HONG KONG A partner from Ernst & Young testified in the Hong Kong High Court on Wednesday, the first senior executive from one of the Big Four auditors to be cross-examined in what is turning into a global brawl pitting U.S. and Hong Kong regulators against their Chinese counterparts.
Hong Kong's Securities & Futures Commission (SFC) is seeking an order to force Ernst & Young's Hong Kong office to produce documents related to its unfinished audit of Standard Water, a Chinese municipal water services provider that scrapped its 2010 initial stock sale after Ernst & Young resigned as its auditor.
Ernst & Young has said it doesn't have the relevant records, which are held in mainland China by its joint venture partner, Ernst & Young Hua Ming, and can't be produced due to Chinese state secrecy laws.
The case comes as U.S. regulators want auditors working in China to hand over documents, against a backdrop of rising accounting scandals at Chinese firms listed in the United States.
Trading in Ambow Education Holding Ltd shares AMBO.N was halted this week as Baring Asia Private Equity withdrew a go-private proposal after Ambow's auditor resigned. In December, the U.S. Securities and Exchange Commission (SEC) charged the Chinese affiliates of Ernst & Young, DeloitteDLTE.UL, KPMG KPMG.UL, PricewaterhouseCoopers PWC.UL (PWC), and BDO with securities violations for refusing to produce audit documents.
The proper channel for the SFC to obtain the audit paperwork is through direct communication with the China Securities Regulatory Commission (CSRC), said Benjamin Yu, the attorney representing Ernst & Young. "There is no suggestion Ernst & Young in the course of its audit work behaved in any way not professional," Yu said.
SFC attorney Jat Sew-Tong said Ernst & Young had failed to produce the documents and had given evasive answers. "We believe Ernst & Young has been less than forthcoming," he said.
In his testimony, Alden Leung Kwok-ki, Ernst & Young's Greater China quality and risk management leader, said resigning as Standard Water's auditor wasn't a difficult decision. "It was a clear cut situation," he said, adding that Standard Water gave contradictory answers about a contract and another document.
ACCESS TO U.S. CAPITAL MARKETS
Chinese companies have raised $161 billion from equity sales in Hong Kong over the past two decades and make up more than half of the city's $1.7 trillion market capitalisation.
Failure to comply with the regulator's demand will complicate relations between Chinese and Hong Kong regulators and raise questions about the former British colony's status as an international finance centre.
More than 200 Chinese firms have listed on U.S. stock exchanges over the last decade, and may face delisting if their accountants are deemed unable to practice. The U.S. Public Company Accounting Oversight Board, a non-profit corporation created by Congress to oversee auditors of U.S.-listed companies, is expected to move towards de-registering Chinese accounting firms if their clients' books cannot be examined.
"China has to decide if it wants its companies to have access to U.S. capital markets," said Paul Gillis, an accounting professor at Peking University's Guanghua School of Management. "Access to U.S. capital markets comes with certain conditions.
"If you don't want that transparency and oversight, you don't list in the U.S.," Gillis said.
In a December 2012 filing on its investigation into Nasdaq-listed Longtop Financial Technologies Ltd LFTy.SG Ltd, the SEC said the CSRC "remains unwilling or unable to provide the SEC with meaningful assistance in its enforcement actions."
(Editing by Ian Geoghegan)