The legal battle between the Securities and Futures Commission and Ernst & Young kicked off yesterday, with lawyers debating whether state secrets were an excuse for not handing a listing candidate's audit working papers to the regulator.
The landmark case will determine if the regulator can require accounting firms to provide documents for investigations.
E&Y helped the mainland water treatment firm Standard Water apply for a listing in Hong Kong in 2009, but resigned as its auditor in 2010 after finding inconsistencies in documents. Standard Water subsequently withdrew its listing application.
The SFC issued nine notices from April 2010 to October 2011 to E&Y asking for accounting records to check on Standard Water, but E&Y refused to oblige.
The Court of First Instance saw the courtroom packed yesterday with media, accountants and SFC staff, including executive director Mark Steward.
Benjamin Yu SC, representing E&Y, a "Big Four" accounting firm, said the mainland's state secret law clearly prohibited E&Y from handing working papers to any overseas regulators.
The law states that auditors' working papers may contain information relating to state secrets, Yu said. As such, mainland firms can only give information to the China Securities Regulatory Commission, he argued.
For the SFC, Jat Sew-tong SC said that the Hong Kong regulator, under the city's laws, had every right to ask E&Y for documents. He told Mr Justice Peter Ng Ka-fai: "It is not the intention of the SFC to challenge the mainland's secrecy law."
Under Hong Kong law, Jat said, E&Y was duty-bound to provide the documents requested by the SFC for its investigation, but did not do so.
While Standard Water was audited by E&Y's mainland joint venture, Ernst & Young Hua Ming, the E&Y Hong Kong office was the one that signed the audit report for Standard Water's listing in Hong Kong. As such, the two offices should have a lot of communication records or documents that could be obtained by the Hong Kong office.
Jat said that in addition, in keeping with the standards befitting a Big Four firm, E&Y's Hong Kong office should have kept written records on why it decided to resign as auditor.
Alden Leung Kwok-ki, a partner responsible for E&Y's quality and risk management in the Greater China region, said he could not recall a lot of details on the Standard Water audit. However, Leung said, resigning was an easy decision after Benjamin Yam, who was the E&Y partner in charge of that audit, told him about inconsistencies in the information provided by the company. After Leung and Yam had a verbal discussion in Beijing, E&Y resigned as auditor of Standard Water. Yam left the firm in 2011.
The hearing continues today.