The Ontario Securities Commission alleged Monday that the audits performed by Ernst & Young on Sino-Forest’s consolidated financial statements for 2007, 2008, 2009 and 2010 “failed to meet relevant industry standards.”
“The evidence we will present to the OSC will show that Ernst & Young Canada did extensive audit work to verify ownership and existence of Sino-Forest’s timber assets,” it said.
E&Y also said it has cooperated with the OSC throughout the Sino-Forest investigation.
The OSC will pursue the case through its internal tribunal. Under the province’s Securities Act, its commissioners have the power to issue reprimands, professional sanctions and financial penalties. None of the allegations against Ernst & Young have been proven.
It also alleges that Ernst & Young “failed to undertake their audit work on Sino-Forest with a sufficient level of professional skepticism.”
Ernst & Young auditors should have realized that the Sino-Forest’s purchase contracts had significant deficiencies, according to the OSC’s statement of allegations. For instance, the contracts did not “clearly delineate” the location of the timber assets, the OSC said in its allegations, with survey reports all prepared by the same firm, even though the areas purportedly surveyed were widely scattered across China.
E&Y “performed only very limited site visits” to inspect the timber assets, and placed “inappropriate reliance” on valuation work by Poyry Forest Industry Ltd., a firm engaged by Sino-Forest, according to the allegations.
The OSC documents include an internal E&Y email. One member of the audit team asked another in the email: “How do we know that the trees that Poyry is inspecting (where we attend) are actually trees owned by the company? E.g. could they show us trees anywhere and we would not know the difference?”
According to the OSC allegations, the other auditor replied: “I believe they could show us trees anywhere and we would not know the difference …”
“Our investigation into Sino-Forest is a complex international investigation, and a major focus has been on whether gatekeepers such as auditors and other corporate advisers properly performed their role in protecting investors,” Tom Atkinson, director of enforcement at the OSC, said in a release.
“Investors rely on auditors to conduct their audits in accordance with professional standards, particularly when foreign companies are listing on Canadian exchanges. If auditors fail to abide by Canadian auditing standards and securities laws, we will hold them accountable.”
“(It’s) the largest settlement by an auditor in Canadian history and is one of the largest auditor settlements worldwide,” according to law firm Koski Minsky, which represents the plaintiffs in the class action.
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