The importance of knowing who does the auditing

Ernst & Young Hong Kong's case with the Securities and Futures Commission revolves around the vexed question as to whether the auditing firm is correct in its decision to cite "state secrets" in justification for not turning over the working papers of the failed initial public offering by Standard Water. Hearings on the case are due to continue in the High Court on May 16.

However, the author of the China Accounting Blog, Paul Gillis, says in a recent post: "The real scandal of this case is not the refusal to turn over the working papers, but the way that EYHK has misled investors into thinking that it, rather than its mainland affiliate, conducted the audit." He says the Big Four accounting firms like to treat the mainland and Hong Kong as one market and position themselves as seamless global organisations. That is until they get sued, and then they argue they are a collection of independent franchises.

He goes on to argue that Hong Kong regulations have long required that companies listed in the city used a Hong Kong-based auditor. This was fine until 2011 when Hong Kong was pushed into accepting mainland auditors of H shares. The upshot was that most H-share companies switched from the Hong Kong affiliate to the mainland affiliate of the same Big Four accounting firm.

Gillis argues that investors need to know the true identity of the auditor. If mainland companies wish to list in the United States, Hong Kong or London, they should follow the rule of law in those jurisdictions. This is, after all, why people invest through the Hong Kong stock exchange. This means co-operating with the regulators.

Yau's awful legacy

The high roadside pollution levels yesterday are a further reminder of the legacy of former chief executive Donald Tsang Yam-kuen and secretary for the environment Edward Yau Tang-wah. Despite mounting evidence that roadside pollution was getting worse in Hong Kong, they did next to nothing about it.

The Hedley Environmental Index, which relates Hong Kong's roadside pollution to World Health Organisation standards, moved beyond the "very dangerous" level yesterday and went off the scale.

Tsang tried to make out that Hong Kong's dirty air was only a problem for expatriates. Yau for his part would talk glibly about the need to "balance" public health with economic development. Even when he was shamed into setting a date for the introduction of new air quality objectives, he disingenuously claimed that the legislative process meant they couldn't be introduced before 2014, when in fact he had the authority to do it almost immediately. His is an awful legacy. But he has nevertheless been rewarded with another stint in government as the Director of Office of the Chief Executive. Membership of the government/civil service club seems to entail a job for life regardless of performance.

Can corporates do charity?

For the past month, The Economist has been conducting a spirited debate on its website on the motion "CSR has nothing to do with charity". The debate attracted more than 400 comments and 30,000 readers. A surprisingly large 75 per cent agreed with the motion, which during the course of the debate chewed over issues such as what are business' ethical and social responsibilities; is philanthropy an important part of the social responsibility of business, or should they get on with what they are good at - making money; is corporate CSR just PR.

We were asked to consider whether philanthropy is "merely a footnote in a large discussion about corporate behaviour" or a "compelling" way for companies to contribute to society. Others pointed out that the issue was not so much about business handing over a cheque to charity but acting responsibly in the first place. All this and much more on The Economist's website.

Crocodile tears

Spare a thought for Paul Hogan of Crocodile Dundee fame. He has spent years haggling with the Australian tax authorities over money, which he has stashed overseas in a series of elaborate corporate structures. However, after he has settled with the revenue authorities, it appears that he is currently unable to get his hands on his US$34 million stash. In an ironic twist, it appears that the sophistication of these structures has benefited his tax "adviser", who Hogan says has made off with the money. He is now attempting to sue him.