Canada's OSC says Ernst failed in Sino-Forest audits

Mon Dec 3, 2012 1:40pm EST
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By Allison Martell

TORONTO (Reuters) - Canada's top securities regulator said on Monday it believes Ernst & Young LLP breached the Ontario Securities Act in its audits of Sino-Forest Corp TRE.TO, a China-focused forestry company that collapsed under the weight of fraud allegations.

But in an emailed statement, Ernst & Young Canada said it is confident its work "met all professional standards."

Regulators have accused Sino-Forest of exaggerating the size of its assets in China. Trading of shares of Sino-Forest, once the biggest forestry company on the Toronto Stock Exchange, was halted in August 2011. The shares were formally delisted in May 2012, and the company is now insolvent.

In a statement released by the Ontario Securities Commission on Monday, the regulator said its staff allege that Ernst & Young's audits failed to measure up to industry standards in verifying the ownership and existence of Sino-Forest assets. The allegations concern audits from 2007 to 2010.

Ernst & Young resigned as Sino-Forest's auditor in April.

The news came as U.S. regulators charged the Chinese affiliates of five top accounting firms, including Ernst & Young, with violating U.S. securities laws, alleging that they refused to produce audit documents in connection with accounting fraud investigations into Chinese companies.

Sino was the most prominent in a series of North American-listed companies with Chinese operations whose accounting or disclosure practices came under suspicion last year.

The scandals have hurt investor confidence and led to sharp declines in the equity valuations of many Chinese companies listed in the United States and Canada.   Continued...