The Securities and Exchange Commission charged a New Jersey-based audit firm and one of its founding partners Monday for their roles in the botched audits of a China-based company that failed to disclose related party transactions by its CEO and others.
The SEC investigation found that Patrizio & Zhao LLC (P&Z) and head of the firm’s China practice Xinggeng (John) Zhao “failed to comply with U.S. auditing standards and exercise appropriate professional care and skepticism in conducting audits and interim reviews for Keyuan Petrochemicals,” which was charged with accounting and disclosure violations by the SEC earlier this year.
In agreeing to settle the SEC’s charges, P&Z and Zhao will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. P&Z is also required to pay a $30,000 penalty.
“P&Z and Zhao failed to subject Keyuan’s related party transactions to appropriate scrutiny and contributed to the company’s false and misleading financial statements,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement, in a statement. “Auditors play an important role as gatekeepers to the securities markets, and they must adhere to professional standards whenever they perform audit engagements.”
With Zhao acting as the engagement partner, P&Z, which is registered with the Public Company Accounting Oversight Board, conducted audits and interim reviews during the time periods when Keyuan failed to disclose the material-related party transactions, according to the SEC’s order instituting settled administrative proceedings. Many of the same types of related party transactions Keyuan failed to disclose are reflected in P&Z’s audit work papers and other documents and, determining that related party transactions were an audit risk area, Zhao reviewed the audit documentation reflecting Keyaun was engaged in such transactions.
Zhao went on to approve the issuance of unqualified audit opinions in addition to interim review reports on Keyuan’s financial statements that violated U.S. Generally Accepted Accounting Principles by failing to include the disclosure of material related party transactions.
The SEC also found further significant audit documentation violations by Zhao, including a failure to document key audit procedures, evidence his review and sign off on audit work papers, and ensure preparation of required audit documents.
The SEC order found that P&Z and Zhao engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the SEC’s Rules of Practice, that they violated Section 10A(a)(2) of the Exchange Act, and caused the reporting and disclosure violations by Keyuan.
P&Z and Zhao, without admitting or denying these findings, agreed to a cease-and-desist order in addition to the monetary penalty and prohibition from practicing before the Commission, with the right to apply for reinstatement after three years.
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