Hong Kong auditors are becoming pickier in selecting clients as the accounting industry pushes to protect its reputation in the wake of local and overseas financial scandals. The resignation of PricewaterhouseCoopers (PwC) as auditor of toymaker Playmates Holdings on Monday sent another shock wave through the stock market. PwC withdrew its services over what it saw as the toymaker's resistance to requests for information it deemed necessary for a full risk assessment. It was the second time this year an auditor had made serious allegations against a client. In June, Deloitte Touche Tohmatsu withdrew its services from eyewear maker Moulin Global Eyecare Holdings over failure to keep proper records of company transactions. Not long after, the company collapsed with up to $5.3 billion in bad loans having to be written off. In the push to shield themselves from legal challenges - the United States-based Arthur Andersen accounting empire collapsed following the Enron Corp scandal in 2002 - auditing firms worldwide are dumping clients rather than accept responsibility for sloppy book-keeping. The Big Four - KPMG, PwC, Deloitte and Ernst & Young - are leading the charge. With US regulators putting pressure on the accounting industry to get its house in order, the impact is being felt in the key players' partnership offices in Europe, Japan, Hong Kong and Singapore. Hong Kong Society of Accountants president Edward Chow Kwong-fai said the accounting environment was becoming more demanding by the day. 'When an accounting firms finds it is taking disproportionate risks to the fee it is receiving, it simply quits,' Mr Chow said. Although it is not easy to quantify risks associated with auditing, the professional indemnity insurance to cover possible investors' lawsuits stemming from accounting scandals is an indicator. One audit firm - not one of the Big Four - said one insurer had cut the original two-year indemnity insurance deal to one year on the same terms. Consequently, the audit firm's indemnity insurance agreements will be doubled next year, while its audit fee will increase by only 20 to 30 per cent. As a result, audit firms are quitting clients in droves, simply saying they cannot reach agreement with companies on auditing fees or that there is nothing unusual that needs to be brought to investors' attention. Stock exchange reports show that almost 30 companies have switched auditors this year. The same report shows a trend of first-tier auditors - the Big Four - divesting themselves of unwanted clients, which then have to seek the services of second-tier auditors. This adds to the manpower problems facing the accounting industry, which is already stretched amid the wave of mainland enterprises rushing to list on Hong Kong's exchange. An accountant outside the Big Four said most of the switching was being prompted by auditors quoting unreasonably high fees. In some cases, fees were almost doubled from the previous year, which scared away clients without need for further explanation, she said. But PwC had no hesitation in saying what it thought about Playmates' refusal to allow a more in-depth review of the books after the discovery of a US$410,000 misstatement in accounts. From an accounting point of view, it would have been easy for both sides to have reached a consensus on how to handle what PwC labelled 'accounting misconduct'. 'This showed the client-auditor relationship between Playmates and PwC had soured, a scenario seldom seen,' Mr Chow said. With Moulin's collapse and now Playmates running foul of its auditors, investors have become jittery. When news of the Playmates-PwC falling out broke on Monday, the company's share price tumbled 9.82 per cent to $1.01 in heavy trading of 67.2 million shares. In the following days, Playmates major shareholder, chairman and founder Thomas Chan Chun-hoo, was said to have staged a buy-back, resulting in the share price regaining ground. In Moulin's case, it appointed auditor CCIF to investigate Deloitte's allegations of doubtful shipping documents involving $12 million. Playmates, on the other hand, appointed an independent US legal counsel to investigate the accounting misconduct claim. Clement Chan, the managing director of Horwath Hong Kong, said he thought PwC considered the lack of information available from the report posed too great a risk for it to carry on. 'US auditors are adopting a more proactive approach in presuming wrongdoing on the part of their clients before renewing contracts,' Mr Chan said.