Dirty secrets

27 March 2013 By Peter Thal Larsen Follow @Peter_TL

The local regulator is suing Ernst & Young for withholding documents on a suspect client. The audit firm says Chinese secrecy rules left it no choice. The case mirrors a broader U.S. complaint about Chinese accounting frauds. But Hong Kong has much more to lose.

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Hong Kong’s High Court started hearing a dispute between the Securities and Futures Commission and Ernst & Young on March 27.
The regulator announced last August that it would sue the accounting firm for failing to hand over audit papers and other documents relating to Standard Water. E&Y resigned as the Chinese company’s auditor in 2009, derailing a planned initial public offering. The SFC asked for the documents as part of an investigation into Standard Water.
Despite repeated requests, E&Y has refused to comply. The firm argues that the records belong to Ernst & Young Hua Ming, its Chinese joint venture. E&Y maintains that Chinese rules prevent the firm from handing over records.
Last December the U.S. Securities and Exchange Commission targeted the Chinese affiliates of five big audit firms - E&Y, KPMG, Deloitte, PricewaterhouseCoopers and BDO - for failing to hand over information relating to their clients.
The SEC could refuse to recognise the audit firms, temporarily or permanently. Were they unable to find SEC-approved auditors, companies may be forced to give up their U.S. stock market listings.

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