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Ernst Must Give H.K. Regulator Failed IPO’s Audit Papers

Ernst & Young Hong Kong was ordered to give the city’s Securities and Futures Commission audit papers for a Chinese water treatment company that the accounting firm said it couldn’t because of Chinese laws.

“If prior approvals are required under PRC laws, it is up to EY to make the necessary applications,” Hong Kong High Court Judge Peter Ng said in his ruling yesterday, referring to the People’s Republic of China.

EY, as the firm now calls itself, resigned in 2010 as the auditor of Standard Water Ltd., which applied to list in Hong Kong in November 2009 and withdrew its application after the resignation. The SFC sued EY after it failed to provide the records, with the audit firm claiming it was prevented from doing so by Chinese secrecy laws.

“The objection based on state secrets or commercial secrets is a complete red herring,” Judge Ng said, rejecting EY’s other arguments as well. He ordered the firm to pay the SFC’s costs.

EY will review and consider the judgment carefully before deciding if it will appeal, spokesman Terence Ng said.

“Given the significance of this issue for the entire accounting industry we will continue to work with Hong Kong and mainland China authorities and regulators to ensure that we act in full compliance with applicable laws,” he said.

Ashley Alder, the SFC’s chief executive officer, said the case is not about PRC law, but about the obligations of an accounting firm in Hong Kong to comply with the city’s 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,” he said.

The case is Securities and Futures Commission and Ernst & Young, HCMP1818/2012 in the Hong Kong Court of First Instance.

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