In a case filed by Hong Kong's Securities and Futures Commission (SFC)
in 2012, the court on Friday rejected EY's contention that Chinese
law prohibits the mainland partner of the firm, previously known as
Ernst & Young, from passing on documents.
EY must explain why it resigned as auditor of Standard Water in 2010
and provide a list of all staff involved in an application by the
company to list in Hong Kong that was eventually scrapped, the court
said in its ruling, the first of its kind in Hong Kong. EY has 28
days to comply, it said.
The ruling comes a week after China's Ministry of Finance reiterated
the country's secrecy laws and said that accountants may not pass
information to overseas regulators or exchanges.
The Ministry further said that all audit work in China must be done
by mainland firms and international auditors will no longer be able
to obtain temporary licenses to audit mainland companies. The new
rules banning international auditors from acting independently in
China are expected to be implemented this year, according to the
"The ruling creates a really messy situation and it gets worse with
the regulatory changes that were composed by the mainland last
week," said Paul Gillis, an accounting professor at Peking
University's Guanghua School of Management.
"I am surprised that mainland regulators and Hong Kong regulators
haven't found a way to negotiate a solution to this. I think it's
probably tied up in the fight with the SEC (U.S. Securities and
Exchange Commission) and China doesn't want to set any precedents
with respect to Hong Kong that it might have to follow through on
with the SEC."
The Hong Kong ruling also comes as international regulators
including U.S. watchdogs continue to press the case for access to
documents regarding mainland Chinese companies in ongoing
investigations into cases of possible irregularities and previous
EY said it would review the judgment carefully before deciding
whether it would appeal.
SFC's chief executive Ashley Alder said the Hong Kong authorities
were acting independently.
"This case is primarily about the obligations of an accounting firm
in Hong Kong to comply with requirements under Hong Kong law. The
case is not about PRC law. Auditors should not withhold information
which is in their possession and sought by the SFC in connection
with suspected misconduct in Hong Kong's markets," Alder said in an
The SFC brought the case to court seeking access to documents
related to EY's unfinished audit of Standard Water, the Chinese
municipal water services provider. The company couldn't immediately
be reached for comment.
The audit firm has said it didn't have the relevant records, which
were held in mainland China by its joint venture partner, Ernst &
Young Hua Ming, and could not be produced due to Chinese state
[to top of second column]
In its ruling, the Hong Kong court said it was dismayed at EY's
failure to initially disclose the fact that it had in Hong Kong
three hard drives related to the case.
EY, along with PricewaterhouseCoopers, Deloitte Touche Tohmatsu and
KPMG, review the books of most of the world's largest corporations
through networks of legally separate, nationally based audit firms.
The 'Big Four' accounting firms say paperwork at their Chinese
affiliates, which audit Chinese companies listed overseas as well as
the operations of multinationals, are protected by China state
secrecy laws and may not be handed over to foreign regulators
without Beijing's permission.
While Hong Kong is a special administrative region of China, it
operates under separate legal and regulatory systems. Chinese
companies make up more than half of the market capitalization of the
Hong Kong Stock Exchange.
Accounting scandals at mainland China companies listed in the United
States such as Longtop Financial Technologies and Sino-Forest Corp
have shaken investor confidence in U.S.-listed Chinese stocks in
recent years, spurring regulators to take action after financial
losses and de-listings.
A U.S. judge ruled the Chinese affiliates of the 'Big Four' global
accounting firms should be suspended from practicing in the United
States for six months for failing to comply with Securities and
Exchange Commission document requests.
The suspension will not go into effect, however, until all legal
appeals processes are exhausted. The Chinese affiliates of the
accounting firms have all said they will appeal.
U.S. authorities including the SEC and the U.S. Public Company
Accounting Oversight Board, which regulates auditors of U.S.-listed
companies, continue to work with Chinese regulators to gain access
to audit documents for U.S.-listed Chinese companies.
(Additional reporting by Anne Marie Roantree, Grace Li and Rachel
Armstrong; Editing by Kenneth Maxwell, Greg Mahlich)
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