Canadian Manufacturing

Ernst & Young paying $8M to settle with Ontario regulator

Ontario Securities Commission accused Ernst & Young of mishandling audits of two Chinese companies



TORONTO—Ernst & Young LLP has agreed to pay $8 million in two settlements with the Ontario Securities Commission (OSC), which accused the firm of mishandling the audits of two Chinese companies, including Sino-Forest Corp.

Both settlements were entered into on a no-contest basis, but required approval by an independent panel.

Ernst & Young didn’t accept nor deny the allegations issued against it by the OSC’s enforcement branch.

“The terms of this settlement, I think, are unprecedented in Canada in these circumstances, and are consistent with the level of payments imposed by the SEC (United States Securities and Exchange Commission) in similar matters,” OSC vice-chairman James Turner said in granting approval of the settlements.

In the case of Sino-Forest, Ernst & Young agreed to pay $6.5 million.

The auditor had been accused of failing to meet industry standards through its accounting measures, and failing to verify the existence of some of the company’s key assets.

“Auditors are gatekeepers who are responsible to shareholders,” OSC lawyer Yvonne Chisholm told the hearing.

“This settlement achieves key regulatory goals that we submit will have a deterrent effect on Ernst & Young and on other auditing firms.”

The OSC staff did not allege, and found no evidence, that Ernst & Young employees were involved in dishonest conduct, she added.

Within the settlement tied to Sino-Forest, $1.5 million will go towards paying for “most” of the expenses incurred by OSC staff during their investigation, while the remaining $5 million will be allocated to undetermined third parties at the discretion of the OSC, Chisholm said.

Typically those funds go towards various causes, including an OSC investor education fund, said OSC spokesperson Carolyn Shaw-Rimmington.

Ernst & Young lawyer Linda Fuerst said the settlement will avoid lengthy and costly hearings for both cases that were scheduled to take place over 100 hearing days starting later this year.

Sino-Forest was once the most valuable forestry company on the Toronto Stock Exchange (TSX), with a market cap of more than $6 billion.

But in 2011 it became embroiled in a scandal over its finances after investment firm Muddy Waters Research Group LLC released a report that labelled the company as a complex Ponzi scheme.

The report prompted investigations by the Ontario regulator and the RCMP.

Sino-Forest filed for bankruptcy protection the following year, and is now controlled by its bondholders under a different entity called Emerald Plantation Holdings Ltd.

In March 2013, Ernst & Young agreed to pay $117 million to settle a class action brought by shareholders of Sino-Forest.

Meanwhile, the OSC is also involved in a separate hearing related to allegations that former Sino-Forest executives lied to investors and attempted to mislead investigators.

Separately, in Ernst & Young’s $1.5-million OSC settlement involving Zungui Haixi Corp., the audit firm was accused of failing to respond to clear signs the company was at risk of fraud in two separate instances.

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