The Ontario Securities Commission (OSC) has approved its first-ever, no-contest settlement, which sees accounting firm Ernst & Young (E&Y) pay $8 million to settle allegations that its audits of two Chinese firms, Sino-Forest Corp. and Zungui Haixi Corp., fell short of Canadian standards.
Following a hearing Tuesday, the OSC approved a settlement, which is the first deal the regulator has made in an enforcement case that doesn’t involve any admission of wrongdoing. The option of entering into no-contest settlements has only recently been adopted by the commission.
“An OSC panel has reviewed the facts and circumstances of this matter and has approved, for the first time, a no-contest settlement,” said Howard Wetston, chair and CEO of the OSC. “Such settlements are an important component of our enforcement strategy, allowing for timely and appropriate resolutions in the public interest, while freeing OSC resources to pursue other activity.”
In this case, E&Y has agreed to make voluntary payments totalling $8 million to settle the OSC’s allegations; which include $6.5 million for the allegations connected to the Sino-Forest audits, including $1.5 million in costs, and $1.5 million for the Zungui case (which includes $600,000 in costs). In doing so, E&Y neither admitted, nor denied, the OSC’s conclusions in the case.
The regulator had charged E&Y with violating securities laws by carrying out audits that fell short of Canadian standards, demonstrating insufficient skepticism in those audits, and then making statements in financials that the audits were adequate. The settlement indicates that the OSC found no evidence of dishonest conduct by E&Y, that the firm cooperated with its investigation, and that by settling it will avoid two complex, lengthy hearings.
The settlement agreement also notes that E&Y has settled class action suits in relation to those audits, which have resulted in payments of $119 million to shareholders in both companies; that it has beefed up its audit practices for companies that are operate in emerging markets; and that E&Y also specifically reviewed its audit work for companies based in China, which resulted in it either stepping up its audit resources, or dropping audit clients. The accounting firm also agreed that its employees will testify in the OSC’s hearings into allegations against Sino-Forest.
“This settlement sends a clear message of deterrence to the capital markets regarding our expectation that auditors exercise the appropriate level of scrutiny, professional skepticism and diligence in the performance of financial statement audits,” said Tom Atkinson, director of enforcement at the OSC.