• EY Goes To Hong Kong For A Scandal

    By • Jun 17th, 2011 • Category: The Case Against The Auditors

    This was originally published at GoingConcern.com on September 23, 2009.

    I’m frequently accused of being too hard on one firm or the other.

    Sometimes PwC defenders crab that I’m a “disgruntled ex-employee who needs to get laid.”

    The Deloitte defenders are often Ayn Randers who accuse me of being an anti-capitalist, a Marxist, naïve, non-auditor who has no clue how their firm serves the holy-grail capitalist system. (Remind me again…)

    KPMG professionals are dejected, worn down, and disillusioned.  “FM, please stop, we can’t all be like you – free, independent, eating grapes, and drinking champagne from Gucci loafers.

    I hardly ever hear from EY. Ok, I once canceled a flight home from NY because sixty professionals had just been cut from their NYC tax practice. In fact, that was a very bad week for EY. But, other than being sued for the failure of Lehman Brothers (the catalyst for the “financial crisis”), their role as auditor of failed Corus Bankshares, exposure to Madoff, and a partner caught up in a swingers sex and insider trading scandal, EY has a lot fewer assorted suits and scandals, it seems, than the others.

    Yes, the bar for the Big 4 is very low.

    On the other hand, in spite of the alleged audit failure that obscured the impending failure of Lehman Brothers, EY will pick up more than $60 million dollars helping the New York Fed make something of the mess PwC presided over at AIG.

    But…who knew there was a huge lawsuit in Hong Kong bubbling, brewing and causing EY constant constipation for years? The trial started September 16th with a bang – and not the good kind – for EY:

    Accounting firm Ernst & Young used “false documents” in audit work for Akai Holdings Ltd., a lawyer representing the failed company’s liquidator told a court…Audit documents from 1994 were back-annotated by EY to “give semblance of an audit trail,” …falsified documents “permeated the defense”… audit documents from 1994 contained handwriting from an auditor who was not employed by EY until 1998… electronic versions of some documents had been… The allegations were “volcanic” and “a bombshell,” the judge said.”

    No sooner had the attorney for EY told us, “We emphatically deny anything was done by anyone to mislead…” then EY admits they’re “dismayed,” settles the case for a substantial sum, and suspends the partner who was audit manager at the time.

    Lest you think this is all just trial maneuvering, an ugly smear on the firm and a partner, a situation impossible to believe given the honor and integrity of accounting professionals worldwide, I’ll remind you of the recent case of a BDO partner who also took the “audit trail short cut.”

    Nardi entered the Manager’s office and directed her to initial and sign the Hemispherx FY 2004 financial statement audit work papers to indicate that she had performed a timely detailed review….affixed her initials and signatures to the Hemispherx audit work papers, which had been tabbed to indicate where initials and signatures were missing.  She backdated her initials and signatures to dates preceding the March 16, 2005 issuance of BDO’s audit report.”

    How many more of these situations, in backdating cases for example, would come to light if only more went to trial rather than being settled? Maybe we need Judge Rakoff to put a stop to audit firm settlements that obscure the truth about how the work of the auditors really “gets done.”

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    6 Responses »

    1. A follow up new article on South China Morning Post was published on 10 Oct 2009 re EY (Hong Kong) alleged forgery of legal evidence relating to Akai.

      One of the paragraph in the news article read:
      “Ernest & Young admitted in a statement on the day of the settlement that some documents were “altered”

      Then, later in one of the paragraph, it mentioned the Akai liquidator’s barrister has handed a folder to the judge containing description by Akai’s solicitors of more than 80 doctored papers.

      .Gather

    2. Another follow up article from South China Morning Post, 13 October, in Hong Kong:

      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.

    3. Surely the managing partner of E& Y at the time should bear most of the responsibility for the Akai fraud, and now, other big cases. After all, he raked in most of the share of the profits at the time, under his watchful eye. Why should the newer partners be financially responsible for his incompetence, or should it be called incompetence ?

    4. Adding to my previous comment, partner in question is Brian Stevenson, who had a substantial share of the partnership and only retired in 1999.

    5. […] Ernst and Young recently went through a terrible phase focused on their Bally’s sanctions, the Akai scandal and another fraud in Hong […]

    6. […] by a firm’s system of quality control and PCAOB oversight.” (fm: EY should know. In Akai, EY partner was so accountable he falsified workpapers to evade responsibility. His arrest by HK […]

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