Hong Kong's securities regulator is to take Ernst & Young to court after the Big Four auditor failed to turn over accounting records related to a former China-based client.
The firm is now confronted with something of a Catch22 situation - whether to comply with the regulator's order and expose itself to a potential breach of China's state secrecy laws - or face regulatory sanctions in Hong Kong, Reuters reports.
As the first case of this nature to be brought in Hong Kong, it has echoes of a similar case where the US Securities and Exchange Commission (SEC) filed a subpoena enforcement action against Deloitte in Shanghai after it failed to produce documents in response to a subpoena related to an investigation into possible fraud by one of its longtime clients, Longtop Financial Technologies Limited. The SEC later filed charges against Longtop for alleged reporting failures.
The Securities and Futures Commission (SFC) in Hong Kong said it wants the E&Y unit in the city to hand over audit records for mainland-based water provider Standard Water Ltd.The SFC said the audit firm claims it does not have the relevant records, as they 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.
E&Y said it had performed IPO audit work for Standard Water in 2009 and resigned in March 2010 and did not issue an accountant's report for the IPO.
An E&Y spokesperson said: 'The SFC requested workpapers from Ernst & Young in relation to our work on Standard Water. We understand our obligations to the SFC and endeavour to fully comply, while also meeting our compliance obligations with mainland China's laws and regulations.
'Ernst & Young supports close working relationships between Hong Kong and mainland China audit regulators on matters of public interest. 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.'
No date for the first hearing has yet been set.