HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals.
Due Diligence Guidelines –
7. Special Circumstances
7.1 Multiple Accountants
7.1.1 The sponsor should have a clear understanding on the delineation of work scope and procedures to be performed with respect to the members of the Group between the different accountants.
7.1.2 The sponsor may consider adjusting its due diligence procedures on multiple accountants based in different jurisdictions or subject to a different professional body or accounting standards.
7.2 Accountant Resignation
7.2.1 In all instances where the accountant resign during the Track Record Period and not just a change of accountant, the sponsor should enquire and review the term of engagement with the exiting accountant and the new accountant, as well as comparing and noting any differences between the old and the new term of engagements.
7.2.2 The sponsor should enquire and obtain evidence to its satisfaction as to whether there has been any disagreement or dispute between the listing applicant and the exiting accountant, the reason for the resignation, whether there is any release letter issued by the exiting accountant with respect to the resignation. The new accountant will usually seek to interview the exiting accountant and to obtain a professional clearance letter from it. The new accountant will typically be willing to discuss with the sponsor what has been done by it with respect to the exiting accountant, but typically will not provide a copy of the professional clearance letter to the sponsor. It may be possible to obtain such clearance letter from the listing applicant.
7.3 Confidentiality of Audit Work Papers
Representatives of major accounting firms have stated that the firms will not provide access to such work papers, given that they are the accountant’s own work product and belong to the accountant and in some circumstances, accountants may not be able to, or assert that they cannot provide audit work papers because of restrictions imposed by foreign law or regulations.31
7.4 Underlying accounts
7.4.1 If member(s) of the Group have their accounts audited/reviewed under different accounting standards, the sponsor should ensure that it understands how the accounting standard differs from HK GAAP/IFRS and that material information arising from an understanding of such differences is understood and, where appropriate, disclosed.
7.4.2 Should there be any concerns raised during the sponsor’s review, the sponsor should conduct further due diligence work in order to satisfy itself that the concerns have been addressed.
31. The SFC’s press release “SFC commences legal proceedings against Ernst & Young over access to accounting records” of 27 August 2012 summarises the SFC enforcement action against Ernst & Young with respect to its work as the reporting accountant and auditor for Standard Water Limited (“Standard Water”). Standard Water applied for listing on the Stock Exchange on 9 November 2009 and on March 2010, Ernst & Young suddenly informed the Stock Exchange of its resignation as reporting accountants and auditors of Standard Water upon discovery of certain inconsistencies in documentation provided by Standard Water. Shortly afterwards, Standard Water also withdrew its listing application. The SFC issued a formal notice to Ernst & Young seeking the audit working papers and underlying accounting documents relating to Standard Water and Ernst & Young failed to comply with such request and claimed that they did not have the relevant records which were held in the Mainland by its joint venture partner in the Mainland. Ernst and Young further claimed that pursuant to a joint statement issued by PRC authorities on 20 October 2009, accounting records (including audit working papers) may be the subject of claims of state secrecy under PRC law and that all Hong Kong accountants are required to obtain the consent of the relevant Mainland authorities before handing over any accounting records to regulators like the SFC. The SFC then sought the assistance of the relevant authority in the Mainland using its standing arrangements for mutual assistance in investigatory matters. Despite this, Ernst & Young still failed to produce the records to the relevant Mainland authority as requested. As a result, the SFC has commenced proceedings in the Court of First Instance against Ernst & Young Hong Kong to enquire into the circumstances of Ernst & Young’s non-compliance with the SFC’s request for these records. The Court of First Instance can order Ernst & Young to comply with the SFC’s request if it is satisfied that Ernst & Young does not have any reasonable excuse for not complying.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.