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Tuesday
Jun032014

Hong Kong court orders EY to produce China client audit papers

A Hong Kong court ordered Ernst & Young to hand over audit papers related to a former Chinese client to securities regulators investigating potential accounting irregularities.

Hong Kong’s Securities and Futures Commission (SFC) filed a lawsuit against EY in 2012 following the firm’s refusal to produce audit papers of mainland-based water provider Standard Water Ltd.

EY had resigned from the Standard Water audit in 2010, citing inconsistencies in the company’s documents.

Standard Water withdrew its application to list in Hong Kong soon afterwards.

The SFC launched an investigation into Standard Water’s scrapped IPO plan but EY refused to turn over audit papers relating to the company. Ey cited China’s state secret laws which prohibit accounting firms from passing sensitive data to overseas regulators.

The Hong Kong court said in a May 23 ruling that EY had deliberately withheld the documents and ordered it to comply within 28 days.

“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,” said Ashley Alder, the SFC’s Chief Executive Officer.

EY said it would review the judgment carefully before deciding whether to appeal.

A U.S. judge ruled in January that the Chinese affiliates of the global “Big Four” accounting firms should be barred from auditing U.S.-listed companies for six months for their failure to produce audit papers to the Securities and Exchange Commission.

The SEC has agreed to hear an appeal by the accounting firms.  

Sources: Reuters, SFC, Financial Times

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Hui Zhi is the Senior Manager for Content with the China Compliance Digest, where a version of this post first appeared.