Professional Documents
Culture Documents
Sino-Forest Corporation
• Leading commercial forest plantation operators in China
• Established in 1994
• Principal businesses included the ownership and management of tree
plantations and complementary manufacturing of downstream engineered-wood
products
• It valued at over $6 billion dollars, employed almost 4,000 persons
• It had sixty (60) offices in nine provinces in China
• Sino-Forest achieved much success between the years of 2006 and 2011, their
“share price from $5.75 (CDN) to $25.30 (CDN), an increase of 340%”
Sino-Forest Corporation
SINO-FOREST
Trading of
Standing
Wood Logs:
Timber: 75%
21% of
of Revenue
Revenue
Carson Block, Director of Research created a team of ten researchers who spent two
months researching Sino-Forest. These researchers went to China and visited many
different areas across five cities, including forests that Sino-Forest claimed to own as
well as offices of both the company and their various partners.
Alleged Fraud
• Muddy Waters claimed that Sino Forest was a "multibillion-dollar Ponzi scheme"
that was accompanied by substantial theft..
• After releasing this report, Sino-Forest’s share price dropped in large scale,
causing billions of dollars in investor losses. One was American billionaire John
Paulson, whose hedge fund lost around $500 million
• Sino Forest rejected the allegations of fraud and launched an independent
investigation by PWC.
Audit Issues Related to Sino-Forest
• Ernst & Young, Canada (EY) was Sino-Forest’s auditor from August 2007 until
April 2012.
• EY’s audit plan recognized that there was higher inherent risk of misstatement
regarding Sino-Forest’s assets.
• In their audits of the Standing Timber Assets, EY’s main procedures involved
physical observation of the timberland (site visits), gathering evidence about the
value assigned to the timberland, and obtaining legal opinions for Sino-Forest’s
claims of ownership and control of the timberland.
Audit Issues Related to Sino-Forest
Sino-Forest’s timber assets were widely scattered throughout China. The OSC states
that “Ernst and Young performed only very limited site visit” to inspect the assets.
The OSC indicates that the extent of the site visits was insufficient in light of the
higher assessed risk of misstatement regarding these assets.
Audit Issues Related to Sino-Forest
Sino-Forest engaged Poyry Forest Industry Ltd., a firm based in the China, to
provide periodic valuations of its timber holdings. Poyry’s valuation reports contained
a disclaimer that they should not be relied upon by anyone other than Sino-Forest
and were only for Sino-Forest’s valuation purposes. EY auditors accompanied the
Poyry staff on a limited number of site visits and observed their activities.
Audit Issues Related to Sino-Forest
Later on, in 2014 Ernst & Young admitted no wrongdoing in its audits of Sino-Forest
Corp. and another Chinese company, but it has agreed to pay an $8-million penalty
to the Ontario Securities Commission (OSC), co-operate with a fraud investigation,
and changed its internal policies on emerging markets.
Ernst & Young has neither admitted nor denied it did anything wrong, the OSC
maintains the company didn't show enough "professional skepticism" in conducting
its audits. OSC lawyer told the settlement hearing that the accounting firm
overlooked flaws in its clients' accounting and didn't conduct proper reviews.
Allegations against Sino-Forest
❑ sought bankruptcy protection because it could not pay its bond and note holders
❑ any previous financial claims and statements they had made could not be trusted or used when
❑ allegedly owed $1 billion in receivables from the sale of wood and timber
❑ company was also being sued civilly by creditors, who filed motions in the bankruptcy
• created and used fraudulent purchase and sales contracts, using these same documents as evidence of
purchase and ownership of land
• withheld details about “internal control weaknesses/ failures that obscured the true nature of transactions
conducted within the BVI network and prevented the detection of the deceitful documentation process
Greenheart group fraud
In 2010, Sino-Forest purchased a majority share of Greenheart, a forestry company listed on the
Hong Kong Stock Exchange for $120 million. Prior to this purchase, Sino-Forest had allegedly
purchased lumber from Greenheart, dating back to 2007; and exercised an option to purchase thirteen
percent (13%) of this resource company.
However, no logs were ever delivered at this time. Sino-Forest kept internal control problems private,
resulting in a misunderstanding of the business transaction. In fact, Mr. Allan Chan, president of
Sino-Forest, kept his involvement in Greenheart Group secret, withholding the information about
purchasing a majority of the company as well as approximately $22 million he received for doing do.
Dacheng Fraud
• purchased timber plantations
from Guangxi Dacheng Timber
Company at $6.3 m in WFOE
model and at $30 million in BVI
model (2008)
• sold- at $48 m (2009)
Approximate Effect of the Dacheng Fraud $ millions Q3 of 2009
Chinese practice
Customary of “guanxi,” or
relationships
business Authorized Plantation based on
practice in personal favors
intermediaries rights and familial
China relations
certificates
Sino Forest’s defense
Lawyers argued that Sino-Forest had grown so substantially from 2006 to 2010, that mistakes
were made in administration, but did not necessarily constitute fraud.
These Chinese business practices were different from Western accounting procedures.
The problem is that Sino-Forest was listed on a Canadian exchange as a public company, subject
to Canadian securities statutes, not Chinese custom. As a result, company of $6 billion dollars in
market value that suddenly went bankrupt, couldn’t account for its alleged assets, nor pay its
bond holders.
How does this company make it big!
They simply hire auditors that do not actually speak Chinese, and do not understand
market practices in China.
Sino-Forest conducted business that made it possible for the company to engage in
such extensive fraud is the company’s use of off-shore, subsidiary companies.
Sino-Forest validated its inventory of trees on land it leased from the Peoples
Republic of China.
How does this company make it big!
Overstated its timber assets by $800 million dollars in Yunnan province alone.
None of the principals in this action returned to Canada for the hearings; most were deposed in mainland China,
Hong Kong, or the Dominican Republic.
The principle conspirators facilitated this fraud by controlling so-called arms-length suppliers and customers
without disclosing that control.
This documentation put forward by the principles allowed them to deceive and mislead their own auditors–
thus giving SinoForest Corporation a veneer of legitimacy in Canadian exchanges and globally
The Verdict:
• In 2017 the company filed for bankruptcy and the directors were found guilty of fraud
• The CEO and the directors were charged with USD 2.63 Billions
• Ernst and Young had to pay 117 million to settle investor’s lawsuit
Impact
Corporate
Influence: Stock Investor Impact: Industry Impact:
price Plummeted Firms had to pay Stricter Industry
the settlement Regulation
Recommendations:
• Rotation of Auditors
• Role of Legal Authorities
• Auditors role to assess risk
• Proper internal Control
Thank You