HK's SFC sues E&Y for workpapers | China Accounting Blog | Paul Gillis

HK's SFC sues E&Y for workpapers

Hong Kong’s Securities and Futures Commission (SFC) has commenced proceedings against Ernst & Young Hong Kong (E&Y) for failing to produce working papers on Mainland based Standard Water Limited. SFC is the Hong Kong equivalent of the United States’ Securities and Exchange Commission (SEC).  

Standard Water applied for listing on the Stock Exchange of Hong Kong in 2009. E&Y, the reporting accountant, resigned in March 2010 and the company withdrew its listing application.

SFC asked E&Y for the working papers. E&Y did not comply, claiming that E&Y Hua Ming, its mainland joint venture, actually did the work. E&Y said that Mainland laws precluded them from giving the SFC the working papers. SFC sought the assistance of Mainland regulators without success. 

This case opens a new front in the regulatory wars and creates uncertainty in the H-share and Red Chip markets. The case appears to be virtually identical to the SEC case against Deloitte. Mainland regulators probably decided they needed to be consistent in their treatment of the Deloitte case with the SEC and the E&Y case with SFC. The SEC sought a six-month stay in its case against Deloitte citing efforts to reach a compromise; apparently SFC was not prepared to delay its case any longer. Or perhaps Chinese officials wanted another precedent to illustrate that they were not applying the rules only with respect to the United States.  

This also illustrates another problem first seen in KPMG’s renewal of its PCAOB registration. The Hong Kong and Mainland Big Four firms are playing fast and loose with their names. In this case, E&Y Hong Kong claims to be the reporting accountant, yet when confronted with an issue E&Y Hong Kong says it was actually the Mainland firm (E&Y Hua Ming) that did the work. KPMG appears to be doing the same thing - signing reports in Hong Kong where the work is actually done by a different firm on the Mainland. Under auditing standards applicable in both Hong Kong and the United States, reports need to be signed by the principal auditor, who cannot solely rely on work done by other firms. Regulators need to be asking some tough questions about these practices. 

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