Adam Dean
Sino-Forest Corp. suffered its second major blow in less than a week after Ernst & Young LLP resigned as auditor of the scandal-plagued Chinese forestry company.
The accounting firm has refused for months to sign off on the Mississauga-based and Hong Kong-headquartered company's third quarter financial results, after a $50-million internal investigation was unable to resolve key questions surrounding Sino-Forest's relationships and dealings with its business partners.
On Wednesday, Ernst & Young, which had audited Sino-Forest's financial results for most of its 18-year history, informed the company it was resigning effective immediately.
The loss of its auditor follows the timber firm's filing for bankruptcy protection in Ontario last Friday under the Companies' Creditors Arrangement Act.
In a related development, Sino-Forest said on Thursday that its shares will be delisted from the Toronto Stock Exchange as of May 9th, due to its CCAA filing and its inability to file audited financial statements.
Once the most valuable forestry company on the Toronto Stock Exchange, Sino-Forest's share price collapsed in June after short-seller Carson Block and his firm Muddy Waters LLC levelled fraud allegations against the company in a research report.
Sino-Forest has denied the allegations but its business has floundered amid suspicions that it may have engaged in undisclosed related-party transactions. The Ontario Securities Commission, the RCMP and Hong Kong stock market regulators are all investigating the company.
In its resignation letter, Ernst & Young noted that Sino-Forest "remained unable to satisfactorily address outstanding issues in relation to its 2011 financial statements."
Sino-Forest said it intended to file further information regarding the auditor resignation with regulators.
The OSC halted trading in Sino-Forest's stock in August after alleging co-founder, chairman and chief executive officer Allen Chan and several other executives had engaged in fraudulent activity. Mr. Chan soon resigned as CEO and was replaced by Judson Martin, a Canadian and former chief financial officer of Toronto film and television producer Alliance Atlantis Communications Inc.
Without an auditor, Sino-Forest will remain unable to file official financial statements. That is unlikely to be the company's largest concern at the moment: In an affidavit sworn as part of its CCAA filing, Mr. Martin said the company's business activities have been effectively "frozen" by the scandal.
Mr. Martin said Sino-Forest can't get credit from banks and is having trouble collecting payments from customers. He also said the company has lost the support of local government officials in some areas of mainland China where it operates.
Sino-Forest has put itself up for sale and if a buyer isn't found in the next six months, the company's assets will be transferred to its bond holders.
Sino-Forest has launched a lawsuit in Ontario seeking $4-billion in damages from Mr. Block, Muddy Waters and a number of unnamed hedge funds.