September 30, 2014 / 4:24 PM / in 3 years

UPDATE 1-Ernst & Young agrees to C$8 mln settlement in Sino-Forest audit

(Adds details from hearing)

By Alastair Sharp

TORONTO, Sept 30 (Reuters) - Accounting firm Ernst & Young LLP agreed on Tuesday to an C$8 million ($7.2 million) voluntary payment with Canada’s biggest securities regulator over its audits of Sino-Forest Corp and another China-focused company.

Ernst & Young, which has already paid C$119 million to settle civil lawsuits in the two cases, did not admit to any wrongdoing in the no-contest settlement, which was approved by the Ontario Securities Commission (OSC).

The settlement related to audits of the insolvent forestry company and clothing and footwear company Zungui Haixi Corp.

Sino-Forest had been listed on the Toronto Stock Exchange and at one point was valued at more than C$6 billion ($5.47 billion). But after a short-seller in 2011 alleged the company had exaggerated its assets, its shares tanked and were later delisted.

OSC staff said in the agreement that Ernst & Young did not exercise sufficient professional skepticism about Sino-Forest’s stated timber assets.

In the case of Zungui, Ernst & Young identified a risk that the company could fraudulently inflate its revenue, but then disregarded evidence that it had done so, staff said.

In both cases, OSC staff said Ernst & Young failed to comply with generally accepted auditing standards.

Ernst & Young neither admitted nor denied the accuracy of the facts stated by the OSC staff, and it has agreed not to state that there was no factual basis for the settlement.

“I‘m prepared to accept that the voluntary payment of C$8 million is reasonable in the circumstances and proportionate to the conduct involved,” OSC Vice Chair James Turner said.

The deal was the first time the OSC has reached a no-contest settlement since introducing the provision in March, and likely cut out around 100 days of testimony and evidence.

“The approval of the settlement enables us to put this matter behind us and remain focused on our people and our clients,” an Ernst & Young spokeswoman said.

Since 2011, Ernst & Young has improved its auditing policies and procedures for companies with significant operations in emerging markets and dedicated more resources to audits of China-focused companies, the settlement agreement said.

Yvonne Chisholm, the OSC’s senior litigation counsel in the case, said the watchdog found no evidence of dishonest conduct from Ernst & Young, and said that the auditor had agreed to make its employees available in an ongoing OSC hearing against Sino-Forest’s Hong Kong and China-based executives. (U.S. $1 = 1.1169 Canadian dollar) (Reporting by Alastair Sharp; writing by Solarina Ho; editing by G Crosse and Leslie Adler)

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