Lai See | The importance of knowing who does the auditing

Ernst & Young Hong Kong's case with the Securities and Futures Commission revolves around the vexed question as to whether the auditing firm is correct in its decision to cite "state secrets" in justification for not turning over the working papers of the failed initial public offering by Standard Water. Hearings on the case are due to continue in the High Court on May 16.

However, the author of the China Accounting Blog, Paul Gillis, says in a recent post: "The real scandal of this case is not the refusal to turn over the working papers, but the way that EYHK has misled investors into thinking that it, rather than its mainland affiliate, conducted the audit." He says the Big Four accounting firms like to treat the mainland and Hong Kong as one market and position themselves as seamless global organisations. That is until they get sued, and then they argue they are a collection of independent franchises.

He goes on to argue that Hong Kong regulations have long required that companies listed in the city used a Hong Kong-based auditor. This was fine until 2011 when Hong Kong was pushed into accepting mainland auditors of H shares. The upshot was that most H-share companies switched from the Hong Kong affiliate to the mainland affiliate of the same Big Four accounting firm.

Gillis argues that investors need to know the true identity of the auditor. If mainland companies wish to list in the United States, Hong Kong or London, they should follow the rule of law in those jurisdictions. This is, after all, why people invest through the Hong Kong stock exchange. This means co-operating with the regulators.

The high roadside pollution levels yesterday are a further reminder of the legacy of former chief executive Donald Tsang Yam-kuen and secretary for the environment Edward Yau Tang-wah. Despite mounting evidence that roadside pollution was getting worse in Hong Kong, they did next to nothing about it.