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.