Andersen challenges Climax investigation
Profession's watchdog squares off again in clashes with big firms over powers
Former accountancy giant Arthur Andersen is seeking to halt an inquiry by the professional watchdog into a 1997 audit of listed stationery maker Climax International.
The legal action is another challenge to the Hong Kong Institute of Certified Public Accountants' disciplinary powers, the regulator having squared off with other firms over the scope of its authority.
Although the body formerly known as the Hong Kong Society of Accountants (HKSA) has successfully fended off the previous challenges, the status of the investigations is unknown. These include a probe into Deloitte Touche Tohmatsu's audits of materials supplier GKC Holdings and Guangnan Holdings, and a 1996 audit of Cosco International Holdings carried out by Ernst & Young.
In this case, Arthur Andersen and accountant Raymund Chao Pak-ki are seeking a judicial review of an HKSA decision to probe their conduct despite a reshuffle in the disciplinary panel during the course of the inquiry.
The watchdog formed a disciplinary committee in June 2002 to investigate a complaint by the stock exchange that the firm and Mr Chao may have been professionally negligent in relation to Climax's 1997 audit.
Climax was forced to restate its 1997 year-end financial statements after it found irregularities in its balance sheet. These included an overvaluation of semi-finished products by $88.49 million, $48.25 million in non-existent transactions and $31.2 million of questionable cheques.
Arthur Andersen - which was merged into Pricewaterhouse-Coopers' operations in July 2002 - resigned as auditor of Climax in June 1998 and was replaced by Deloitte Touche Tohmatsu.
Climax chairman Kenneth Fung Kin-yuen was jailed for three years in April 2003 after pleading guilty in the Court of First Instance to seven counts of theft from Climax totalling more than $16 million. Climax was taken over by First Century Holdings in 2000. Fung had been extradited from the United States in April 2002 after resigning as chairman of Climax in 1998.
During the course of the HKSA inquiry into Arthur Andersen and Mr Chao, two of its five-member disciplinary panel resigned and had to be replaced.
Counsel for the firm and Mr Chao, Ronny Tong SC, told the Court of First Instance yesterday that the HKSA council deemed there to be no grounds to dissolve the panel.
It then decided to proceed with the inquiry. Arthur Andersen and Mr Chao now seek to quash the decision. Mr Justice Michael Hartmann reserved decision.