Ernst & Young LLP (EY) likely paid more in its no-contest settlement with the Ontario Securities Commission (OSC) than if it would have by going through a contested hearing, an OSC panel says in its reasons for that decision
On Monday, the OSC published a transcript of the oral reasons given for approving the commission’s first-ever enforcement settlement that did not involve admissions of wrongdoing. In that case, audit firm EY agreed to pay $8 million to settle the allegations that its audits of Sino-Forest Corp. and Zungui Haixi Corp. fell short of Canadian auditing standards, and did not exhibit sufficient professional skepticism. (See Ernst & Young to pay $8 million to settle with OSC, investmentexecutive.com, September 30, 2014.)
In its reasons, the OSC panel says that the $8 million likely exceeds any penalty or penalties that could have been imposed on E&Y under securities law after contested hearings in these matters.
“The terms of this settlement are unprecedented in Canada in these circumstances and the voluntary payment in this matter is consistent with the level of payments imposed by the [U.S. Securities and Exchange Commisison (SEC)] in some similar matters,” it says.
The panel also notes that the voluntary payment of $8 million, along with the other terms of settlement, “will send a very clear message that the commission expects that auditors of reporting issuers will fully comply with auditing standards and will exercise an appropriate level of scrutiny, professional skepticism and diligence in the performance of their audits. The settlement also demonstrates that staff will not hesitate to initiate proceedings against an auditor where appropriate audit standards have not been met.”
“An auditor plays a crucial gatekeeper role in ensuring the integrity of the financial information and statements upon which investors rely. Accordingly, auditors play a vital role in the effective functioning of our capital markets. That is why the commission views Ernst & Young’s failures in these matters as so serious,” it says.
For the OSC, the panel also points out that the settlement “avoids two complex, lengthy and expensive hearings”; which, it says, would have involved multiple expert witnesses and at least 100 hearing days. “There is significant uncertainty and substantial risks to both sides as to the potential outcomes of those hearings. The settlement avoids those uncertainties and risks and brings these proceedings to an appropriate conclusion,” it says.
The panel also spells out that this case is appropriate for the OSC’s first no-contest settlement several reasons, including: that it includes detailed facts and conclusions, which provides a basis to assess the terms of settlement; the OSC does not allege that there was any dishonest conduct by the firm; it cooperated with the OSC, and self-reported certain issues; it has taken remedial action; and, that the firm has already paid an aggregate of $119 million to settle class action lawsuits.