SEC blacklists auditor of scammed brokerage

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The Securities and Exchange Commission (SEC) has blacklisted and fined R&L Investments’ external auditor, under whose watch a rouge settlement clerk pulled off a long-running stock theft that led to the collapse of this stock brokerage house.

In a press statement on Monday, the SEC announced that it had disqualified KL Siy & Associates (KLSA) from securing accreditation as external auditor, citing “gross negligence” over a scheme that resulted in the collapse of brokerage R&L Investments.

In an order issued on July 21, the SEC’s Office of the General Accountant (OGA) effectively barred KLSA, along with its managing partner Kathleen Mary Siy and partner Arturo Sabino, from acting as external auditor of all entities regulated by the SEC.

The SEC revoked Siy’s accreditation, which would have remained effective until September 6, with the expiration of KLSA’s conditional accreditation.

Aside from its disqualification, KLSA was ordered to pay P314,570.65 as penalty for “material disclosure deficiencies and misstatements, as well as for violation of independence rules.”

The OGA issued the order after finding that KLSA had failed to comply with the auditing standards and other rules adopted by the SEC under the Securities Regulation Code (SRC) Rule 68, resulting in what it described as “gross negligence” in the audit of R&L Investments’ financial statements for the year 2018.

“The failure to flag the misappropriation of securities through the conduct of appropriate audit procedures contributed to the continuation of the illegal acts which resulted to the massive loss of securities in the total amount of P606,641,351 as of December 31, 2018 belonging to numerous number of investors,” the OGA noted.

“The misappropriation of the said securities under the custody of R&L Investments did not only cause damage to the concerned investors but also created a negative impact on investors’ confidence to the Philippine stock market,” it added.  

In its 2018 audited financial statements, R&L Investments booked client securities worth P738.9 million. However, the business partner (BP) portfolio report provided by the Philippine Depositary & Trust Corp. showed that its client portfolio only amounted to around P132.25 million.

KLSA relied on the BP portfolio report furnished by R&L Investments, which turned out to be altered, and accepted the same as audit evidence to validate the information in the brokerage’s inventory report, the SEC said.

Instead, KLSA should have rejected the documents as audit evidence and initiated additional audit procedures, considering it has identified weaknesses in R&L Investments’ control environment, the OGA said.

The OGA also found that KLSA itself prepared the audited financial statements of R&L Investments, in violation of the independence requirement for external auditors.

“KLSA’s responsibility is confined to the expression of an opinion on the fairness of the financial statements,” the OGA noted. “KLSA’s inability to exhibit impartiality hindered the early detection or prevention of fraud which has caused substantial losses to investors.”    

The valuation of securities shown in R&L Investments’ 2018 statement of financial position and the related disclosures were incorrect and constituted a material disclosure deficiency, according to the OGA.
R&L Investments nominee Lucy Linda Lee first reported the discovery of the discrepancy to the Philippines Stock Exchange in October last year, supposedly after the nominee of another brokerage house flagged numerous error transactions made by rouge settlement officer Marlon Moron on several trading days.
Moron had admitted to forging reports to conceal his actions from the management, as well as from the audits conducted.
Upon the SEC’s order, the Capital Markets Integrity Corp. (CMIC) took over the operations of R&L Investments late last year to protect affected customer accounts.//30