China has intensified its supervision of the Big Four auditing firms, including Deloitte, EY, PwC, and KPMG, amid growing concerns about corporate malpractice. The Ministry of Finance has ramped up its scrutiny of these firms’ audits of financial institutions and highly leveraged companies, following a regulatory investigation into Evergrande Group.

Evergrande, a major property developer, was discovered to have artificially inflated its revenue by $78 billion, leading to its default on debt and subsequent liquidation. This revelation has sparked fears about the extent of financial firms’ exposure to the troubled real estate sector and its potential impact on economic growth.

In response to these concerns, Chinese regulators have pledged to crack down on financial fraud to restore investor confidence in the country’s stock markets. The Ministry of Finance has increased its scrutiny of audits conducted by the Big Four, particularly focusing on audits of small and weak lenders in debt-laden provinces, Chinese asset management companies, state-owned enterprises, and property developers.

The failure of auditors to detect issues like those at Evergrande before they escalate has raised questions about the effectiveness of their oversight. Francine McKenna, an expert in accounting and auditing, emphasized the importance of ensuring that audit firms accurately assess risks such as bad loans and leverage levels at client companies to prevent future crises.

PwC is reportedly facing a substantial fine for its shortcomings in auditing Evergrande, while Deloitte was fined last year for neglecting to evaluate asset quality at China Huarong Asset Management. Huarong’s delayed financial reporting and subsequent restructuring underscore the need for more rigorous auditing practices to safeguard against financial instability.

The Ministry of Finance’s heightened scrutiny of the Big Four reflects a broader effort to strengthen regulatory oversight and prevent corporate misconduct. By holding auditors accountable for their failures to uncover financial irregularities, Chinese authorities aim to protect investors and ensure the stability of the financial system in the face of mounting challenges in the real estate sector.