By its press release issued on 23 July 2015, the Securities and Futures Commission (SFC) confirmed that the legal battle between the SFC and Ernst & Young (EY) came to an end upon the discontinuance of EY’s appeal against the decision of the Court of First Instance (CFI) dated 23 May 2014 (Judgment), which compelled production by EY of audit working papers and records in relation to the aborted listing application of Standard Water Limited (Company).

However, new regulations recently implemented in Mainland China, together with the past practices of Mainland Chinese authorities, suggest that matters are not straight-forward. This e-bulletin discusses the new PRC rules that came into force following the Judgment, highlights issues that may arise under the new PRC rules in the context of the SFC’s requests for documents which potentially contain state secrets, and provides practical tips on how to deal with such requests.

Recap of the SFC v EY decision

On 27 August 2012, the SFC applied to the CFI for a direction that EY produce all relevant auditing working papers relating to the listing application of the Company to the SFC pursuant to a section 183 investigation notice. The requested documents were then held by EY’s affiliate firm in China.

EY objected to production and contended (among other things) that it was prohibited by PRC laws to disclose the requested documents as they contained state secrets. The CFI rejected such argument due to the lack of evidence showing that the documents indeed contained state secrets. It further held that the obligation lay with EY to make the necessary applications if prior approvals from Mainland Chinese authorities were required before producing the documents. We issued a detailed bulletin last year on this decision.

EY produced the requested documents to the SFC pursuant to the Judgment, and its appeal therefore became academic. EY subsequently discontinued the appeal.

SFC’s expectation

It is clear from the SFC’s press release on 23 July 2015 that they expect Hong Kong audit firms to cooperate fully with the SFC and the China Securities Regulatory Commission (CSRC). The SFC commented that EY could have avoided litigation by conducting proper searches of its offices in Hong Kong and, where necessary, cooperating with the Mainland authorities to seek clearance of records.

PRC Interim Provisions

On 26 May 2015, the Ministry of Finance of China published the “Interim Provisions on Accounting Firms’ Provision of Auditing Services for the Overseas Listing of Enterprises in Chinese Mainland” (PRC Interim Provisions), which came into force on 1 July 2015, to regulate accounting firms’ provision of auditing services for the overseas listing of domestic China-based enterprises.

Article 12 of the PRC Interim Provisions requires Mainland Chinese companies and overseas accounting firms to strictly comply with the “Regulation on Strengthening Confidentiality and Archives Administration Relating to Overseas Issuance and Listing of Securities” (Circular [2009] No. 29 dated 20 October 2009) (2009 Rules), under which:

  • the overseas listed company must obtain approval from the relevant Mainland Chinese authorities prior to providing documents involving state secrecy to (among others) overseas regulators (Article 3);
  • whether or not the documents constitute state secrets shall be determined by the corresponding secrecy administrative department (Article 3); and
  • the working papers and other archives created within Mainland China during the overseas listing process should remain in Mainland China, and any documents which contain state secrets cannot be transmitted to individuals or institutions overseas without the approval of the relevant Mainland Chinese authorities (Article 6).

Pursuant to Article 12 of the PRC Interim Provisions, where the listing of a Mainland company becomes the subject of a legal or litigation matter, requests for audit working papers of that company by an overseas judicial or regulatory authority, as well as requests for audit working papers of a Mainland company by an overseas regulatory authority in the performance of its regulatory functions shall be dealt with in accordance with the supervision agreements between the regulatory authorities of Mainland China and the regulatory authority of the relevant overseas jurisdiction.

The PRC Interim Provisions therefore serve as a reminder of the 2009 Rules which prohibit the transfer of working papers containing state secrets outside of China unless specifically approved. At the same time they confirm the need to deal with requests from overseas regulators in accordance with the supervision agreement that exists between the CSRC and the overseas regulator in question.

At a press conference held on 4 July 2014, the CSRC spokesperson acknowledged the enforcement cooperation program between the SFC and the CSRC that facilitates regulatory enforcement cooperation efforts, which include the provision of audit working papers. It is reasonable to expect the CSRC to continue to provide assistance to the SFC in relation to documents request through the cooperation program that is in place, as reflected in the Memorandum on Regulatory Cooperation dated 19 June 1993 and signed between the SFC and the CSRC, as well as the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (revised in 2012) to which the SFC and the CSRC are signatories. These memoranda provide a framework within which the SFC and the CSRC will render mutual assistance and exchange information for the purpose of enforcing and securing compliance with the respective laws and regulations of Hong Kong and Mainland China.


In view of the large number of PRC companies that are currently listed in Hong Kong and the anticipated growth in the listing of PRC companies in Hong Kong, the legal issues that arose out of the SFC v EY case are bound to arise again in future SFC investigations.

Given the SFC’s expectation of auditors’ compliance of its investigation notices, and the general prohibition under PRC laws against transmission of audit working papers outside of China, it is important for the Mainland companies and their auditors to ensure that appropriate steps are taken to fully comply with the SFC’s request without violating PRC laws, failing which serious legal consequences will follow under the laws of both jurisdictions.

Practical tips

  • Ensure that the necessary internal investigations are conducted before responding to the SFC’s requests for documents, including:
    • identifying the existence and location of the documents (such as audit working papers) responsive to the SFC’s request;
    • determining whether they are potentially subject to PRC laws on the protection of state secrets.
  • Bare assertion of state secrets as a basis for refusing to produce the requested documents to the SFC will not be accepted.
  • Persons claiming state secrets must take the initiative to seek approvals from the CSRC and/or relevant Mainland Chinese authorities prior to disclosure if the documents potentially involve state secrets.
  • Be prepared that the SFC may liaise directly with the CSRC to seek their cooperation and assistance in obtaining the requested documents to facilitate the SFC’s investigations.