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Thursday 24 September 2009
Auditor accused of fakes settles
Accounting giant Ernst & Young has settled out of court a negligence case over the collapse of a former auditing client, electronics firm Akai Holdings, following allegations its staff tampered with or faked hundreds of documents.
Accounting giant Ernst & Young has settled out of court a negligence case over the collapse of a former auditing client, electronics firm Akai Holdings, following allegations its staff tampered with or faked hundreds of documents.
But its troubles may be just beginning. The company, one of the world’s Big Four accountants, with more than 135,000 employees, has referred the case to the city’s accounting watchdog, which could pass it on to the Financial Reporting Council for investigation.
The council, a statutory body, can recommend disciplinary action or, if it suspects criminality, refer cases to the police, Securities and Futures Commission or Independent Commission Against Corruption.
The size of the settlement between Ernst & Young and the liquidator, Borrelli Walsh, is confidential, but a person familiar with the situation said the liquidator asked for US$400 million to settle the case before it went to trial last week. The settlement was brokered by members of Ernst & Young’s global senior management team, people familiar with the talks said. John Ferraro, Ernst & Young’s global chief operating officer, was in Hong Kong over the weekend.
Ernst & Young admitted an internal investigation had found that one of its Hong Kong partners, Edmund Dang, may have tampered with evidence on which it had based its defence. It has suspended Dang pending further inquiries.
“This investigation has made clear that certain documents produced for the audits in 1998 and 1999 could no longer be relied on due to the action of the audit manager in early 2000,” the firm said. Dang was identified in court as the Akai audit manager.
It also said a former employee may have been involved, and that it had referred the matter to the Hong Kong Institute of Certified Public Accountants, which oversees accounting firms in the city.
Hong Kong-listed Akai collapsed under suspicious circumstances after reporting a US$1.8 billion loss for the year to January 1999. Its founder, James Ting, was jailed in 2005 for false accounting, but the conviction was overturned on appeal because of errors by the prosecution.
Borrelli Walsh accused Ernst & Young of negligence for failing to avert Akai’s collapse. When hearings in the case began last week, the liquidator alleged Ernst & Young staff had falsified or doctored more than 80 files relating to their audit of Akai. On the second day of the case, it said the scope of the tampering and falsification was far greater than that.
Mr. Justice William Stone adjourned the case on Friday.
Barlow Lyde & Gilbert, a law firm acting for Ernst & Young, then questioned the staff at the accounting firm who had been involved in Akai’s audit. They included David Sun Tak-kei, its co-managing partner for the Far East, who was in charge of overseeing the firm’s Akai audit between 1997 and 1999.
Francis Wong, now Ernst & Young’s head of audit for China and previously the audit engagement principal on the Akai account, was also questioned, along with Dang.
Ernst & Young has exonerated Sun. The firm’s statement quoted him as saying: “We are dismayed by the unexpected circumstances that have arisen. While we do everything we can to live our values, no global organisation of more than 135,000 people can be totally insulated from the risk of one or more individuals not upholding these values.”
Borrelli Walsh said Dang’s handwriting was on some of the questionable Ernst & Young documents. But the liquidator’s barrister, Michael Kosmin QC, said in court last week that the case went well beyond the actions of a junior manager. The suspicious documents ran back to 1994, he said. Dang only joined the Akai audit team in December 1997.
“It runs contrary to common sense that [Dang] would voluntarily, without consultation with anybody else, have interfered with files going back as far as 1994,” Kosmin told the court on Thursday. “This is not the case of Mr. Dang. This is the case of Ernst &Young, because people don’t volunteer to tidy up things from four years before they became employed.”
Winnie Cheung Chi-woon, chief executive of the accounting institute, said it could fine or revoke the licence of any individual Ernst & Young found in its own inquiries to have breached duties. The regulator may refer the case to the Financial Reporting Council, which has greater powers and the resources to conduct in-depth inquiries.
The government said it would await the financial regulators’ rulings and “consider following up as appropriate”.
Sin Chung-kai, deputy chairman of the Democratic Party, said police should investigate.
“It’s not much use if only the accounting regulator looks into this,” Sin said. “After such allegations it is for the [police] commercial crime bureau to request the [allegedly doctored] evidence from Ernst & Young or from the court.”
2 comments:
Auditor accused of fakes settles
Accounting giant may face new Akai probe
Naomi Rovnick and Enoch Yiu
24 September 2009
Accounting giant Ernst & Young has settled out of court a negligence case over the collapse of a former auditing client, electronics firm Akai Holdings, following allegations its staff tampered with or faked hundreds of documents.
But its troubles may be just beginning. The company, one of the world’s Big Four accountants, with more than 135,000 employees, has referred the case to the city’s accounting watchdog, which could pass it on to the Financial Reporting Council for investigation.
The council, a statutory body, can recommend disciplinary action or, if it suspects criminality, refer cases to the police, Securities and Futures Commission or Independent Commission Against Corruption.
The size of the settlement between Ernst & Young and the liquidator, Borrelli Walsh, is confidential, but a person familiar with the situation said the liquidator asked for US$400 million to settle the case before it went to trial last week. The settlement was brokered by members of Ernst & Young’s global senior management team, people familiar with the talks said. John Ferraro, Ernst & Young’s global chief operating officer, was in Hong Kong over the weekend.
Ernst & Young admitted an internal investigation had found that one of its Hong Kong partners, Edmund Dang, may have tampered with evidence on which it had based its defence. It has suspended Dang pending further inquiries.
“This investigation has made clear that certain documents produced for the audits in 1998 and 1999 could no longer be relied on due to the action of the audit manager in early 2000,” the firm said. Dang was identified in court as the Akai audit manager.
It also said a former employee may have been involved, and that it had referred the matter to the Hong Kong Institute of Certified Public Accountants, which oversees accounting firms in the city.
Hong Kong-listed Akai collapsed under suspicious circumstances after reporting a US$1.8 billion loss for the year to January 1999. Its founder, James Ting, was jailed in 2005 for false accounting, but the conviction was overturned on appeal because of errors by the prosecution.
Borrelli Walsh accused Ernst & Young of negligence for failing to avert Akai’s collapse. When hearings in the case began last week, the liquidator alleged Ernst & Young staff had falsified or doctored more than 80 files relating to their audit of Akai. On the second day of the case, it said the scope of the tampering and falsification was far greater than that.
Mr. Justice William Stone adjourned the case on Friday.
Barlow Lyde & Gilbert, a law firm acting for Ernst & Young, then questioned the staff at the accounting firm who had been involved in Akai’s audit. They included David Sun Tak-kei, its co-managing partner for the Far East, who was in charge of overseeing the firm’s Akai audit between 1997 and 1999.
Francis Wong, now Ernst & Young’s head of audit for China and previously the audit engagement principal on the Akai account, was also questioned, along with Dang.
Ernst & Young has exonerated Sun. The firm’s statement quoted him as saying: “We are dismayed by the unexpected circumstances that have arisen. While we do everything we can to live our values, no global organisation of more than 135,000 people can be totally insulated from the risk of one or more individuals not upholding these values.”
Borrelli Walsh said Dang’s handwriting was on some of the questionable Ernst & Young documents. But the liquidator’s barrister, Michael Kosmin QC, said in court last week that the case went well beyond the actions of a junior manager. The suspicious documents ran back to 1994, he said. Dang only joined the Akai audit team in December 1997.
“It runs contrary to common sense that [Dang] would voluntarily, without consultation with anybody else, have interfered with files going back as far as 1994,” Kosmin told the court on Thursday. “This is not the case of Mr. Dang. This is the case of Ernst &Young, because people don’t volunteer to tidy up things from four years before they became employed.”
Winnie Cheung Chi-woon, chief executive of the accounting institute, said it could fine or revoke the licence of any individual Ernst & Young found in its own inquiries to have breached duties. The regulator may refer the case to the Financial Reporting Council, which has greater powers and the resources to conduct in-depth inquiries.
The government said it would await the financial regulators’ rulings and “consider following up as appropriate”.
Sin Chung-kai, deputy chairman of the Democratic Party, said police should investigate.
“It’s not much use if only the accounting regulator looks into this,” Sin said. “After such allegations it is for the [police] commercial crime bureau to request the [allegedly doctored] evidence from Ernst & Young or from the court.”
Additional reporting by Phyllis Tsang
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