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Ernst & Young accused of failing to meet standards

Rob Gillies, Associated Press

TORONTO (AP) -- The Ontario Securities Commission is going after the auditor of troubled Chinese timberland company Sino-Forest Corp., accusing Ernst & Young of failing to conduct its audits in accordance with industry standards.

The OSC has already accused Sino-Forest Corp and many of its executives of engaging in a complex fraudulent scheme to inflate the assets and revenue of the company. Sino-Forest was once Canada's most valuable publicly traded forestry business, but shares plunged last year after short-seller Muddy Waters Research alleged the company exaggerated its assets. The company filed for bankruptcy protection in March and put itself up for sale.

The commission said Monday Ernst & Young failed to perform sufficient audit work to verify Sino-Forest's ownership of its assets and didn't show a "sufficient level of professional skepticism."

"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," Tom Atkinson, director of enforcement of the OSC, said in a statement.

Auditors involved in financial scandals in the past in Canada have rarely been targeted so the move is a change for Canadian regulators, who are now going after a so-called "gatekeeper."

The OSC said Ernst & Young "inappropriately relied" on a firm hired by Sino-Forest on the valuations of its timber holdings. The OSC will hold a hearing on Jan. 7 that will examine whether Ernst & Young should be reprimanded and fined.

Ernst & Young denied the allegations and said it has been cooperating with the OSC.

"We are confident that Ernst & Young Canada's work was conducted in accordance with Generally Accepted Auditing Standards (GAAS) and met all professional 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," Ernst & Young said in a statement.

Also Monday, Ernst & Young said it reached a settlement with Sino-Forest shareholders who sued the accounting firm. Dimitri Lascaris, a lawyer for the shareholders, called the $117 million settlement the largest settlement involving an audit firm in Canadian history.

"It's more than twice the largest settlement," Lascaris said.

Ernst & Young said it is subject to court approval.

"The settlement is without admission of liability. Upon approval, the settlement will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients," Ernst & Young said in a statement.

Sino-Forest manages tree plantations in China, sells logs and standing timber and manufactured-wood products. Its management offices are primarily in Hong Kong, China and Ontario. Muddy Waters and its founders, short seller Carson Block, have described Sino Forest, which raised more than $3.5 billion from investors through debt and equity markets, as a massive pyramid scheme.

The OSC said that company founder and former chief executive Allen Chan, and executives Albert Ip, Alfred Hung, George Ho and Simon Yeung engaged in deceitful and dishonest courses of conduct. The OSC also accused them of attempting to mislead investigators.

The OSC allegations came as U.S. federal regulators announced that they have charged the Chinese affiliates of five of the biggest U.S. accounting firms with impeding the government's investigation of Chinese companies by refusing to turn over documents. The Securities and Exchange Commission said Monday it has started proceedings against the Chinese affiliates of all so-called Big Four accounting firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, and a fifth major firm, BDO.

Hundreds of Chinese companies trade on U.S. stock exchanges. The SEC has been investigating many of them for possible accounting fraud. The agency says the accounting firms, which audit Chinese companies, have refused to cooperate in investigations of nine companies and to provide documents.