Auditor drama casts unflattering light on Lufax at already-difficult time

The online loan facilitator moved to fire PwC after the accountant raised a red flag over some related-party transactions
Key Takeaways:
- Lufax’s board has proposed terminating PwC as its external auditor after the accounting firm raised questions about related-party transactions
- The clash comes at a critical time when the loan facilitator is trying to reverse its falling revenue and profits
By Warren Yang
For publicly listed companies, optics do matter. And firing your auditor for flagging a potential problem certainly doesn’t make you look good, especially when you’re from a club of offshore-listed Chinese companies that often come under scrutiny for some of their accounting practices.
Yet that’s exactly what Lufax Holding Ltd. (LU.US; 6623.HK) is doing. Investors weren’t too reassured by the move, announced in a stock exchange filing last Monday, especially as the online loan facilitator struggles to shore up its financials in a sluggish Chinese economy.
In its filing, Lufax said its board proposed sacking PricewaterhouseCoopers (PwC) and the accounting firm’s China affiliate, PwC Zhong Tian, as its auditors. Lufax’s shareholders will vote on the matter at an extraordinary meeting at a date that has yet to be set.
The decision means that Lufax won’t be able to issue its annual report for 2024 on time as it needs to hire another auditor to sign off on it. Lufax’s Hong Kong-listed shares were suspended after the disclosure, freezing the stock at pre-announcement levels. But investors made their displeasure known through its U.S.-listed American depositary shares (ADS), which tanked 22% over the three days following the disclosure of the PwC conflict.
Lufax was once a superstar in China’s budding private lending sector, drawing attention for its ties to parent Ping An Group and a C-suite that included several high-profile foreigners, such as co-CEO Greg Gibb and Chairman Yong Suk Cho. But the company and other private lenders that rose to prominence have fallen on hard times lately, initially as a result of a crackdown by Beijing and more recently due to China’s economic slowdown.
The latest drama at the company unfolded pretty quickly. As recently as last May, Lufax shareholders voted to rehire PwC for the rest of 2024 at the company’s latest annual meeting. But it didn’t take long before the relationship between the two began to sour. On Jan. 21, Lufax’s audit committee received a letter from PwC stating that the latter had been verbally notified of the company’s decision to terminate its contract between the two sides five days earlier, according to the filing.
That communication was the culmination of events dating back to last October, when a senior Lufax executive told PwC about potentially problematic related-party transactions that the company had made. A month later, the accountant informally relayed the information to Lufax’s audit committee, and last December it requested an independent investigation into the matter.
Lufax launched a probe, but PwC raised questions about it after the original whistleblower apparently denied taking issue with the transactions in question. This led to a Jan. 21 letter from PwC Zhong Tian to Lufax’s audit committee, basically saying that PwC Zhong Tian no longer trusted the company and didn’t want its work to be included in Lufax filings anymore. That’s the same day PwC sent its letter to Lufax’s audit committee disclosing that it had been informally fired by the company.
Lufax says when its audit committee received the letter from PwC, it had not yet decided to stop working with the accountant and the investigation was still underway. But the company later opted to terminate the relationship because the auditor was “less than candid” in explaining how its concerns first came about. It added its view that parts of information PwC provided were inconsistent, contradictory or “demonstrably and materially” wrong.
Blame game
Lufax also blames PwC for failing to report the transactions in question promptly, “unreasonably” limiting its audit committee’s access to information that would have led to more timely action. Moreover, Lufax says PwC failed to provide information to prove whether PwC Zhong Tian was authorized by relevant Chinese authorities to conduct audit work for the company for 2024.
The last claim is a bit strange, since Lufax had no problem retaining PwC through last year. Thus, it’s unclear why Lufax didn’t have any problem with PwC Zhong Tian’s eligibility to be its accountant until just a little more than a month ago. Lufax’s explanation is that PwC Zhong Tian last September received a six-month suspension from China’s finance ministry for its inadequate auditing work for troubled property developer Evergrande, meaning it cannot resume operations until March.
That reasoning may be legitimate. But again, Lufax could have moved more quickly to sever its relationship with PwC Zhong Tian immediately after the penalty was announced, like dozens of other Chinese companies did.
At this point, it’s hard for outsiders to know what kind of potential irregularity PwC discovered. Lufax regularly discloses related party transactions in its annual and interim reports, all involving its parent Ping An and the financial services giant’s subsidiaries. Such inter-group dealings are rather common among Chinese companies.
Regardless of how the issue is resolved, negative publicity like this is the last thing Lufax needs now as its financial performance has been bad enough news lately. Its revenue decreased more than 40% in 2023, and its net profit plunged 88%. Things didn’t improve last year, with revenue continuing to drop through the first half, pushing its bottom line into the red.
Lufax’s loan business has been shrinking as it shifts its focus away from small business owners to less risky borrowers as part of a “de-risking” process during China’s economic slowdown. That effort may well be prudent and pay off in the end, but not all investors are patient enough to stick around. And there’s no guarantee the new strategy will lead to a turnaround for Lufax, as that will depend on many external factors like China’s economy and the potential for future regulatory changes that could affect all financial companies.
Lufax’s ADS have lost nearly 95% of their value since the company’s New York IPO in 2020 to trade at a modest trailing price-to-earnings (P/E) ratio of about 3 and a dismal price-to-sales (P/S) ratio of 0.5. By comparison, New York-listed shares of FinVolution (FINV.US), another online loan facilitator, fetch a P/E ratio of 6.6 and a P/S ratio of 1.1.
All lenders in China should be feeling the pinch of China’s weak economy, compounded by a constantly evolving regulatory environment that seems increasingly weighted against private lending-related companies. A scandal like the PwC drama is no doubt an unnecessary distraction for any company trying to navigate such already-tough times.
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