The Ontario Securities Commission has agreed to an $8 million settlement agreement with giant auditing firm Ernst & Young LLP over its work for two defunct companies operating in China.
The deal with Ernst & Young, approved Tuesday by OSC vice chairman James Turner, is the first time that a new “no contest” rule is being used.
That means Ernst & Young neither admits or denies the allegations set out by the OSC staff in the cases of Sino-Forest and Zungui Haixin Corp.
Sino-Forest, a forestry company, was listed on the Toronto Stock Exchange while Zungui Haixin, a footwear and apparel company, traded on the Toronto venture exchange.
Both companies raised millions from investors in Canada, but eventually questions were raised about fraudulent practices with overstated assets and revenues.
“The settlement agreement is in the public interest,” OSC lawyer Yvonne Chisholm told the hearing. “This settlement achieves key regulatory goals and we submit will have a deterrent effect on Ernst & Young and on other auditing firms.”
As well, Chisholm noted that Ernst & Young officials have agreed to co-operate with the OSC in an ongoing case against Sino-Forest’s executives, including making partners and executives available to testify.
Linda Fuerst, lawyer for Ernst & Young, told the hearing that the settlement avoids the “time, expense and uncertainty,” around the two separate cases against Ernst & Young that were scheduled to take place over nearly 100 days.
Fuerst emphasized that OSC staff made no specific fraud allegations against Ernst & Young.
“The honesty and integrity of Ernst and Young and its people were never in question,” she added.
Turner agreed to the deal, noting that the settlement likely would not have been reached if not for the new “no contest” clause introduced by the OSC.
In a statement of allegations filed in 2012, the OSC said Ernst & Young failed to conduct their audits in accordance with relevant industry standards, including performing sufficient audit work to verify Sino-Forest Corp.’s ownership and existence of its most significant assets.
Similarly in the statement of allegations against Zungui Haixi Corp., the OSC said Ernst & Young relied on certain audit results “that raised more questions than they answered.” As well, Ernst & Young had “failed to treat multiple red flags about the company’s revenue and earnings with appropriate skepticism.”
In addition in 2013, Ernst & Young agreed to pay $117 million to settle a class-action lawsuit in the Sino-Forest case, and $2 million in a separate lawsuit in the Zungui Haixi case.
Hearings are currently under way at the OSC against five former executives of Sino-Forest Corp. accused of fraud.