HKSA challenged over audit probe

PUBLISHED : Monday, 21 June, 2004, 12:00am
UPDATED : Monday, 21 June, 2004, 12:00am


Arthur Andersen and accountant pursue judicial review to halt watchdog's inquiry

Hong Kong's accountancy watchdog is facing yet another legal showdown over its disciplinary powers, this time involving a probe into an Arthur Andersen audit of listed stationery maker Climax International.

The accountancy company, which was merged into PricewaterhouseCoopers' operations in July 2002, will square off in court with the Hong Kong Society of Accountants (HKSA) in September or October this year, according to sources.

Disciplinary proceedings were launched by the society against Arthur Andersen and accountant Raymund Chao Pak-ki in June 2002 following a complaint made by the stock exchange. This arose from a 1997 audit of Climax International.

A disciplinary committee was set up by the accountancy body to investigate whether the auditors were guilty of professional negligence. Both Arthur Andersen and Mr Chao deny this is the case.

During the course of the HKSA inquiry, however, two committee members of a panel of five resigned. Although they were replaced, it prompted a dispute over the jurisdiction of the committee. Arthur Andersen and Mr Chao sought to have the committee dissolved, but the society declined their request.

Arthur Andersen and Mr Chao now seek to quash the decision of the HKSA to continue its inquiry by way of a judicial review.

It will add to a long list of lawsuits the society has had to contend with in recent years as accountancy heavyweights challenged the watchdog's powers.

A number of cases were launched in 2000 and took years to work their way through the courts. Deloitte Touche Tohmatsu challenged the HKSA over a probe into audits of materials supplier GKC Holdings and Guangnan Holdings.

Ernst & Young likewise took the society to court after it flexed its investigative muscle in relation to a 1996 Cosco International Holdings audit. The society has successfully fended off the challenges in court, but nothing has been heard of the investigations since.

Such David and Goliath style battles spurred debate over self-regulation of the industry, with the profession now moving towards a system of independent policing. An independent investigation board is to be set up under ongoing legislation.

In the Climax case, Arthur Andersen and Mr Chao had tried to have the fact that they were under investigation by the HKSA kept secret by asking the High Court in February to suppress their identities until the trial began. Mr Justice Michael Hartmann, in a closed-door hearing, threw out their request, saying their desire to avoid professional embarrassment was outweighed by the public nature of proceedings.

'The accountancy profession plays a critical role in ensuring the orderly and lawful conduct of commercial activities,' he noted in a judgment. 'Dishonesty, dereliction or culpability on the part of its members can and does have a far-reaching effect, not only in the sphere of business activities, but in matters concerning the well-being of individuals.'