Staff of the Ontario Securities Commission (“OSC”) have once again successfully pursued an audit firm for various failings Staff allege contributed to investor losses. On January 24, 2020, the OSC approved a settlement agreement in a hearing held before Vice-Chair D. Grant Vingoe. Pursuant to the approved agreement between OSC Staff and BDO Canada LLP (“BDO”), BDO will pay a $3.5 million dollar administrative penalty and $500,000 in costs for failing to comply with generally accepted auditing standards in its audit of the 2014-2015 financial statements of two investment funds managed by Crystal Wealth Management Systems Ltd. (“Crystal Wealth”). BDO also entered into a separate settlement agreement with Crystal Wealth’s court-appointed receiver, Grant Thornton Limited. Upon court approval of that settlement agreement, OSC staff will recommend that $2.5 million of BDO’s fine be allocated to the benefit of Crystal Wealth unitholders.
In April 2017, Crystal Wealth, the investment funds it managed, and their directing mind, Clayton Smith, were put into receivership by the Ontario Superior Court of Justice on application by the OSC. OSC Staff subsequently reached a settlement agreement with Mr. Smith whereby he admitted to fraud on two Crystal Wealth funds – Crystal Wealth Media Strategy, and Crystal Wealth Mortgage Strategy. Certain fraudulent investments were recorded in the funds’ financial statements that BDO audited. The settlement agreement states that BDO’s audits failed to meet generally accepted auditing standards (“GAAS”) by (1) failing to obtain sufficient audit evidence of the existence and valuation of the funds’ assets; (2) failing to undertake the audit with sufficient professional skepticism; and (3) failing to complete the engagement quality control reviews of the audits BDO itself had determined were required. The settlement also considered that BDO had improved its policies and procedures to prevent similar lapses in the future. The allegations did not extend to breaches of accounting standards.
Auditor liability has been a subject of renewed interest since the Supreme Court of Canada’s decision in Livent v. Deloitte, 2017, where the Court held Deloitte liable to Livent’s receiver for negligent audits it performed for Livent, which had committed fraud. The OSC has also targeted similar conduct, as evidenced by its massive $8 million settlement with Ernst & Young over its audit work for Sino-Forest Corp. Crystal Wealth investors sought to follow this trend by bringing a class action against BDO for its substandard audit. Justice Perell ultimately rejected investors’ bid to certify the class action on January 8, 2020. Nevertheless, this case demonstrates that when it comes to financial fraud, investors, regulators, and other stakeholders are increasingly taking action against corporate gatekeepers, such as auditors, as this blog has previously discussed.
The settlement agreement and the OSC’s public statements emphasize the important role auditors play in protecting investors and maintaining public confidence in capital markets – a role that can make them the target of regulatory action. The OSC appears committed to holding corporate gatekeepers such as auditors and underwriters accountable where companies make misrepresentations in the course of accessing, or maintaining a presence in, the public markets. It suggests that the scrutiny of professional services firms from civil, regulatory and professional bodies is set to continue.
