In a crackdown on the broader practice of foreign companies listing on Canadian stock exchanges, the Ontario Securities Commission (OSC) -- the country's biggest securities regulator -- said on Monday Ernst & Young LLP conducted improper audit work on Sino-Forest Corp.
The OSC levelled the allegations against one of the so-called gatekeepers that help companies list on stock exchanges in Canada. It said Ernst & Young breached the Ontario Securities Act by "failing to conduct their audits in accordance with relevant industry standards" between 2007 and 2010. Ernst resigned as Sino-Forest's auditor in April.
The document outlining the accusations states that the accounting firm failed to perform sufficient audit work to verify the ownership and existence of Sino-Forest's most significant assets. As well, it alleges Ernst & Young failed to undertake their audit work on Sino-Forest with a sufficient level of professional skepticism.
At the heart of the investigation is whether gatekeepers such as auditors and other corporate advisors properly performed their role in protecting investors, Tom Atkinson, the OSC's director of enforcement, said in a release.
"Investors rely on auditors to conduct their audits in accordance with professional standards, particularly when foreign companies are listing on Canadian exchanges. If auditors fail to abide by Canadian auditing standards and securities laws, we will hold them accountable," he said.
For its part, Ernst & Young Canada said it is confident its work "met all professional standards."
"Ernst & Young has cooperated with the OSC throughout the investigation relating to Sino-Forest. We are confident that Ernst & Young Canada's work was conducted in accordance with Generally Accepted Auditing Standards (GAAS) and met all professional standards," it said in an e-mail statement.
"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."
The OSC allegations come about a year and half after short-seller Carson Block first accused Sino-Forest, once a major forest company on the Toronto Stock Exchange, of exaggerating its assets.
In May, the OSC issued allegations of fraud against Sino-Forest and former senior executives. Those proceedings are ongoing.
Bold move from OSC
Marian Passmore, associate director at the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), said the move by the OSC was uncommon and bold.
"It shows that they are very serious about their emerging markets review and that they are going to make sure the gatekeepers in the system -- the auditors, the underwriters, the exchanges, in this case it's the auditors -- live up to their obligations and responsibilities," she said.
"Obviously they are just allegations, but the OSC is alleging that Ernst & Young did not fulfill its gate keeper role adequately. I think that's the message it's sending to the markets, that it's going to take into account the role of the gatekeepers in order to ensure investor protection in our markets."
The OSC has only twice before launched proceedings against audit firms for breaching Ontario securities law. The securities watchdog reportedly said on Monday it does not anticipate initiating proceedings against additional parties.
Separately, the lawyers representing shareholders suing Sino-Forest in a class-action suit disclosed on Monday they had reached a C$117 million settlement with Ernst & Young.
The settlement is the largest settlement by an auditor in Canadian history, by a large margin, law firms Siskinds and Koskie Minsky said.