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Ernst & Young faces court grilling over listing bid by mainland China firm

Accounting firm's partner must explain why it will not give documents to SFC

PUBLISHED : Saturday, 09 March, 2013, 12:00am
UPDATED : Saturday, 09 March, 2013, 5:15am

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A partner in the Hong Kong office of the accounting firm Ernst & Young is to be cross-examined in court by lawyers from the Securities and Futures Commission over the firm's alleged failure to provide information on a listing candidate from the mainland.

The Court of First Instance has ordered Alden Leung Kwok-ki, a partner in the Big-Four accounting firm, to attend a court hearing on March 27 and 28, where he will be called on to testify. Leung is responsible for E&Y's quality and risk management.

The case stems from E&Y's alleged failure to comply with a number of summonses issued by the SFC requiring it to provide its audit working papers in relation to the mainland water treatment firm Standard Water.

The SFC filed the notices after E&Y resigned in March 2010 as the reporting accountant and auditor for Standard Water, which had filed an application to list in Hong Kong in November 2009. E&Y informed the Hong Kong stock exchange that it had found inconsistencies in Standard Water's documents, and the company withdrew its listing application soon after.

The SFC said it needed the documents to assist its investigation into Standard Water, but E&Y declined to provide the papers, citing the mainland's secrecy laws. SFC took E&Y to court in August last year. Yesterday Mr Justice Peter Ng Ka-fai agreed to allow the SFC's application that Leung be called to court.

Jat Sew-tong SC, for the SFC, said Leung would be able to reveal what led the accounting firm to decide to resign, where the inconsistencies were in the documents, and how E&Y discovered the inconsistencies.

Jat said that Leung had said in his affirmation that E&Y had relied on Hua Ming, its associate on the mainland, to undertake an audit on Standard Water. Their contract showed that E&Y could have access to some documents only if Hua Ming consented. Ernst & Young had said that it could not provide the documents because a "legal impediment" prohibited it from transmitting the working papers out of the mainland, Jat said.

One of the key issues was whether Ernst & Young had a reasonable excuse for not complying with the SFC's notices to provide the working papers.

Jat said the court should look into the relationship between Ernst & Young and Hua Ming, the relationship between Ernst & Young and Standard Water, and Ernst & Young's responsibilities as a reporting accountant to Hong Kong authorities.

Jose-Antonio Maurellet, for Ernst & Young, said: "Does E&Y have the physical possession of the document? We say a hundred times that we don't."

Maurellet said E&Y had made oral and written requests to Hua Ming asking for access to the documents but to no avail.

Professor Fu Hualing of the University of Hong Kong and Professor Liu Yan of Peking University will file expert reports on mainland laws to the court for the SFC and Ernst & Young respectively.