Ernst & Young Hua Ming, the Beijing-based affiliate of the accounting firm, ignored a request from Chinese authorities to produce audit papers from a withdrawn Hong Kong initial public offering application, a lawyer for the city’s regulator said in a court hearing.
The Chinese Securities Regulatory Commission, at the request of its Hong Kong counterpart, asked Hua Ming in 2010 to hand over the documents, lawyer Jat Sew Tong said in a Hong Kong court yesterday. Hua Ming declined, said Jat, who represents the Securities & Futures Commission.
Ernst & Young Hong Kong resigned in March 2010 as the auditor for Standard Water Ltd., a Chinese water treatment company planning to list in the city, citing the discovery of inconsistencies in documents. It says it can’t provide the working papers to Hong Kong’s regulator because of mainland legal restrictions.
“Ernst & Young clearly has the requested information in their possession,” Jat said in court. “There is no excuse for their non-compliance.”
The SFC is making banks criminally liable for false statements in IPO documents and strengthening regulation after a series of accounting scandals involving Chinese companies. It said auditors must be able to discuss their working papers as part of Hong Kong’s regulatory framework, and that its lawsuit against Ernst & Young followed consultation with Chinese authorities.
The Hong Kong office of the accounting firm would have to sue its mainland counterpart to obtain the documents, its lawyer Benjamin Yu said in court yesterday. Ernst & Young Hong Kong has some computer hard drives that may contain relevant documents, he said.
The auditor has not given them to the Hong Kong regulator as the documents should not have been brought to the city in the first place.
The CSRC did not immediately return a request for comment.
The lawyers delivered their final arguments yesterday to Justice Peter Ng Ka-fai, who will deliberate before making a ruling.
China’s legal restrictions from sharing audit papers also led to a U.S. Securities and Exchange Commission case against affiliates of international accounting firms. China agreed in May to give the U.S. Public Company Accounting Oversight Board access to some documents.
The SEC last year accused affiliates of the world’s top four auditing firms of withholding documents from investigators probing potential fraud by China-based companies. Auditors that don’t comply with the demands face temporary or permanent deregistration in the U.S., meaning they wouldn’t be able to audit U.S.-listed companies.
The case is Securities and Futures Commission and Ernst & Young, HCMP1818/2012 in the Hong Kong Court of First Instance.