Ernst & Young Canada (E&Y) is being investigated by the Ontario Securities Commission (OSC) for the alleged failing to conduct a proper audit Chinese timber firm Sino-Forest Corp.

The investigation by the OSC follows E&Y’s agreed settlement of $117m, “without admission of liability”, as part of a $9bn class action lawsuit brought by shareholders of Sino-Forest earlier in the year.

The settlement, which has not been approved by the court, is being described as the shareholders’ representative law firm Koski Minsky as the “largest settlement by an auditor in Canadian history” and one of the largest worldwide.

The OSC has summoned E&Y Canada to a hearing on 7 January 2013 over charges that it failed to conduct its audits of Sino-Forest in accordance with industry standards.

In particular, E&Y: “failed to perform sufficient audit work to verify Sino-Forest’s ownership of its most significant assets; failed to perform sufficient audit work to verify the existence of Sino-Forest’s most significant assets; and failed to undertake their audit work on the Sino-Forest engagement with a sufficient level of professional skepticism.”

E&Y was auditor of Sino-Forest, which has its primary offices in Hong Kong, China and Ontario, between 2007 and 2010. It is alleged during this time the company fraudulently inflated the value of its assets, in what was described as a giant pyramid scheme, before public allegations of fraud saw its share price plummet.

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Among allegations against E&Y are concerns that they inappropriately relied on one source, Pöyry Forest Industry, to provide assurance of purported assets. It is alleged that the auditors performed “only very limited” visits to inspect assets, and failed to ensure “plantations visited by Pöyry were owned by Sino-Forest” or that the location and dimensions of any sites corresponded to those reported by the company.

It is also alleged that the firm failed to have source documents and other key documents translated into Chinese.
E&Y denied the allegations, in an emailed statement, and said that its audit was performed “in accordance with Generally Accepted Auditing Standards (GAAS) and met all professional standards.”

The firm said it had cooperated with the OSC throughout the investigation, adding: “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.”