Evidence presented by accounting giant Ernst & Young in a negligence case is shot through with false and doctored documents, lawyers for the liquidators of electronics giant Akai Holdings, a former audit client of the firm, told the High Court yesterday.
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New ‘bombshells’ in Akai case
Naomi Rovnick
18 September 2009
Evidence presented by accounting giant Ernst & Young in a negligence case is shot through with false and doctored documents, lawyers for the liquidators of electronics giant Akai Holdings, a former audit client of the firm, told the High Court yesterday.
Ernst & Young is fighting a US$1 billion negligence claim brought by the liquidators of Hong Kong-listed Akai, whose collapse 10 years ago with debts of US$1.1 billion shook the city and led to its chairman, James Ting, being imprisoned for two years before he was cleared on appeal.
On the opening day of the negligence trial on Wednesday, Leslie Kosmin QC, for the liquidators, claimed the accounting firm had doctored or falsified 80 audit documents after Akai’s collapse to make it look like it had done more work overseeing the failed electronics firm’s finances than in fact it had.
Yesterday, Kosmin said the liquidators’ legal team had, overnight, discovered many more documents Ernst & Young had tampered with.
Kosmin said the doctored files “permeated” Ernst & Young’s defence and had been relied on strongly in statements from witnesses, including some of its current staff.
“These documents are in the pleadings, they’re used by the defendant’s expert in his report on behalf of Ernst & Young and they are also used by our expert, because we had to deal with them. They’re relied on, with vigour, in the witness statements,” Kosmin said. He said an Ernst & Young partner, Edmund Dang, who worked on auditing Akai, appeared to have lodged a misleading witness statement with the court.
The liquidators began suing Ernst & Young in 2002. But they only managed to obtain the originals of key files from the firm last Friday.
The judge in the case, Mr. Justice William Stone, who took pains to make it clear these were only allegations, said: “Is this going to happen every day? Every morning, I’m going to come in and you have more bombshells for me?”
Stone said to the lawyers in court later in the day he was unsure how to deal with the claim that a high-profile professional services firm’s legal evidence was inaccurate.
“I don’t know where we go from here. It’s a bit like Alcoholics Anonymous. It’s day by day, isn’t it?” the judge said.
Ernst & Young’s barrister, Mark Hapgood QC, said he was “surprised” by the alleged unreliability of the firm’s evidence, of which he had known nothing until last weekend.
Hapgood said Ernst & Young had begun an internal inquiry into the allegations. He added he could not begin to plead the company’s defence to the negligence claims until the inquiry was completed, since his team might have to withdraw or replace some of the accounting firm’s witness statements.
Kosmin said the liquidators’ legal team, having worked most of Wednesday night reviewing the stacks of original Ernst & Young papers and “playing nocturnal Sherlock Holmes”, had now identified four categories of “problem documents”.
The barrister said scans of the documents using specialist computer software had found that a batch of files dated 1994-98 and relating to Akai’s land and property holdings had been modified in January 2000.
Kosmin alleged someone at Ernst & Young had written over the original files by hand in 2000, adding annotations that referenced false documents.
Secondly, he claimed Ernst & Young had faked documents recording important meetings about Akai’s troublesome 1999 accounts, in which the electronics giant revealed a US$1.8 billion loss.
Ernst & Young had said members of its senior staff held a panel meeting about Akai’s 1999 accounts in June of that year, which was when the financial statements were published, the court heard. According to Kosmin, however, Ernst & Young’s notes recording the panel meetings were not created until March 2000.
Kosmin went on to allege that a third category of Ernst & Young’s Akai files dated 1995-99 had been modified in 2000 to “create a false audit trail by inserting annotations, again [after the fact]”.
One such “post facto” document appeared to have been modified by Dang, the Ernst & Young partner, who then concealed the tampering when he cited the altered file in his witness statement, Kosmin claimed.
He said someone, in handwriting close to Dang’s, had annotated a 1998 file with the word “Akai”. This was very significant because Akai was at that time called Semitech Global. The company’s name was not changed to Akai until 18 months after the file was purportedly written, Kosmin said.
He then told the court that when Dang quoted the altered file in a witness statement, he removed the reference to Akai, replacing the word with three dots.
Stone said Dang would be cross-examined about this allegation.
In the fourth category of allegedly questionable documents was a representation letter supposedly signed by Akai chairman James Ting stating Akai’s accounts were truthful and dated June 26, 1999.
Auditors are not meant to allow companies to release their financial statements until such representation letters have been signed, Kosmin said. But according to him, Ernst & Young did not draft the representation letter until July 1999, after the accounts had been published.
Ernst & Young’s central argument to defend the negligence claim against it is that it relied on the signed representation letter from Ting and would not have signed off the 1999 accounts without it.
A criminal court has already found that Akai’s financial statements were questionable.
Ting was jailed in 2005 on false accounting charges. He was released in 2007 after the Court of Appeal said the prosecution’s evidence was not good enough. But the appeal court upheld claims that Ting’s accounting had been dubious.
In 1998, Akai purportedly invested HK$300 million in a US technology company named Micromain. In 2000, Akai wrote off its entire investment in Micromain as a loss, saying the shares had become worthless.
But the Micromain investment never happened, the appeal judges affirmed in their 2007 ruling.
Ernst & Young’s role in Akai’s accounting methods will not be clarified until the judge makes his final ruling. Kosmin was supposed to open the negligence trial on Wednesday with a summary of the liquidator’s case against Ernst & Young, but this has been delayed by his allegations about Ernst & Young’s evidence.
The liquidators, Borrelli Walsh, will allege that Ting siphoned US$800 million from Akai and hid this through false accounting.
Borrelli Walsh blames Ernst & Young’s Hong Kong office for not noticing the alleged theft and says the audit firm must compensate Akai’s creditors. In pre-trial hearings, Ernst & Young has stated in its defence that it is not an auditor’s job to police fraud and that it relied on representations by Ting that Akai’s accounts were truthful.
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