HK regulator in Ernst and Young China secrecy row

image captionMany Chinese companies that operate in the mainland are listed in Hong Kong

Hong Kong's market regulator is taking Ernst and Young to court to force it to reveal information on a former China-based client, in an unprecedented move.

Ernst and Young has said if it complies it could be in violation of China's state secrecy laws.

The Securities and Futures Commission (SFC) wants records related to Standard Water, a Chinese utility company and an Ernst and Young client in 2009.

The case follows similar ones in the US involving Chinese companies.

China's state law says that Chinese company records can be claimed as state secrets.

The SFC said auditors should be able to provide documents, especially when they have participated in helping the company apply to list on the Hong Kong Stock Exchange.

"Accounting and audit working papers relating to private companies applying for listing in Hong Kong must be capable of being produced either directly to the SFC or via the relevant mainland authority under the standing arrangements for co-operation," the SFC said in a statement.

The commission said it had consulted its mainland counterpart on the case.

This is the first time the SFC has taken such legal action and it is being seen as a test case.

Reveal records

In the US, the Securities and Exchange Commission (SEC) has pursued accounting companies through the courts to reveal records.

Last year, the regulator asked a federal court to force Deloitte to reveal records for the Chinese company Longtop Financial Technologies, as part of an investigation into reports of fraud.

Deloitte has resisted the move, citing Chinese secrecy laws and the case has been delayed.

Claims of fraud and questionable auditing standards at several US listed Chinese companies, for example Sino-Forest Corporation, have dented investor confidence.

The scandals have prompted US regulators to react by demanding access to auditing documents kept in China by accounting firms.