SFC takes legal action against Ernst & Young
Securities watchdog wants records on a company that sought to list in 2009, but the accountants say no because of the mainland's secrecy laws
The Securities and Futures Commission initiated legal action yesterday against Ernst & Young for refusing to provide information on a listing candidate on the grounds of state secrets.
The securities watchdog said it had asked E&Y for records of Standard Water, which the accounting firm had helped to apply for listing on the Hong Kong stock exchange in 2009. The firm refused to comply with the request, citing the mainland's secrecy law.This is the first time the commission has used its power under Section 185 of the Securities and Futures Ordinance to ask the courts to order E&Y to comply with its request.
Although Standard Water did not eventually list, the SFC can demand documents of any company that had applied for listing.
The commission has the mainland authorities' backing in the matter and said it had "brought this proceeding after consulting the relevant mainland authority about access to these records".
E&Y declined to comment on the commission's move.
This is the second time in recent days that the regulator has taken action on non-disclosure issues pertaining to the mainland's secrecy law.
Last Wednesday, it ordered China High Precision Automation Group to suspend trading in its shares after the mainland-based company announced that it could not furnish its former auditor KPMG with all the information it sought because some of its businesses were related to "state secrets".
SFC's statement yesterday said Standard Water filed an application in November 2009 to list in Hong Kong. Then in March 2010, E&Y informed the exchange that it had resigned as Standard Water's reporting accountant and auditor as it had found certain inconsistencies in its documents. Standard Water withdrew its listing application soon after.
The SFC issued a formal notice to E&Y seeking the documents related to Standard Water. It did not say when it issued the notice.
E&Y initially said it did not have the records in Hong Kong as the documents were held by its mainland joint venture Ernst & Young Hua Ming. It later said the documents could not be produced because of restrictions under the mainland secrecy law as "accounting records, including audit working papers, may be the subject of claims of state secrecy", the SFC said.
The SFC sought the help of the relevant mainland authority in the investigation. E&Y Hua Ming also failed to provide the records to the relevant mainland authority, the commission said.
"Given Ernst & Young was the reporting accountant … the failure to produce these records to the relevant mainland authority on the SFC's request is a matter of serious concern," the SFC said.