In both cases, the local offices were essentially left alone to chart their own paths. Perhaps Yahoo! thought that its Chinese managers knew best how to operate in a huge market that was, after all, on the other side of the planet from headquarters in Sunnyvale, California. For its part, Ernst & Young Hong Kong enjoyed autonomy because that is how the group is structured – member firms are separate legal entities that have no liability for each other’s acts or omissions.

 

But in a globalised world, decentralisation without robust oversight can result in reputational damage. Like other accounting firms, Ernst & Young trades on integrity and competence. Once those qualities come under question, its business comes under threat. It is not farfetched to think that some investors may start wondering about the other assignments of the auditors involved in the Akai account and worse, question the work of even non-Akai accountants. When investors, banks, partners, creditors and audited companies themselves lose confidence in the accuracy and fairness of the audited financial statements, a client exodus can be expected – even as the accounting firm’s best people start asking themselves whether they should stay. 

 

For those unclear about the Akai case, here’s a summary. The company was controlled in the 1990s by James Ting, a Shanghai-born Hong Kong entrepreneur who bought the century-old U.S. sewing machine brand Singer in 1989. His business model was to acquire down-at-heel companies and revitalise their well-known but tired brands. Ting plastered the famed Singer brand on VCRs, refrigerators and other appliances. The gamble paid off and he did the same thing to ailing German sewing-machine firm Pfaff and Japanese consumer-electronics companies Sansui and Akai Electric.

 

 

Ernst & Young vigorously denied the charges, but agreed to settle for an undisclosed sum (media reports initially put it at US$400 million; the settlement is now said to be half that) after Borrelli Walsh presented evidence showing that the audit files Ernst & Young presented in court had been falsified. Borrelli Walsh alleged that documents were back-annotated to make it appear there was an audit trail and that the handwriting in 1994 audit documents is that of an auditor who was not employed by Ernst & Young until 1998. The audit firm says it is conducting an internal probe. The Hong Kong police has also opened an investigation, raiding Ernst & Young Hong Kong’s office last week to cart off boxes of documents.