Auditor to pay record sum over Sino-Forest accounts

Class-action group will be getting C$117 million from Ernst & Young which is not admitting liability

PUBLISHED : Wednesday, 05 December, 2012, 12:00am
UPDATED : Wednesday, 05 December, 2012, 3:12am

Ernst & Young has agreed to pay C$117 million (HK$912 million) to settle shareholder claims regarding its audits of Sino-Forest Corp, the tree-plantation company that filed for bankruptcy protection this year.

The settlement was announced on the same day that the Ontario Securities Commission, Canada's securities regulator, said Ernst & Young's audits of Hong Kong- and Ontario-based Sino-Forest were not in accordance with accounting industry standards.

The class-action settlement is the largest by an auditor in Canadian history and one of the biggest worldwide, Siskinds and Koskie Minsky, the law firms representing the shareholders, said.

The lawsuit alleges that Sino-Forest misled investors concerning the business and its accounting practices, the firms said.

Sino-Forest filed for bankruptcy protection in March after short-seller Carson Block's research firm Muddy Waters said in a June 2011 report the company overstated its assets.

Following the allegations, Sino-Forest's stock plunged 74 per cent in Toronto, wiping out about C$3.3 billion of market value by the time the shares were suspended in August 2011.

The class-action settlement "will separately resolve all potential civil claims relating to Ernst & Young Canada's audits of Sino-Forest," Erika Bennett, a Toronto-based Ernst & Young spokeswoman, said yesterday. "The settlement is without admission of liability."

The regulator said yesterday in a statement of allegations that Ernst & Young failed to sufficiently verify Sino-Forest's ownership of the company's most significant assets or to determine whether they even exist. The Toronto-based regulator also said Ernst & Young didn't do its audit work "with a sufficient level of professional scepticism".

"Our investigation into Sino-Forest is a complex international investigation, and a major focus has been on whether gatekeepers such as auditors and other corporate advisers properly performed their role in protecting investors," Tom Atkinson, the regulator's director of enforcement, said in a separate statement.

The accounting firm has been co-operating with the regulator and its work on Sino-Forest was conducted according to Generally Accepted Auditing Standards, Bennett had earlier said.

"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," Ernst & Young said in its statement.

Ernst & Young has its head office in Toronto and is a member of Ernst & Young Global.

Olam International, a Singapore-based commodities trader whose accounting practices also were questioned by Block, employs Ernst & Young in Asia as its auditor.