Thursday, June 30, 2011

Independent Auditor Provides 10A Report and Resigns

An outside auditor has provided a Section 10A report to an SEC registrant and resigned as the company’s independent auditor. In a letter to the audit committee of China-Biotics, Inc., which was an exhibit to the company’s Form 8-K disclosing the resignation of the independent auditor, the resigning outside auditor said that certain irregularities constituted illegal acts that could have a material effect on the company’s financial statements for purposes of Section 10A of the Exchange Act.

The audit firm, BDO Limited, concluded that the board and audit committee have not taken timely and appropriate remedial action in respect of the illegal acts, a failure that rendered it impossible for BDO to gather evidence to assess whether the company’s accounting records have been falsified and whether there are other issues that could have a material effect on the company’s financial statements, which warranted BDO’s resignation.

The board and audit committee were informed of the irregularities, including those related to the performance of audit procedures reviewing the company’s on-line bank accounts through the e-banking system of the bank, in that the auditor was directed by company staff to access a suspected fake website of the bank. Another irregularity was in bank advice pertaining to bank income, which contained mathematical errors, which company management dismissed as clerical mistakes made by the bank. A further irregularity was that deposit interest recorded as earned by the company differed from an undated deposit agreement with the bank presented to the auditor and which the company represented as having been entered into between a company subsidiary and the bank.

The auditor asked the audit committee to take steps as part of its oversight duties to deal with the irregularities. The audit committee’s response failed to provide the auditor with sufficient details about the work the committee should have performed to discharge its oversight duties with regard to the irregularities, such as preparing a specific plan for investigating and remediating the irregularities.
Further, the auditor was not provided with the results and findings of an investigation into the irregularities by a special committee of the audit committee. The auditor was not authorized to communicate directly with those conducting the investigation. Nor has the auditor been able to meet with bank personnel to confirm the company’s bank balances and transactions directly with the bank.