End of audit oversight issues bodes well for economic ties

By Frank Ching

Two years ago, Hong Kong’s market regulator, the Securities and Futures Commission, took accounting firm Ernst & Young to court to force it to reveal information on a Chinese utility company that had sought to be listed on the Hong Kong stock exchange. The firm, now known as EY, refused to provide audit work papers, citing legal restrictions in China. In May, a high court judge ruled in favor of the commission. EY has lodged an appeal. Similarly, the U.S. Securities and Exchange Commission has for years been asking for audit work papers concerning Chinese companies listed in the United States, dozens of which are alleged to have been involved in fraudulent activities. Last January, a U.S. judge ruled in favor of the SEC and threatened to suspend Chinese affiliates of the Big Four accounting firms in China unless they provided information as requested. On the face of it, the two cases were almost identical. But the Chinese reaction has been quite different. Immediately after SEC Administrative Law Judge Cameron Elliot issued his ruling, a spokesman for China’s regulatory body, the China Securities Regulatory Commission, voiced “deep regret” that the SEC had “ignored” China’s efforts to promote cooperation in cross-border supervision. “The U.S. Securities and Exchange Commission would bear all the responsibility for the consequences of its action,” the spokesman Deng Ge said. The previous year, CSRC had provided some information on Chinese companies requested by the SEC and, in May 2013, a memorandum of understanding was signed by CSRC, China’s Ministry of Finance, the SEC and the U.S. Public Company Accounting Oversight Board.

Clearly, CSRC resented the SEC seeking a court ruling rather than trying to resolve the remaining issues through negotiations. In Hong Kong, too, the Chinese government expected the SFC to go through the CSRC to resolve such issues. In fact, the SFC in 2010 did request the assistance of CSRC to obtain work papers in relation to the audit of the company Standard Water Ltd., which applied to list in Hong Kong in November 2009, with Ernst & Young as its auditor.