The US Securities and Exchange Commission (SEC) has imposed sanctions on Baker Tilly Hong Kong Ltd and two accountants employed by the firm for failing to properly audit year-end financial statements of a Chinese company that the SEC has charged with fraud
As a result, Baker Tilly must disgorge its audit fees of $75,000 (£117,000) plus prejudgment interest of $9,101 (£14,000), and cannot accept any new US issuer audit clients until an independent consultant has reviewed and certified that the firm’s audit policies and procedures are compliant with SEC regulations and PCAOB standards.
Andrew Ross, a director of Baker Tilly Hong Kong, and Helena Kwok, a former director, must pay penalties of $20,000 (£31,000) and $10,000 (£16,000) respectively and are barred from practicing as an accountant on behalf of any SEC-regulated entity for at least three years.
An SEC investigation found that the firm and the two accountants had ignored red flags surrounding approximately $59m (£92m) in related-party transactions reflected in internal accounting records of China North East Petroleum Holdings Ltd which were not adequately disclosed in year-end 2009 financial statements.
The regulator said they failed to plan and implement an appropriate audit response to some 176 related-party transactions detailed in an independent forensic accounting report.
China North East Petroleum’s resulting financial statements failed to adequately disclose the magnitude of the related-party transactions and note they involved the company’s CEO and his mother. Instead, the company only disclosed the year-end net balance due, thus masking the true scope of the related-party transactions, the SEC claimed.
The regulator said the audit team also failed to properly obtain adequate evidential matter to support its audit report. For example, the audit workpapers contain conflicting information regarding the source of a $4.6m (£7.2m) capital contribution to a company subsidiary.
Antonia Chion, an associate director in the SEC’s division of enforcement, said: ‘Auditors play a critical gatekeeper role in our financial markets, and Baker Tilly failed to uphold US auditing standards and exercise appropriate professional care and skepticism with regard to numerous related-party transactions.’
In 2012 the SEC sued China North East Petroleum, its then-chief executive officer and its founder, over claims that company funds were being diverted to executives’ family members.