Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, December 20, 2010

SEC Finds Auditor Engaged in Improper Conduct in China Energy Fraud

On December 20, the SEC issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Moore Stephens Wurth Frazer & Torbet LLP (MSWFT) and Kerry Dean Yamagata.  In the Matter of Moore Stephens Wurth Frazer & Torbet LLP and K. Dean Yamagata, CPA

The Order finds that Respondents Yamagata and MSWFT engaged in improper professional conduct and violated the document retention and auditor independence requirements of Regulation S-X, in connection with annual audits and quarterly reviews of the 2004 and 2005 financial statements of China Energy Savings Technology, Inc. (China Energy), a U.S. issuer with operations in China. The Order further finds that although Respondents determined that the China Energy engagement involved high risk, they did not exercise professional skepticism and due professional care. The Order finds that Respondents violated applicable professional standards by: (i) failing to obtain sufficient competent evidential matter regarding China Energy's revenues to afford a reasonable basis for MSWFT's opinion regarding the company's financial statements for fiscal year 2005; (ii) failing to exercise professional skepticism and due professional care regarding revenues in the performance of the audit of China Energy for fiscal year 2005; (iii) failing to document significant findings or issues, actions taken to address them, and the basis for the conclusions reached in the fiscal year 2005 audit; (iv) failing to properly supervise assistants, including assistants engaged from outside the firm, in the fiscal year 2004 audit of China Energy; and (v) failing to ensure the independence of MSWFT in connection with the audit of China Energy's earnings per share calculation in fiscal year 2004.

Based on the above, the Commission's Order censures Respondent MSWFT and denies Respondent Yamagata the privilege of appearance and practice before the Commission as an accountant with the ability to request that the Commission consider reinstatement after two years. In addition, the Order requires the Respondents to disgorge $100,000 in audit fees and $29,500 in prejudgment interest.

Under the Order, MSWFT undertakes to retain an independent consultant to review and evaluate the firm's audit and interim review policies concerning, among other things, client acceptance and retention, auditor independence, document retention, use and supervision of affiliate firms and personnel in other jurisdictions, and training in the detection of client fraud. MSWFT has also undertaken that the firm will not accept any new clients with operations in China until all of the consultant's recommendations have been adopted. Respondents consented to the issuance of the Order without admitting or denying its findings.

This is the Commission's fourth enforcement action concerning the China Energy fraud

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