SEC Fines Baker Tilly Hong Kong for Missing Red Flags in China

Discussion Questions:

(1) Are companies audited by Baker Tilly HK more prone to accounting fraud? What are the firm characteristics e.g. state-owned companies vs privately-owned enterprises? Are they from certain industries? Are they structured as offshore holding companies? Generate the list of Baker Tilly audit clients and do some analysis..

(2) Do different audit firms have different policy in their audit of related-party transactions of Asian/ Chinese companies?

(3) Why has US SEC struggled for years to obtain information for dozens of accounting fraud investigations at China-based companies?

SEC Fines Baker Tilly Hong Kong for Missing Red Flags in China

By Alan Katz – Dec 17, 2014

The U.S. Securities and Exchange Commission sanctioned audit firm Baker Tilly Hong Kong and suspended two of its employees for signing off on the financial statements of a China-based company accused of fraud.

Andrew Ross, a director at Baker Tilly, and Helena Kwok, a ex-director at the firm, ignored warning signs tied to about $59 million in related-party transactions at China North East Petroleum Holdings Ltd. that weren’t adequately disclosed in 2009 financial statements, the SEC said in a statement today.

Baker Tilly agreed to pay about $84,000 to resolve the claims. Ross will pay $20,000 and Kwok $10,000, and the two also agreed to be barred from practicing as an accountant for any SEC-regulated entity for at least three years, the agency said. In settling the claims, neither the firm nor the employees admitted wrongdoing.

“Auditors play a critical gatekeeper role in our financial markets,” SEC enforcement lawyer Antonia Chion said in a statement. “Baker Tillyfailed to uphold U.S. auditing standards and exercise appropriate professional care and skepticism with regard to numerous related-party transactions.”

The SEC in 2012 sued China North East Petroleum, its then-chief executive officer and its founder, over claims that company funds were being diverted to executives’ family members. The U.S. agency has struggled for years to obtain information for dozens of accounting fraud investigations at China-based companies.

Baker Tilly Hong Kong also can’t accept any U.S. issuers as new audit clients until an independent consultant has certified the firm’s audit policies, the SEC said.

Henry Schlueter, identified as defense counsel by the SEC, didn’t immediately return a message left with his secretary.

To contact the reporter on this story: Alan Katz in Washington at

SEC orders Baker Tilly to disgorge US$75,000 in audit fees for failure to detect fraud

Thursday, 18 December, 2014, 9:55am

Benjamin Robertson, Enoch Yiu and Reuters

US regulator fines Hong Kong-based accounting firm US$75,000 over audit failures tied to mainland company China North East Petroleum

A Hong Kong-based accounting firm has been fined US$75,000 and temporarily barred from accepting new clients trading in the US after the American market regulator imposed sanctions on the firm over audit failures tied to a mainland company suspected of fraud.

The US Securities and Exchange Commission said Baker Tilly Hong Kong director Andrew Ross and former director Helena Kwok “ignored red flags” of US$59 million in related-party transactions reflected in accounting records for China North East Petroleum.

The firm could be investigated in Hong Kong under Hong Kong Institute of Certified Public Accountants rules, HKICPA president Dennis Ho Chiu-ping told the South China Morning Post.

“It is a Hong Kong accounting firm and the accountants involved are members of the HKICPA. As such, the HKICPA will definitely look into it and follow up to check if a formal investigation is needed,” said Ho.

“Our focus is to check if the Hong Kong accounting firm and the accountants followed all the auditing procedures and standards. We’ll check if the firm and the accountants have done their duty as the auditor.”

The SEC said Baker Tilly would pay US$75,000 it had earned from auditing the Chinese firm and cease to accept new US company clients until it undergoes a compliance review by an independent consultant.

Ross and Kwok also agreed to pay penalties of US$20,000 and US$10,000, respectively, and face a three-year bar from practising as accountants before the SEC.

The SEC’s case against Baker Tilly marks the latest in a string of cases against so-called gatekeepers such as auditors and lawyers whom it says are uniquely positioned to help detect or prevent fraud before it affects investors.

“Auditors play a critical gatekeeper role in our financial markets, and Baker Tilly failed to uphold US auditing standards,” said Antonia Chion, an associate director in the SEC’s enforcement division.

A spokeswoman for Baker Tilly said the firm would not comment. Ross did not reply to emails.

This is the latest in a series of cases tied to fraud at mainland-based companies that list in US markets. For the past few years, the SEC has been investigating and charging companies and, in some cases, their auditors involved in a rash of accounting scandals. The accounting problems have caused investors to lose billions of dollars, and led to dozens of delistings and deregistrations of mainland companies in the United States.

“The American authorities are very much on alert” when it comes to Chinese listed firms in the US, said Bill Sims, managing director at risk management firm FTI Consulting.

Audit firms typically check to make sure the books balance and do not often ask questions that would uncover whether a fraud is taking place, said Sims.

The dangers are magnified in China as audit work is often subcontracted to a local partner, Sims added. It was not clear whether Baker Tilly used a local partner to audit China North East Petroleum.

The SEC charged China North East Petroleum, the company at the heart of the Baker Tilly complaint, with fraud in 2012. It was delisted and deregistered that same year.

The SEC alleges that Baker Tilly failed to properly audit the company’s year-end financial statements, which did not disclose the “magnitude” of the related-party transactions involving the company’s chief executive and the chief executive’s mother.


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