E&Y Hong Kong is being sued by Hong Kong’s Securities and Futures Commission (SFC) as it failed to produce work papers and accounting records related to its audit work of a former China based client, Standard Water Limited. E&Y was Standard Water Limited’s auditor in November 2009 when the company submitted papers for listing on the Hong Kong Exchange. In March 2010 E&Y HK resigned as the auditors stating inconsistencies in the accounting papers that the company provided the auditors.
The HK securities regulators issued a formal notice to to E&Y Hong Kong seeking the audit work papers and underlying accounting documents relating to Standard Water. According to the HK authority, E&Y claimed that it did not have relevant records, which according to E&Y were being held in Mainland China by its joint venture partner E&Y Hua Ming, whose staff were the ones involved in the engagement. Later E&Y claimed that the documents could not be produced because of restrictions under the laws of the People’s Republic of China. Then SFC reached out to relevant authority in Mainland for assistance in investigation of the matter. Even then E&Y Hua Ming failed to produce the relevant documents to the relevant Mainland authority.
An interesting fact here is a statement that was issued by the People’s Republic of China authorities in October 2009 stating that accounting records, including audit working papers, may be the subject of claims of state secrecy under Chinese 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 like the SFC, even if the records are kept in Hong Kong.