Reuters: Regulatory News: UPDATE 1-HK regulator takes Ernst & Young to court for work papers

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UPDATE 1-HK regulator takes Ernst & Young to court for work papers Aug 28th 2012, 05:03 Tue Aug 28, 2012 1:03am EDT * E&Y says relevant records are in mainland China * E&Y says restricted by Chinese secrecy laws * Mirrors SEC action against Deloitte in U.S. By Anne Marie Roantree and Rachel Armstrong HONG KONG/SINGAPORE, Aug 28 (Reuters) - Hong Kong's securities regulator took Ernst & Young to court after the audit giant failed to turn over accounting records related to a China-based company. The auditor now faces the dilemma of whether to comply with the order by the regulator and risk a possible breach of China's state secrecy laws or face regulatory sanctions in Hong Kong. The case is the first of its kind in Hong Kong and mirrors one in the United States where Ernst & Young's rival Deloitte Touche Tohmatsu is fighting a request from U.S. regulators to hand over its audit work papers of Chinese computer company Longtop Financial Technologies. "This risks throwing H-share and red chip companies into the same mess that all the U.S.-listed Chinese companies are in," Paul Gillis, professor of accounting at Peking University and author of the China Accounting Blog, said by phone on Tuesday. Red chip and H-shares refers to companies operating in mainland China but listed in Hong Kong. Between them, they make up more than half of the city's stock market. In this case, the Securities and Futures Commission (SFC) wants Ernst & Young Hong Kong to hand over its records from its audit work for water provider Standard Water Ltd. The SFC said the audit firm has claimed it does not have the relevant records, as they are held in mainland China by its joint venture partner, Ernst & Young Hua Ming, and could not be produced due to restrictions under China's state secrecy laws. Ernst & Young in Hong Kong did not immediately respond to calls seeking comment. Peking University's Gillis said the fact that the Hong Kong firm was acting as Standard Water's main auditor means it is in a difficult position to defy the SFC's request. "If the Hong Kong firm is signing the reports, that are to be used in Hong Kong, then under auditing standards the majority of the work should have been done in Hong Kong and they should have evidence of that work," he said. Accounting records held in Hong Kong would not be subject to the same secrecy laws as those held in mainland China. The SFC said it has also got the support of the relevant mainland authorities in the investigation. Under the action taken by the SFC, the Hong Kong court will inquire into why Ernst & Young has not complied with the regulator's request. It can order the auditor to hand the papers over if it is satisfied it does not have a reasonable excuse. Link this Share this Digg this Email Reprints

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