Tuesday, September 04, 2012

Hong Kong Securities and Futures Commission Seeks Judicial Assistance to Obtain Audit Work Papers from Big Four Firm

The Hong Kong Securities and Futures Commission has commenced proceedings in the Court of First Instance against Ernst & Young Hong Kong  for failing to produce to the SFC specified accounting records and audit work papers relating to the firm’s work as the reporting accountant and auditor for a company seeking to list on the Hong Kong Stock Exchange. The SFC invoked Section 185 of the Securities and Futures Ordinance, which empowers the Court of First Instance to inquire into the circumstances of the audit firm’s non-compliance with the SFC’s request for the audit work papers. The Court can order the firm to comply with the SFC’s request if it is satisfied that the audit firm does not have any reasonable excuse for not complying.

The SFC issued a formal notice to the outside auditor seeking the audit work papers and underlying accounting documents relating to the company, but the audit firm did not comply with this request and claimed that it did not have the relevant records, which were held in the Mainland by its joint venture partner in the Mainland, whose staff were the ones involved in the engagement. The audit firm also claimed that the documents could not be produced because of restrictions under the law of the Peoples Republic of China (PRC).

As a result of a joint statement issued by PRC authorities in 2009, accounting records, including audit work papers, may be the subject of claims of state secrecy under PRC law and all Hong Kong accountants are required to obtain the consent of the relevant Mainland authorities before handing over any accounting records to regulators even if the records are kept in Hong Kong.

The SFC sought the assistance of the relevant Mainland authority using its standing arrangements for mutual assistance in investigatory matters. However, the audit firm’s PRC network partner also failed to produce the records to the relevant Mainland authority as requested. Given that the audit firm was the reporting accountant and the Mainland firm was its agent, noted the Commission, the failure to produce these records to the relevant Mainland authority on the SFC’s request is a matter of serious concern.

Accounting and audit work papers relating to private companies applying for listing in Hong Kong must be capable of being produced either directly to the Commission or via the relevant Mainland authority under the standing arrangements for cooperation, noted the SFC, especially when the Commission is investigating suspected misconduct
The SFC brought the judicial proceeding after consulting the relevant Mainland authority about access to the audit work papers and the SFC and the relevant Mainland authority are continuing to work closely together in relation to this issue.