Hong Kong sues Ernst & Young

Accounting firm Ernst & Young faces a dilemma that could violate the laws of Hong Kong and China either way.

Financial sector regulator the Securities and Futures Commission is suing Ernst & Young after the firm failed to turn over accounting records related to Standard Water Ltd, a former China-based client. The case is the first of its kind in Hong Kong. A date for the first hearing has yet to be set.

SFC wants the Ernst & Young subsidiary in Hong Kong to turn over its records from its audit work for Standard Water Ltd, which operates in the Mainland. It said the audit firm claims it does not have the relevant records since these 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.

SFC, however, said auditors should always be able to provide documents since Standard Water applied to list in the Hong Kong stock exchange a few years ago.

"Accounting and audit working papers relating to private companies applying for listing in Hong Kong must be capable of being produced either directly to the SFC or via the relevant mainland authority under the standing arrangements for cooperation," the SFC said.

The regulator said that it already has consulted its mainland counterparts about the records. On the other hand, Ernst & Young said it was working to try and resolve the situation as soon as possible.

"We understand our obligations to the SFC and endeavor to fully comply, while also meeting our compliance obligations with mainland China's laws and regulations," the firm said in a statement.

"We will work closely with the relevant regulators, and trust that there will be a quick resolution to enable our full compliance with applicable laws and regulations.”

Ernst & Young resigned as auditor for Standard Water upon discovery of inconsistencies in documentation provided by the Chinese company. Standard Water afterwards withdrew its Hong Kong listing application, according to the SFC.

Under the action taken by the SFC, the Hong Kong court will inquire into why Ernst & Young has not complied with the SFC’s request. It can order the auditor to hand the papers over if it is satisfied it does not have a reasonable excuse.