E&Y's outsourced auditing raises eyebrows in court

Imagine there are two new listings with largely identical businesses. Company A has its report signed off by a Hong Kong arm of a Big Four accountancy. Company B's is signed by the accountancy's mainland joint venture. Where will you put your money?

Most of you will say Company A, given the lack of confidence in the mainland's legal system and professional ethics. That's a big misunderstanding - if not a myth - based on what Ernst & Young Hong Kong told the Court of First Instance in the past month in relation to its audit work on a mainland company.

Despite its signature being on the audit report, it had "little" contractual control and staff participation in work that brought in only HK$873. The audit work had essentially been "outsourced" to its mainland peer, the firm said.

This rare glimpse into the operation of auditors on the mainland was provided by Alden Leung, quality and risk management leader (Greater China) of the firm, in his testimony.

The firm has been trying to fend off a demand by the Securities and Futures Commission for its audit papers on Standard Water, arguing that the mainland's state secrets law prevents it from doing so.

The mainland water treatment provider withdrew its application for listing in Hong Kong after E&Y HK resigned from the audit. The auditor pointed to inconsistencies in some financial documents.