by T. GormanPosted on Posted in SECActions

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.

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by T. GormanPosted on Posted in SECActions

The SEC settled its first action under the Municipalities Continuing Disclosure Cooperation Initiative, launched on March 10, 2014. Under the Initiative the Enforcement Division agreed to recommend settlement on favorable, standardized terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The initiative is due to expire on September 10, 2014.

The settled proceeding involved the Kings Canyon Joint Unified School District in Fresno and Tulane Counties, California. In the Matter of Kings Canyon Joint Unified School District, Adm. Proc. File No. 3-15966 (July 8, 2014).

In 2006 and 2007 the District made two securities offerings. The first was in December 2006, involving $19 million of municipal bonds. The second was in December of the next year when the District issued $6.7 million of certificates of participation.

Under Rule 15c2-12 the District executed Continuing Disclosure Certificates. Those obligated the District to annually submit reports containing certain financial information and operating data to the appropriate national and state repositories. They also require timely notices of certain events and include an obligation to provide notice in the event the information is not furnished. The District also reviewed the Official Statements for the Municipal Offerings which includes a summary description of the provisions of the Continuing Disclosure Certificates.

Between 2008 and 2010 the District failed to submit some of the disclosures required by the Continuing Disclosure Certificates. Subsequently, in November 2010 the District issued $6.8 million in municipal bonds. The Official Statement for the 2010 Offering, reviewed by the District, represented that over the last five years it had complied in all material respects with its continuing disclosure obligations. In fact it had not.

The Order alleges violations of Securities Act Section 17(a)(2). In addition, Rule 15c2-12, adopted in an effort to improve disclosures for municipal securities investors, requires an underwriter to obtain a written agreement in which the issuer undertakes to annually submit certain financial information.

Here the District agreed to settle the proceeding. In entering into the settlement the District agreed to certain undertakings. Those include an obligation to establish appropriate written policies and procedures and provide periodic training regarding the Rule 15c2-12 disclosures. The District also agreed to update any delinquent filings and certify compliance with these terms.

The District also consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2). It was also ordered to comply with its undertakings.

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