Several current and past KPMG partners are facing Hong Kong contempt proceedings as liquidators for a failed US-listed Chinese firm show irritation with the auditors for refusing to hand over papers relating to the company, the Reuters news service has reported.
The contempt summons was issued on November 22 and lists a total of 91 individuals, putting KPMG “between a rock and a hard place”, said Paul Gillis, professor of practice at Peking University’s Guanghua School of Management, pictured left.
It is the latest step following the 2012 collapse of China Medical Technologies, whose founders are being prosecuted in the US for allegedly defrauding investors out of more than £300m (US$400m).
The writ highlights a long-running tussle between China, says Reuters and various local media outlets, which is reluctant to hand over mainland documents, and overseas regulators that demand such papers, which means that auditors end up “trapped between upsetting Beijing or facing offshore penalties when dealing with foreign-listed Chinese firms”.
KPMG was ordered by Hong Kong’s High Court in 2016 to give audit papers, correspondence and records on China Medical to Borrelli Walsh, liquidators for the one-time NASDAQ-listed firm.
But KPMG has refused to do so without written direction of the relevant Chinese authority, arguing that its mainland-based affiliate KPMG Huazhen, which carried out the China Medical audit field work, would be in violation of national security laws if the materials held state secrets or sensitive information, court documents and the writ show.
KPMG and Borrelli Walsh both declined to comment.
Move comes alongside prosecutions for fraud in the US
Those named in the writ were partners in KPMG China (the partnership covering China, Hong Kong and Macau) in 2015, which is when the court dispute over the audit papers began.
Petitions to wind up China Medical were filed in the Cayman Islands, New York and finally in Hong Kong in 2012, and the company went into liquidation.
The liquidators are asking each of the 91 defendants be held in contempt of court, which could result in criminal penalties, or impose weekly fines for failure to comply with the High Court order, Reuters reports.
Some commentators have pointed to the fact that Hong Kong is treated by mainland China in the same way as the US over regulatory matters.
Reuters says, “Hong Kong and US regulators have been at loggerheads with Chinese firms and their auditors over the production of audit work papers since the start of the decade – a battle that at one point threatened to leave U.S.-listed Chinese groups unaudited and in danger of delisting.
“While US and Chinese regulators came to a non-binding agreement in 2013 over exchanging documents, mainland officials have objected to inspections and are still in practice often reluctant to let papers leave China”, the newswire added in a piece by its China correspondent Matthew Miller.
Auditors between a rock and a hard place
“The problem for accounting firms is that they’re still between a rock and a hard place,” said Professor Gillis.
“They need to comply with the laws in all of the locations where they are doing business.”
In a blog for the Seeking Alpha website titled A Lump Of Christmas Coal For KPMG filed today, Gillis said that the case is a repeat of an earlier spat with EY over working papers for Standard Water, which was resolved when EY “found” the working papers on a server in Hong Kong.
Gillis said that, while the Washington DC-based Public Company Accounting Oversight Board had banned a couple of small Hong Kong CPA firms for failing to turn over working papers, it appeared to be unwilling to take on the big firms.
“Perhaps locking up 91 KPMG partners over Christmas may spur the firms to find a solution to this problem”, Gillis noted.