Auditors Battle Over Failed Asian HF

A friendly rivalry between two auditors is turning into a full-court press over a failed hedge fund that could have lasting impact on Hong Kong’s burgeoning HF industry. At the center of the issue isCSA Absolute Return Fund, Hong Kong’s largest hedge fund, which collapsed two years ago, costing investors US$189 million. (FounderCharles Schmittawaits trial on 19 counts of “false accounting,” which allegedly contributed to the collapse.) CSA’s court-appointed liquidator,PricewaterhouseCoopers,has filed suit against the HF’s auditor,Ernst & Young, and the fund custodian, now known asHSBC Institutional Trust Services (Asia), for a number of failures related to the fund: failure to get audited accounts of investments, failure to identify financial statement shortcoming and failure to recognize discrepancies in financial statements. PwC is seeking US$89 million, which amounts to half of the fund’s growth plus US$8.3 million in expenses. Observers view the action of holding auditors responsible as a test case that could pave the way for other recovery efforts in similar cases in the future, but they also believe the parties will follow the traditional route of settling out of court. E&Y has responded in a statement that it is “confident” that the work on CSA “complied with all applicable standards.”