The Securities and Exchange Commission (SEC) banned Sherb & Co. LLP, an auditing firm in New York, from practicing as accountants for any publicly traded companies or other regulated entities after the firm conducted flawed audits on three Chinese companies.
SEC prohibits Sherb’s staff from professional practices
The SEC also prohibited the founder, two partners, and audit manager of Sherb & Co. LLP from practicing their professions. The investigation of the commission found that the auditors of the firm misrepresented their audit reports that they audited the three Chinese companies in compliance with the auditing standards of the United States. The commission said that the audit reports were “riddled with failures and improper professional conduct.”
According to the SEC, China Sky One Medical Inc (OTCMKTS:CSKI), one of the companies audited by Sherb & Co. LLP has been charged with financial fraud. The commission alleged that the Chinese company submitted false annual and quarterly reports in 2007 when it stated that it entered into a strategic distribution agreement with a Malaysian company to become the exclusive distributor of its “slim patch” in the country.
Phony export sales
The SEC found that there was no agreement and the Chinese company created approximately $19.8 million phony export sales to Malaysia and recorded it in its financial results in 2007 and 2008.
In a statement, Andrew Cersney, co-director of the Division of Enforcement of the SEC said, “Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period.”
Sherb & Co’s flawed audit reports
The SEC said Sherb & Co. LLP conducted flawed audit reports involving China Sky One Medical, Inc. (OTCMKTS:CSKI), China Education Alliance, Inc. (OTCMKTS:CEAI), and Wowjoint Holdings Ltd (OTCMKTS:BWOWU).
The commission identified the auditing firm’s founder, Steven J. Sherb, his partners Christopher A. Valleau and Mark Mycio as well as its audit manager Steven N. Epstein responsible for the mistake in audits. The SEC emphasized that they “failed [to] properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances.”
In addition, the commission said the four auditors “ignored clear red flags and failed to exercise professional skepticism, due care, and maintain complete audit work papers.”
Sherb & Co. LLP and its auditors settled the administrative charges filed by SEC by agreeing to refrain from practicing as accountants on behalf of publicly traded companies and any other entity regulated by the commission. The auditing firm also agreed to pay a penalty of $75,000.