The Ontario Securities Commission (OSC) has reached a $3.5-million settlement agreement with BDO Canada LLP for BDO’s substandard audits of two investment funds’ financial statements.
According to the agreement, BDO was the auditor of Crystal Wealth Management Systems Limited and its two privately offered mutual fund trusts, the Crystal Wealth Media Strategy and the Crystal Wealth Mortgage Strategy.
BDO’s audits of the funds’ financial statements in 2014 and 2015 valued the media fund and the mortgage fund at approximately $50 million and $40 million, respectively. But it turned out that Clayton Smith, the founder and sole director of Crystal Wealth, had misappropriated $11.8 million from both funds.
In 2018, Smith reached a settlement agreement with the OSC in which he admitted to defrauding investors in the funds that BDO had audited.
In its settlement agreement with BDO, the OSC said BDO failed to adhere to generally accepted auditing standards by not gathering sufficient evidence to corroborate the valuations of the Crystal Wealth funds, failing to undertake its work with sufficient professional skepticism and not completing quality control reviews.
“Investors rely on auditors to carry out their work with professional skepticism and proper oversight,” Jeff Kehoe, the OSC’s director of enforcement, said in a statement. “When auditors fall short, investors lose confidence in the integrity of financial reporting, a cornerstone of our capital markets.”
The OSC did not allege that BDO acted dishonestly or engaged in intentional misconduct when it audited Cyrstal Wealth’s financial statements. The OSC also noted that BDO has “taken a number of steps” to ensure adherence to accounting principles since 2015.
In addition to paying an administrative penalty of $3.5 million, BDO has agreed to pay $500,000 in costs. Upon court approval of the settlement, the OSC will recommend that $2.5 million of the penalty be allocated to Crystal Wealth investors.
“This settlement holds BDO accountable for failing to adequately carry out its role as a gatekeeper,” Kehoe said.