SEC Charges New Jersey-Based Accounting Firm and Founding Partner for Failed Audits of China-Based Company
The Securities and Exchange Commission today charged a New Jersey-based audit firm and one of its founding partners for their roles in the botched audits of a China-based company that failed to disclose related party transactions by its CEO and others.
An SEC investigation found that Patrizio & Zhao LLC (P&Z) and Xinggeng (John) Zhao, who is head of the firm’s China practice, 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.
P&Z and Zhao agreed to settle the SEC’s charges. They will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC, and P&Z is 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. “Auditors play an important role as gatekeepers to the securities markets, and they must adhere to professional standards whenever they perform audit engagements.”
According to the SEC’s order instituting settled administrative proceedings, P&Z is registered with the Public Company Accounting Oversight Board (PCAOB). With Zhao acting as the engagement partner, the firm conducted audits and interim reviews during the time periods when Keyuan failed to disclose the material related party transactions. P&Z’s audit workpapers and other documents reflect many of the same types of related party transactions that Keyuan failed to disclose. Zhao, who determined that related party transactions were an audit risk area, reviewed audit documentation reflecting that Keyuan was engaged in such transactions. Nonetheless, Zhao approved the issuance of unqualified audit opinions as well as 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’s order further identifies significant audit documentation violations by Zhao, including his failure to document key audit procedures, evidence his review and sign-off on audit workpapers, and ensure preparation of required audit documents.
The SEC’s order finds 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. The order further finds they violated Section 10A(a)(2) of the Exchange Act, and caused the reporting and disclosure violations by Keyuan. Without admitting or denying the SEC’s findings, P&Z and Zhao 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.
The SEC’s investigation was conducted by Fuad Rana, Avron Elbaum, Janet Yang, and Melissa A. Robertson.