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

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


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

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