Accountants face challenge over disclosure of state secrets

Accountants in Hong Kong are facing a challenge that goes beyond balance sheets and profit and loss accounts - how to handle state secrets.

At issue is whether companies can use such secrets as a reason for not disclosing information to auditors and if accountants can use that same excuse to not give information to the Securities and Futures Commission (SFC).

The debate will take centre stage on September 11 when the High Court will rule on whether Ernst & Young can use state secrecy as a reason for not providing audit papers to the SFC.

Last Monday, the commission filed a writ in the High Court seeking a court order to require the Big Four accounting firm to deliver accounting information regarding mainland company Standard Water. The company applied to list in Hong Kong in November 2009 but Ernst & Young resigned as auditor four months later. Standard Water later withdrew its application.

Despite nine notices from the SFC, Ernst & Young has failed to hand in the requested papers. It claimed they contained state secrets and could not be disclosed.

Roy Lo Wa-kei, managing partner of ShineWing HK, said he was surprised that Ernst & Young had not complied with the SFC's requests. Lo said that although mainland secrecy laws generally banned firms from giving out audit papers, it could be done if the relevant consents were obtained. "From the SFC announcement, it appears the SFC has already received the consent of the relevant mainland regulators to access the accounting record," he said.