Ernst & Young (E&Y) Hong Kong has settled with the liquidator of Chinese consumer electronics company Akai Holdings for an undisclosed amount and suspended one of its partners after finding some of the documents in the audits of Akai could “no longer be relied on”.
The Big Four firm was in court facing allegations it was negligent in its auditing of Akai from 1997 to 1999.
Neither party would disclose the size of the settlement, describing it only as “substantial”. Liquidators Borrelli Walsh had claimed for damages of “hundreds of millions of dollars”, according to court documents.
The trial had been scheduled to take six months and on the opening day the liquidator’s lawyers claimed about 80 records were deliberately doctored in 2000.
They alleged this was done to give the impression that more audit work had been carried out by E&Y between 1994 and 1998.
The case was adjourned on 17 September following an application from E&Y’s lawyers to allow the firm to conduct a thorough investigation.
E&Y said this investigation made clear that certain documents produced for the audits in 1998 and 1999 could not be relied on due to the action of an audit manager in early 2000.
“That individual, who is now a partner with the firm, has been suspended from his duties, pending the completion of the internal disciplinary process. In addition, a former E&Y Hong Kong professional may have been involved,” E&Y said in a statement.
E&Y co-area managing partner for the Far East David Sun said the firm was 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,” he said.
Freshfields Asia dispute resolution practice leader Richard Chalk is an expert in auditor negligence cases. He said this was one of the larger auditor negligence cases ever brought before Hong Kong courts.
Chalk said allegations of falsification against E&Y were serious and unusual.
“The allegations have raised eyebrows and the fact that they have been made by a respected QC has made people [in Hong Kong] take notice. E&Y have to take the allegations seriously and if there was anything in them then that would be very damaging,” Chalk said, just before a settlement had been reached.
Akai was declared bankrupt in 2000 owing creditors about $1.1 billion. Former owner James Ting was jailed for six years in 2005 for falsifying accounts.
The consumer electronics maker employed 100,000 staff at the height of its success and had annual sales of HK$40 billion ($5.2 billion) across several brands, including Singer sewing machines, before its bankruptcy. Singer was subsequently sold off and all the remaining assets transferred into a new company, Grande Holdings.
BorrelWalsh is also suing Ting in Bermuda for $524 million and was reported to have last month won $22.5 million plus interest and costs after it sued Thailand’s Kasikornbank over a $30 million loan pledged against Akai shares.
THE LEGAL TRAIL
1999 Akai Holdings records a $1.75 billion loss
Aug 2000 Akai Holdings declared bankrupt in Hong Kong and Bermuda owing creditors about $1.1 billion. The remaining assets were transferred to Grande Holdings.
Feb 2004 Courts in Bermuda and Hong Kong elect to liquidate company in Hong Kong
May 2004 Liquidators Borrelli Walsh issue writ against Ernst & Young Hong Kong, alleging negligent audits from 1997 to 1999
Sep 2009 Ernst & Young Hong Kong settles for “substantial” amount after internal investigation
Source: International Accounting Bulletin