Audit firm ordered to disclose PRC working papers to SFC despite PRC ‘state secrets law​’ concerns

On 23 May 2014, the Securities and Futures Commission of Hong Kong (SFC) successfully obtained an order from the High Court of Hong Kong requiring Ernst & Young Hong Kong (E&Y) to produce all audit working papers prepared in connection with its audit of Standard Water Limited (Standard Water), despite concerns raised by E&Y that: (i) disclosing such information would result in E&Y breaching numerous PRC laws, including the state secrets law; and (ii) in any event, E&Y had no right to possession of the relevant documents, the audit having been conducted by Ernst & Young Hua Ming LLP (HM), a sino-foreign co-operative joint venture between Hua Ming Certified Public Accountants and E&Y in China.

Standard Water was incorporated in the Cayman Islands and registered as a non-Hong Kong company under Part XI of the Companies Ordinance (Cap. 32). Its two main operating subsidiaries engaged in the business of water supply and wastewater treatment in the PRC. In 2009, Standard Water applied to list on the main board of the Stock Exchange of Hong Kong Limited. E&Y was engaged as reporting accounting and independent auditor for that purpose.

In March 2010, while the listing application was still pending, E&Y resigned from its role as reporting accounting and independent auditor with immediate effect, citing ‘inconsistencies in documentation’, which led them to conclude they could no longer act. In light of E&Y’s resignation, in April 2010 the SFC issued a direction to investigate whether any market misconduct had been committed, or misleading information disclosed, in connection with the listing application…

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