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Chinese Company Fined For Secret Accounting Books And Disclosure Violations

The U.S. Securities and Exchange Commission charged a U.S.-based audit firm and one of its founding partners for their roles in the botched audits of a China-based company that failed to disclose related party transactions by its CEO and others.

An SEC investigation found that Patrizio & Zhao LLC and John Xinggeng Zhao, who is head of the firm's China practice, failed to comply with 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.

P&Z and Zhao agreed to settle the SEC's charges. They will be prohibited from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC, and P&Z is required to pay a USD30,000 penalty.

In February 2013, the SEC also charged Keyuan and the company's former chief financial officer with accounting and disclosure violations, and they agreed to pay more than USD1 million combined to settle the charges.

The SEC at that time alleged that Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.

The SEC further alleged that Keyuan's then-CFO Aichun Li played a role in the company's failure to disclose the related party transactions. Li was hired to ensure the company's compliance with U.S. accounting and financial reporting regulations, and she reportedly received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li apparently signed Keyuan's registration statements and quarterly reports that failed to disclose material related party transactions.

Keyuan agreed to pay a USD1 million penalty and Li agreed to pay a USD25,000 penalty to settle the SEC's charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years.