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.
In the release, OSC Director of Enforcement Tom Atkinson said a major focus in the investigation into Sino-Forest has been whether auditors and other advisers acted properly.
"Investors rely on auditors to conduct their audits in accordance with professional standards, particularly when foreign companies are listing on Canadian exchanges," he said. "If auditors fail to abide by Canadian auditing standards and securities laws, we will hold them accountable."
In a separate statement, the OSC said there would be a hearing on the matter on January 7, 2013. In cases like this one, staff at the regulator argue the case before OSC commissioners, who can choose to impose monetary penalties and other sanctions.
"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," said the statement from Ernst & Young.
The OSC launched its review after short-seller Carson Block and his firm Muddy Waters accused Sino-Forest of exaggerating its assets, and the firm's shares collapsed.
Sino-Forest filed for protection under the Companies' Creditors Arrangement Act, the equivalent of U.S. Chapter 11 filing, in March.
Reporting by Allison Martell and Solarina Ho; Editing by Frank McGurty, Steve Orlofsky and Bernard Orr