawsuits taking place in Hong Kong. An interesting development has unfolded in the courts regarding PwC International. They have claimed that Evergrande was never their client.

Separate legal entities, one network

Let's step back and look at that. PwC Hong Kong and PwC International are separate legal entities and there is no ownership by PwC International. What connects them is membership in the network, the brand, and PwC Hong Kong agreeing to maintain the network's standards. So PwC International has a relationship with PwC Hong Kong, and says it never had any relationship with Evergrande. The liquidators are arguing that its relationship with PwC Hong Kong was close enough to put a "duty of care" on PwC International toward Evergrande.

PwC International's own governance page says it develops and implements policies on risk and quality, and that member firms agree to maintain the standards of the PwC network. The same page says it's liable only for its own acts or omissions. The standards are set centrally, but the liability is held locally.

WHERE THE STANDARDS SIT, AND WHERE THE LIABILITY DOES PwC International network entity, no ownership of the member firms standards, developed and implemented centrally PwC Hong Kong member firm PwC Zhong Tian member firm, mainland engagement letter signed with the local entity Evergrande audit client duty of care claimed, not decided Structure as PwC International's own governance page describes it. The duty of care running direct to the client is what the liquidators argue and has not been decided.

The claim runs against three entities

The claim runs against PwC Hong Kong and PwC Zhong Tian on the mainland, with a large part of it also claimed against PwC International. PwC International asked the Court to be removed from the case. The judge refused and said the evidence it had submitted in support of that application was "inadequate and unsatisfactory." That's a ruling about the application, not a finding against anybody, and the duty of care point survives to be argued. If it succeeds, the question of what a global firm owes the client of a member firm will be open in Hong Kong in a way it was not before.

Having worked as a Managing Director in a few companies where I had to sign the engagement letter and management representation letter from the local entities of the global firms, it makes me question what due diligence companies now need to perform on the offices and staff actually executing the work on their behalf.

How the engagement actually gets signed

In the multinationals I worked in, the engagement typically goes out to a bidding process, which is run by the audit committee. It's then executed by the finance department at headquarters, and the regional finance and subsidiary finance team work with the local office of the global firm to handle the individual legal entity engagements.

I was required to review the documents prior to signature for compliance reasons, and everything was done correctly. We checked the terms and the fee to ensure they matched the corporate guidelines and that's it.

In this instance, if it had been my company, the letter would not have helped, and who could we recover from other than the local entity? The devil is in the details. Which entity signs the opinion, what professional indemnity cover stands behind that signature, and what accountability does the global firm have, if any.

I will be actively watching the outcome of this case.