Ernst & Young pays up to settle negligence claim

PUBLISHED : Wednesday, 27 January, 2010, 12:00am
UPDATED : Wednesday, 27 January, 2010, 12:00am

The Hong Kong branch of accounting giant Ernst & Young, which in September l paid US$200 million to creditors of its collapsed former client Akai Holdings, has quietly settled another audit negligence case involving a failed local company.

Ernst & Young Hong Kong has paid to resolve a claim of between HK$250 million and HK$300 million that the liquidators of Moulin Global Eyecare had threatened to launch against it.

Moulin, which once claimed to be Asia's biggest manufacturer of eyewear, was wound up by the High Court in 2006 amid fraud allegations, owing lenders HK$2.7 billion. Ernst & Young was Moulin's auditor between 2002 and 2004.

The accounting firm declined to comment.

The eyewear firm's liquidator, Ferrier Hodgson, which also declined to comment, has consistently accused Moulin of fraudulently inflating its revenues.

The liquidator told creditors in private that one of Moulin's four biggest customers was really a Chinese restaurant in McCook, a town of 8,000 in Nebraska in the United States, people who attended the meetings said.

The terms of Ernst & Young's settlement are confidential. A source with knowledge of the accounting firm's local operations said it had paid 'substantially less' than Ferrier had threatened to seek.

The case, which was in mediation, never reached a High Court trial.

'After Akai, Ernst & Young did not want another public fight over alleged audit negligence involving an allegedly fraudulent former client,' the source said.

In September Akai's liquidator, Borrelli Walsh, accused Ernst & Young in the High Court of faking legal evidence to shield itself from a US$1 billion audit negligence claim.

Akai was the Hong Kong-listed global electronics empire of disgraced entrepreneur James Ting which collapsed in 2000 owing lenders US$1.1 billion.

Like Akai, which was a stock market darling before its fall from grace, Moulin was once a company that made Hong Kong proud.

Rags-to-riches entrepreneur Ma Bo-kee moved to Hong Kong from Guangdong in 1960 and began producing spectacles from a small workshop with just a dozen employees.

Before its demise, Moulin boasted of an optical business that spanned China, Europe and North America. It produced more than 15 million frames a year for brands including Benetton and Nikon.

But after examining its books, Ferrier Hodgson believed the actual business was much smaller. The liquidator once wrote to Moulin's lenders claiming the company's accounts were a 'morass of dodginess' that would take 14 years to unravel. Officer's from the police force's commercial crime bureau raided Moulin's offices in July 2005.

In February, police charged Ma and his son Cary Ma Lit-kin, Moulin's former chief executive, with offences including making false statements and conspiracy to defraud. The criminal case is yet to come to trial.

In a separate civil action, Moulin's creditors are suing accountant KPMG for HK$471 million over its role as Moulin's auditor between 1999 and 2002.

Police are also investigating Ernst & Young's role in Akai's collapse.

Lawyers for Borrelli Walsh alleged in court that staff at Ernst & Young had falsified and doctored old files relating to Akai and that the audit firm used the questionable documents to support its witness statements and pleadings in the negligence trial.

In September, police raided Ernst & Young's offices and arrested a partner who had audited Akai. Edmund Dang, a junior member of staff when he worked on the Akai account, was granted bail.

No criminal proceedings have been launched against Ernst & Young in relation to Moulin.

Costly collapse

Ernst & Young Hong Kong was auditor for Moulin Global Eyecare, which was wound up by the High Court in 2006 owing lenders, in HK$,: $2.7b