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Accountants in Hong Kong are facing a challenge that goes beyond balance sheets and profit and loss accounts - how to handle state secrets.
At issue is whether companies can use such secrets as a reason for not disclosing information to auditors and if accountants can use that same excuse to not give information to the Securities and Futures Commission (SFC).
The debate will take centre stage on September 11 when the High Court will rule on whether Ernst & Young can use state secrecy as a reason for not providing audit papers to the SFC.
Last Monday the commission filed a writ in the High Court seeking a court order to require the Big Four accounting firm to deliver accounting information regarding mainland company Standard Water. The company applied to list in Hong Kong in November 2009 but Ernst & Young resigned as auditor four months later. Standard Water later withdrew its application.
Despite nine notices from the SFC, Ernst & Young has failed to hand in the requested papers. It claimed they contained state secrets and could not be disclosed.
Roy Lo Wa-kei, managing partner of ShineWing HK, said he was surprised that Ernst & Young had not complied with the SFC's requests.
Lo said that although mainland secrecy laws generally banned companies from giving out audit papers, it could be done if the relevant consents were obtained.
"From the SFC announcement, it appears the SFC has already received the consent of the relevant mainland regulators to access the accounting record," he said.
Hong Kong Institute of Certified Public Accountants (HKICPA) chief executive Raphael Ding said accountants had become sandwiched between the Hong Kong regulator and the requirements of mainland secrecy laws.
"The HKICPA has clear guidelines requiring all accountants to provide assistance to SFC investigations and they must hand in information to the commission. However, all accountants also need to comply with the mainland secrecy law which says accountants' working papers are state secrets," Ding said.
In this case, Ernst & Young's mainland joint venture, EY Hau Ming, handled the audit preparing Standard Water for its IPO.
"The mainland joint venture is another entity and it may not be necessary to give information to the Hong Kong office," Ding said, adding a High Court ruling would provide a clear guideline for Hong Kong accountants in such situations.
"It is not good from the perspective of investor protection if the SFC cannot get the information it needs to conduct an investigation.
"If the court rules in favour of any firm using mainland secrecy laws as an excuse for non-disclosure, there should be some sort of reform to solve the problem," he said.