HK regulator takes Ernst & Young to court for work papers

Tue Aug 28, 2012 6:25am EDT
 
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By Anne Marie Roantree and Rachel Armstrong

HONG KONG/SINGAPORE (Reuters) - Hong Kong's securities regulator, in an unprecedented move, took Ernst & Young to court after the audit giant failed to turn over accounting records related to a former China-based client.

The auditor now faces the dilemma of whether to comply with the order by the regulator and risk a possible breach of China's state secrecy laws or face regulatory sanctions in Hong Kong.

The case is the first of its kind in Hong Kong and mirrors one in the United States where Ernst & Young's rival Deloitte Touche Tohmatsu is fighting a request from U.S. regulators to hand over its audit work papers of Chinese computer company Longtop Financial Technologies.

Accounting scandals at mainland companies listed in America such as Longtop and Sino-Forest Corp have dented investor confidence in U.S.-listed Chinese stocks. The blow-ups have spurred regulators there to demand access to audit work papers kept in China and inspect mainland-based auditors.

"This risks throwing H-share and red chip companies into the same mess that all the U.S.-listed Chinese companies are in," Paul Gillis, professor of accounting at Peking University and author of the China Accounting Blog, said by phone on Tuesday.

Red chips and H-shares refer to companies operating in mainland China but listed in Hong Kong. Between them, they make up more than half of the city's stock market.

The U.S. Securities and Exchange Commission (SEC) last September asked a federal court to force Deloitte to produce records related to possible accounting fraud at Longtop, but Deloitte has resisted, citing Chinese secrecy laws.

That case has currently been postponed as the SEC said it is trying to reach a solution with Chinese regulators.   Continued...