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December 18, 2014

SEC sanctions Baker Tilly Hong Kong

By Isabella Grotto

The US Securities and Exchange Commission (SEC) has sanctioned Baker Tilly Hong Kong, as well as two of the firm’s top members of staff for their failure to correctly audit the financial statements of a company it charged with fraud in 2012.

An SEC investigation found that Baker Tilly Hong Kong Limited, alongside director Andrew Ross and former director Helena Kwok, ignored the "red flags" indicating a total of 176 related-party transactions detailed in an independent forensic accounting report.

Worth around $59m, the transactions were reflected in internal accounting records, but were not adequately disclosed in the 2009 year-end financial statements of the company, China North East Petroleum Holdings. According to the SEC, Baker Tilly Hong Kong,
Ross and Kwok failed to devise and adopt and appropriate audit response to the transactions, which related for the most part to the company, the then-chief executive officer and his mother.

The resulting financial statement masked the magnitude of the transactions, as well as their pertinence to the then chief executive officer and his mother and masked the, by only disclosing the year-end net balance due.

The SEC’s investigation also found that the audit team had failed to properly obtain the evidence necessary to support its audit report, including conflicting information about the source of a $4.6m capital contribution to one of the company’s subsidiaries.

As a consequence, it ruled, the audit report issued by Baker Tilly Hong Kong contained unqualified opinions of China North East Petroleum’s financial statements.

The firm agreed to settle the SEC charges and must pay $75,000 in audit fees as well as a prejudgment interest payment of $9,101.
Baker Tilly Hong Kong will also be banned from accepting any new US audit clients until an independent consultant has reviewed and confirmed the firm’s audit policies and procedures are compliant with both SEC regulation and PCAOB standards.

Kwok and Ross also agreed to settle; they have been ordered to pay fines of $10,000 and $20,000, respectively, and have been banned from practicing as accountants on behalf of any SEC-governed entity for a minimum of three years.

The case bears similarities to the SEC’s ongoing ruling which bans the Big Four and BDO from providing services to US listed companies in China.

Despite attempts by the firms to appeal the ban, progress on a possible settlement has been slow, with the SEC granting a further extension order to court hearings yesterday.

SEC division of enforcement associate director Antonia Chion 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."

Related articles:

US and Chinese regulatory standoff continues

Big Four appeal SEC ban

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