The Sino-Forest Case provides a real-world example of financial misstatement and audit failure.[1] The case encompasses related parties, auditing procedures for tangible assets, and internal controls. Sino-Forest Corporation was engaged primarily in the purchase and sale of standing timber in the People’s Republic of China (PRC). The principal executive office was in Hong Kong and its securities were traded on the Toronto Stock Exchange until 2011. The management of Sino-Forest created a complex web of subsidiaries and related entities whereby it controlled the purchase and sale of standing timber in widely dispersed regions of the PRC. Sino-Forest personnel created false documents related to these transactions, which were materially misstated in the company’s financial statements. Sino-Forest auditors failed to properly recognize and deal with these misstatements, despite concerns expressed by members of the audit team about a lack of evidence regarding the standing timber assets. As a result of these problems, the company was delisted from the Toronto Stock Exchange and is now defunct.
[1] Unless otherwise noted, this case is based on four Ontario Securities Commission (OSC) Enforcement actions related to Sino-Forest and it auditor (OSC 2012a, OSC 2012b, OSC 2014a, OSC 2014b).
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