KPMG partners face HK contempt of court rap

> Liquidators of China Medical Technologies step up action against auditor

BEIJING: Several current and former KPMG partners are facing contempt proceedings in a Hong Kong court, as liquidators for a failed US-listed Chinese company step up their action against the auditor over its refusal to produce Chinese working papers.

The contempt summons, seen by Reuters, names 91 individuals and was issued on Nov 22.

It is the latest move in a battle surrounding the 2012 collapse of China Medical Technologies, whose founders are being prosecuted in the United States for allegedly defrauding investors out of more than US$400 million (RM1.6 billion).

The writ highlights a long-running tussle between China, which is reluctant to hand over mainland documents, and overseas regulators that demand such papers – leaving auditors 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.

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 was placed 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.

China Medical is the most highprofile international contest over Chinese audit papers since 2014, when EY, KPMG’s fellow Big Four accounting firm, handed over certain documents to Hong Kong’s Securities and Futures Commission after a court battle.

EY had argued that Chinese officials would not let it produce documents related to its work on an unfinished audit of Standard Water Ltd – a Chinese municipal water services provider that scrapped plans for an initial public offering in Hong Kong. – Reuters