The Securities and Exchange Commission has imposed sanctions against Baker Tilly Hong Kong Limited and two of its accountants for failing to properly audit year-end financial statements of a company that the SEC has charged with fraud.
An SEC investigation found that the Hong Kong member firm of the Baker Tilly International network, along with its director Andrew Ross and former director Helena Kwok, ignored red flags surrounding approximately $59 million in related-party transactions reflected in internal accounting records of China North East Petroleum Holdings Limited but not adequately disclosed in the company’s year-end 2009 financial statements.
The SEC said Wednesday that Baker Tilly and its two accountants failed to plan and implement an appropriate audit response to the related-party transactions, which primarily involved the company, its then-CEO, and his mother. Baker Tilly then issued an audit report containing an unqualified opinion on China North East Petroleum’s financial statements.
Baker Tilly, Ross, and Kwok agreed to settle the SEC’s charges. Baker Tilly must disgorge its audit fees of $75,000 plus prejudgment interest of $9,101, and cannot accept any new U.S. 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 Public Company Accounting Oversight Board standards. Ross and Kwok agreed to pay penalties of $20,000 and $10,000 respectively and are barred from practicing as accountants on behalf of any SEC-regulated entity for at least three years.
“Auditors play a critical gatekeeper role in our financial markets, and Baker Tilly failed to uphold U.S. auditing standards and exercise appropriate professional care and skepticism with regard to numerous related-party transactions,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement, in a statement.
According to the SEC, the Baker Tilly audit team failed to adequately perform an audit of China North East Petroleum in light of 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 audit team also failed to properly obtain adequate evidential matter to support its audit report. For example, the audit workpapers contained conflicting information on the source of a $4.6 million capital contribution to a company subsidiary.
The SEC’s order found that Baker Tilly, Ross, and Kwok engaged in improper professional conduct under the SEC’s Rules of Practice, and violated the securities laws. They neither admitted nor denied the findings of the order, which censures Baker Tilly. The firm did not immediately respond to a request for comment.
