A lump of Christmas coal for KPMG | China Accounting Blog | Paul Gillis

A lump of Christmas coal for KPMG

It is a bad day for KPMG. Reuters reports that the Hong Kong High Court has issued a contempt summons to 91 current and former KPMG partners for their failure to hand over audit working papers for US listed China Medical. China Medical is in liquidation and the court apparently has been overseeing the liquidation of Hong Kong subsidiaries. The case is a repeat of an earlier spat with EY over working papers for Standard Water, which was resolved when EY “found” the working papers on a server in Hong Kong. 

KPMG says it cannot turn over the working papers without permission from mainland regulators. The US PCAOB reached an enforcement agreement with China that allowed it access to working papers in connection with investigations (but not inspections). Hong Kong has no such arrangements, and this is private litigation. 

China has argued national sovereignty and state secrets concerns trump foreign laws requiring the production of documents on Chinese companies listed abroad or doing business abroad. Hong Kong, while part of China, is being treated the same as the United States, presumably to avoid undermining arguments used against the U.S. I seriously doubt there are any state secrets in these working papers. 

While the PCAOB has banned a couple of small Hong Kong CPA firms for failing to turn over working papers, it appears to be unwilling to take on the big firms.  Perhaps locking up 91 KPMG partners over Christmas may spur the firms to find a solution to this problem. The CPA firms play an important role in capital markets, and their work needs to be accessible outside of China.

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