SEC Charges Auditing Firm Patrizio & Zhao LLC and one of its Founding Partner for Bad Audits of China-Based Company

In the Matter of Patrizio & Zhao LLC and Xinggeng (John) Zhao, CPA, Admin. Proc. No. 3-15534.  On September 30, 2013, the SEC announced it filed a settled Order Instituting Proceedings (“OIP”) charging auditing firm Patrizio & Zhao LLC (“P&Z”) and  one of its founding partners Xinggeng (John) Zhao with bad audits of a China-based company that did not disclose various related party transactions.  According to the SEC, P&Z and Xinggeng (John) Zhao did not adhere to U.S. auditing standards and exercise appropriate professional care and skepticism in conducting audits and interim reviews for Keyuan Petrochemicals, which was charged with accounting and disclosure violations by the SEC earlier this year.  According to the OIP, P&Z is registered with the Public Company Accounting Oversight Board.  Zhao generally was the engagement partner for audits and interim reviews during the time periods when Keyuan failed to disclose the material related party transactions for which it was charged by the SEC.  P&Z’s audit work papers identified the problematic transactions that Keyuan failed to disclose.  Zhao felt the related party transactions were an audit risk area and reviewed audit documentation reflecting that Keyuan was engaged in such transactions.  According to the OIP, Zhao nevertheless approved the issuance of unqualified audit opinions as well as interim review reports on Keyuan’s financial statements that violated U.S. Generally Accepted Accounting Principles by failing to include the disclosure of material related party transactions.  Zhao also did not document key audit procedures, evidence his review and sign-off on audit work papers, and ensure preparation of required audit documents.

The OIP finds that P&Z and Zhao engaged in improper professional conduct as defined in Section 4C of the Exchange Act and Rule 102(e) of the SEC’s Rules of Practice.  The order further finds they violated Section 10A(a)(2) of the Exchange Act, and caused the reporting and disclosure violations by Keyuan.  Without admitting or denying the SEC’s findings, P&Z and Zhao agreed to a cease-and-desist order in addition to P&Z’s $30,000 monetary penalty and prohibition from practicing before the Commission, with the right to apply for reinstatement after three years.

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