BDO backs Ernst & Young on 'secrecy' documents

Accounting firm BDO stands behind competitor Ernst & Young's decision to withhold some audit-related documents from the Securities and Futures Commission on the grounds of mainland secrecy laws until a Hong Kong court has ruled on the issue.

The High Court is set to make a landmark ruling in March next year on whether Ernst & Young has to hand over audit working papers about mainland water treatment firm Standard Water to help the commission in an investigation.

Ernst &Young helped Standard Water apply for a listing in Hong Kong in 2009, but resigned as its auditor in March 2010 after finding inconsistencies in company documents.

Standard Water subsequently withdrew its listing application.

BDO chairman Albert Au Siu-cheung said many accounting firms, including his own, had more than 70 per cent of their Hong Kong staff working on the mainland, doing annual audits or auditing work to prepare companies for stock market listings.

As such, Au said, if the firm breached mainland secrecy laws, those staff would be at risk.

"How about if such a breach of secrecy law caused all my staff to be banned from going to the mainland, or what if they were detained as a result?" Au said. "I can fully understand why Ernst &Young refused to help the commission.

"As an accounting firm, we have to comply with the SFC's rules in Hong Kong, but then we also need to follow mainland law and regulations.

"China has clearly defined accounting papers to be a type of state secret."

Au said it would be good to have a court ruling so that all accounting firms could then rely on that as a guideline in handling future requests from the commission.

However, he said listed companies should not use state secrets as an excuse not to give information to their auditors.

The commission suspended trading in shares of Fujian-based watch component and industrial measurement maker China High Precision Automation after the company used state secrets as an excuse for withholding information from its auditor KPMG. The auditor later resigned.

"As an auditor, we cannot do our jobs if companies do not allow us to have the information needed," Au said.

He said that if a company needed to abide by state secrecy laws, then it should not be listed and have public shareholders to whom it should be accountable.