(The Canadian Press) TORONTO - The Ontario Securities Commission is accusing Ernst and Young of failing in its audits of troubled Chinese forestry company Sino-Forest Corp. (TSX: T.TRE, Stock Forum), which has since collapsed amid allegations of being a massive fraud.
The provincial regulator accused Ernst and Young on Monday of failing to conduct their audits of the company in accordance with industry standards.
The OSC has also accused the accounting firm of failing to do enough to verify the existence of Sino-Forest's most significant assets and conduct their audits with a "sufficient level of professional skepticism."
"Ernst and Young failed to adequately respond to a number of unusual facts and findings that came to its attention in the course of conducting the audits of the material financial statements," the regulator said in its statement of allegations.
"These facts and findings should have caused Ernst and Young to treat the representations of Sino-Forest management with greater caution and to perform additional audit procedures and to obtain additional evidence from independent sources."
The allegations have not been proven in court.
Ernst and Young said it has co-operated with the OSC throughout the investigation into Sino-Forest.
"We are confident that Ernst & Young Canada's work was conducted in accordance with Generally Accepted Auditing Standards and met all professional standards," the firm said in a statement.
"The evidence we will present to the OSC will show that Ernst and Young Canada did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."
Sino-Forest was first accused last year of being a massive fraud by Muddy Waters Research, prompting investigations by the Ontario regulator and the RCMP.
The company and several former executives have since also been accused of lying to investors and attempting to mislead investigators.
Sino-Forest, once the most valuable forestry company on the Toronto Stock Exchange, has since filed for bankruptcy protection and is working to restructure itself under the Companies' Creditors Arrangement Act.
The company has proposed a plan what will see its creditors take over the firm.
Last month, the Ontario Court of Appeal upheld a lower court decision that ranked indemnity claims by the auditors and underwriters of Sino-Forest with other equity claims in the company's restructuring.
The appeal court panel agreed the court overseeing Sino-Forest under the Companies Creditors Arrangement Act was correct in its decision that the claims were equity claims.
The decision puts the claims on a lower priority than other creditors' claims on the company's assets in the restructuring.
Generally, debt holders are first in line to make claims on a company's assets ahead of shareholders, who have an equity stake in the company.
In the case of Sino-Forest, shareholders are not expected to receive anything.
Several class-action lawsuits have been filed against the company, its auditors and its underwriters.
Though none of the proposed lawsuits have been yet certified, an Ontario case is seeking $9.2 billion in damages.
Cases in Quebec, Saskatchewan and New York have not specified the amount of damages sought.