Monday, 12 October 2009
Ernst & Young’s US$200m snag
The global partnership of Ernst & Young is unwilling to help its Hong Kong office fund a legal settlement of about US$200 million agreed with the liquidators of Akai Holdings, the accounting firm’s bankrupt former client, according to people familiar with the firm’s operations.
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Ernst & Young’s US$200m snag
Naomi Rovnick and Enoch Yiu
12 October 2009
The global partnership of Ernst & Young is unwilling to help its Hong Kong office fund a legal settlement of about US$200 million agreed with the liquidators of Akai Holdings, the accounting firm’s bankrupt former client, according to people familiar with the firm’s operations.
This would hurt partners’ take-home profits for years, they said. The settlement, which was struck on September 23, marked the end of an audit negligence case where Ernst & Young Hong Kong was accused of turning a blind eye while Akai’s disgraced founder James Ting bankrupted Akai in the late 1990s.
Akai’s liquidators, Borrelli Walsh, said in court that Ernst & Young Hong Kong staff falsified legal evidence to shield the firm from the negligence claim. The liquidators had originally demanded US$400 million from Ernst & Young Hong Kong, expecting that even if the local office could not pay this, the global partnership would step in to help.
But John Ferraro, Ernst & Young’s global chief operating officer who took part in the settlement negotiations, managed to halve the figure by making it abundantly clear that the global partnership would not dig into its own coffers to bail Hong Kong out, people familiar with the situation said.
They said Ferraro argued that the global practice would rather jettison the Hong Kong office than help to fund a US$400 million claim. Instead, he told the liquidators to reduce the figure to one that the Hong Kong partners could manage to borrow, insiders at the accounting firm said.
Ernst & Young Hong Kong audited Akai and its subsidiaries right up until the electronics conglomerate collapsed in 2000 owing creditors US$1.1 billion. In contrast, the accountant’s US and Canadian practices resigned from auditing Akai companies in 1997, citing a breakdown of trust with Ting and saying they did not fully understand the conglomerate’s financial statements.
Ting was jailed in 2005 for false accounting but his conviction was overturned on appeal a year later after errors in the prosecution’s case. Ernst & Young’s defence collapsed in the audit negligence case when Borrelli Walsh accused the firm’s local staff of falsifying and doctoring Akai audit files, then relying on the questionable papers in legal evidence.
The Hong Kong police’s commercial crime bureau is investigating that claim. On September 29, the police raided Ernst & Young’s Hong Kong offices, seized documents from Borrelli Walsh and the liquidator’s solicitors, Lovells, and arrested an Ernst & Young partner who had audited Akai, Edmund Dang.
Now, police are questioning other staff members at the accountant’s local office. Ernst & Young Far East co-managing partner David Sun Tak-kei said on Thursday: “We have reached a manageable settlement that does not create a current or future financial burden for the practice.” Sun was the independent review partner on the Akai audit when the company collapsed, and Dang was a junior manager on the account. Sun relinquished his role as Ernst & Young’s China chairman on September 30, the day after the police raided his employer’s offices. Dang was freed on bail without being charged.
The people familiar with the firm’s operations added that Hong Kong partners who were not involved with auditing Akai now felt resentful about paying for others’ past mistakes, and that the embarrassingly public nature of the faked evidence allegations had hurt staff morale at Ernst & Young Hong Kong.
Apart from Sun and Dang, there are very few people left in Ernst & Young’s local office who had anything to do with Akai. Chee Tat Kwok, another of Akai’s former senior audit partners, has retired. Another person named in court as having worked with Akai in a senior audit role, Andrew Lam, is now a partner at the Hong Kong practice of accountant Grant Thornton. Lam did not response to e-mails asking for comment. A lawyer familiar with Ernst & Young’s insurance arrangements said the global partnership had a self-funded insurer, called a captive, which may be able to fund part of the settlement.
But the captive had just US$50 million available to fund negligence claims for 1997-99, the period in which Ernst & Young Hong Kong was accused of inadequate auditing work.
Another lawyer, who specialises in insurance, said the captive may not be allowed to pay anything towards the Akai settlement.
People familiar with the settlement negotiations said Ernst & Young’s global partnership had signed the original US$200 million cheque to expedite the agreement, but this was only a holding payment until Ernst & Young Hong Kong raised the cash.
Partners in Ernst & Young’s Hong Kong office in the 1990s relied on the practice’s close relationship with Ting for a substantial amount of audit business, Borrelli Walsh’s lawyers said in court during the audit negligence claims.
A spokesman for Borrelli Walsh could not be reached.
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