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SEC Imposes Sanctions Against Hong Kong-Based Firm and Two Accountants for Audit Failures


Washington D.C., Dec. 17, 2014 —

The Securities and Exchange Commission today imposed sanctions against a Hong Kong-based audit firm and two 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 Baker Tilly Hong Kong Limited, its director Andrew Ross, and its 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 year-end 2009 financial statements.  Baker Tilly and the 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 consequently 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 PCAOB standards.  Ross and Kwok must pay penalties of $20,000 and $10,000 respectively and are barred from practicing as an accountant 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.

According to the SEC’s order instituting a settled administrative proceeding, the Baker Tilly audit team failed to adequately perform the 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 contain conflicting information regarding the source of a $4.6 million capital contribution to a company subsidiary.

The SEC’s order finds that Baker Tilly, Ross, and Kwok engaged in improper professional conduct under Rule 102(e)(2)(ii) of the SEC’s Rules of Practice, and violated Section 10A(a)(2) of the Securities Exchange Act of 1934.  They neither admitted nor denied the findings of the order, which censures Baker Tilly.

The SEC’s investigation was conducted by Ansu Banerjee, Delane Olson, Debra Russell, and Michael Semler.  The case was supervised by Melissa Hodgman.


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