SFC wins Hong Kong case against EY, but future problems loom
Beijing's state secrets law will lead to further legal disputes unless procedures are clarified
The Securities and Futures Commission has won a five-year legal battle with EY as the accounting firm has finally handed over the audit papers of a mainland Chinese client to the commission. But this does not mean other accountants will automatically follow EY's lead.
The Ministry of Finance announced this month that from July 1, a new rule bans all auditors from taking any papers out of the country due to the state secrets law.
China's state secrets law has a much wider scope than overseas markets and covers accountants' working papers, examination papers and even the results of agricultural harvests.
EY pointed to the state secrets law and the SFC put things up to the Hong Kong courts. The Court of First Instance last year ruled in favour of the SFC. EY appealed. But the saga ended since the appeal is now "academic" as EY has already handed over the documents.
EY officials last week refused to comment on why the firm bowed to the SFC while the commission statement gave a vote of thanks to the assistance of the China Securities Regulatory Commission.
As such, it looks like the CSRC worked behind the scenes to help attain the papers.
But next time there is a similar case, will the CSRC help again or will the Ministry of Finance - which issued the ban in the first place - handle it.
In announcing its victory result last Thursday, the SFC reminded all audit firms to produce working papers upon SFC request and that it was "their obligation to identify records held in the mainland and to seek their clearance with the auditor."
The SFC is eager to access such documents to crack down on market malpractices. The problem though is that accountants do not fall under SFC jurisdiction.
It is the Hong Kong Institute of Certified Public Accountants that issues licences for accountants and the Financial Reporting Council that handles alleged auditor failures.
The SFC can only remind but not order auditors around. If the accountants do not listen to the regulator, the SFC may well need to go to court again. The EY-SFC saga is bound to repeat itself.
What we need are clear guidelines on who is doing what. Should auditors fill in a form from the Ministry of Finance to apply to get papers for the SFC, or would this all be done through the CSRC in the future?
Only clear procedures can prevent future legal disputes.
