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
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.