SFC wins Hong Kong case against EY accounting, but future problems loom
The Securities and Futures Commission has won a five-year legal battle with EY as the accounting firm finally gave the audit papers of a mainland client to the commission. But this does not mean other accountants would automatically follow EY’s lead.
They point out that they were told this month by Beijing’s Ministry of Finance 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 secret law has a much wider scope than overseas markets and would cover accountants’ working papers, examination papers and even the result of agricultural harvests.
EY pointed to the state secret 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.
Officials of EY last week refused to comment on why it changed its mind and 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 CSRC worked behind the scenes to help grab 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 it is “their obligation to identify records held in the mainland and to seek their clearance with the auditor.”
The SFC is eager to get its hands on these papers to crack down on any market malpractices. The problem though is that accountants are not under SFC jurisdiction.
It is the Hong Kong Institute of Certified Public Accountants that issues the license for accountants and the Financial Reporting Council handles alleged auditor failures.
The SFC thus could only remind but could 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 is a clear guideline on who is doing what. Should auditors fill in a form from the Ministry of Finance to apply to get the paper for the SFC, or would this all be done through the CSRC in the future?
Only clear procedures could prevent future legal disputes.