SEC Charges Auditor of PRC Firm With Unprofessional Conduct

by Dorsey & Whitney LLP

The Commission filed another proceeding against an audit firm and its partners arising out of the audit of a PRC issuer. Unlike earlier actions involving audit firms for Chinese issuers, in this case the difficulties did not focus on misconduct that the company. Rather, the proceeding arises out of the audit failures of the outside audit firm.

In the Matter of Child Van Wagoner & Bradshaw, PllC, Adm. Proc. File No. 3-15965 (July 8, 2014) is a proceeding against the Utah based audit firm and two of its partners, Russell Anderson and Marty Van Wagoner centered on its 2009 and 2010 engagements

for Yuhe International, Inc., a Nevada company with its principal offices in the PRC. The company sells day old chicken broilers – chickens bred for meat. It claims to be the biggest seller of day old chicken broilers in China.

The audit firm’s first engagement for Yuhe concerned the financial statements for the fiscal year ended December 31, 2008. To do the work at the audit firm contracted with accounting personnel in Shanghai. During that engagement the firm did not place any reliance on the internal controls of the firm based on its conclusion that they were ineffective. Rather, it conducted a fully substantive audit.

The next year the audit firm continued to work for Yuhe until late in the year. The company replaced the audit firm with another which had acquired the local Shanghai personnel used by the Child firm the prior year. The new firm, however, resigned in March 2010, noting in a Form 8-K that the company had engaged in a prohibited related party loan, had a material weakness in its procedures and could not properly close its books. At the time the firm had conduct much but not all of the field work for the 2009 engagement.

Yuhe rehired the Child firm to complete the 2009 audit. At the time the 2009 Form 10-K was due on March 31, 2010. Russell Anderson was the engagement partner and Marty Van Wagoner serves as the quality review partner. A senior manager at the firm obtained the work papers from the Child firm’s predecessor. Neither the firm nor Mr. Anderson participated in planning, conducting or supervising the prior firm’s work. After making what was at best was a cursory review of the work papers, and conducting no significant procedures, an unqualified audit opinion was issued within three weeks of accepting the engagement.

During the planning for the 2010 engagement the firm and Mr. Anderson determined that Yuhe lacked effective internal controls. The company also did not have experienced personal. Nevertheless, the firm performed a basic audit and failed to adjust or extend its procedures to in view of these determinations. The firm also did not adequately supervise the foreign staff. Despite these deficiencies Mr. Van Wagoner provided his concurrence. An unqualified audit opinion was issued.

In June 2010 Yuhe filed a Form S-3 Registration Statement with the Commission. The unqualified audit report of the Child firm for the fiscal year 2009 was included in the filings. The offering was conducted in the fall of 2010, raising over $27 million.

In mid-June 2011 the audit firm resigned, noting that its 2010 audit opinion should no longer be relied on. By that time the audit firm learned that an acquisition agreement Yuhe claimed to have entered into in 2009 which would have increased its capacity by about 60%, and which was reflected n numerous press releases and a filing with the Commission, had never occurred.

The Order alleges violations of Exchange Act Sections 4C and 10A(a)(1) and (2) and Rule 102e of the Rules of Practice based on the failure of the firm to properly plan and conduct the two audit engagements. The action will be set for hearing.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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