The Securities and Exchange Commission (SEC) has disqualified KL Siy & Associates (KLSA) from securing accreditation as external auditor for gross negligence over a scheme that resulted in the collapse of brokerage R&L Investments, Inc.
In an order issued on July 21, the Office of the General Accountant (OGA) effectively barred KLSA, along with its managing partner Kathleen Mary L. Siy and partner Arturo D. Sabino, from acting as external auditor of entities regulated by the Commission.
The SEC also deemed ineffective Ms. Siy’s accreditation, which would have remained effective until September 6, with the expiration of KLSA’s conditional accreditation.
The Commission had accredited KLSA under Group A, allowing the firm to serve as external auditor of issuers of registered securities, public companies, clearing agencies, exchanges and other self-regulatory organizations, among others.
Ms. Siy, the signing partner for the audited financial statements of R&L Investments, had secured a Group B accreditation that allowed her to audit entities such as investment houses, brokers and dealers of securities, government securities eligible dealers, and investment company advisers.
Mr. Sabino, who served as KLSA’s internal quality audit reviewer for 2018, had been accredited under Group A.
Aside from their 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 failed to comply with the auditing standards and other rules adopted by the SEC under the Securities Regulation Code (SRC) Rule 68, resulting in 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 P738,897,290. However, the Business Partner (BP) Portfolio Report provided by the Philippine Depositary & Trust Corp. (PDTC) showed the brokerage’s client portfolio only amounted to P132,255,939.
Consequently, 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 D. Lee first reported the discovery of the discrepancy to The Stock Exchange, Inc. (PSE) on October 31, 2019, supposedly after the nominee of another brokerage flagged numerous error transactions made by settlement officer Marlon Moron on several trading days.
In a November 4, 2019 letter to PSE Director Alexander Yu, Ms. Lee said Mr. Moron and his wife Edna went to R&L Investments’ office on November 1, 2019 and admitted to the unauthorized transfer of shares to Venture Securities, Inc. using the account name Julieto Sulapas.
Mr. Moron also supposedly admitted to forging reports to conceal his actions from the management, as well as from the audits conducted.
On November 8, 2019, Capital Markets Integrity Corporation (CMIC) commenced a special audit of the pertinent books and records of the involved parties. It also placed R&L Investments under involuntary suspension.
PDTC, meanwhile, deactivated the sweeping of share balances from R&L Investments’ Depositary House Accounts to the Securities Clearing Corporation of the Philippines Nostro Account by the end of November 8, 2019.
The SEC then ordered R&L Investments to preserve its books, records and assets, as well as the PSE, CMIC and PDTC to take all the necessary actions through a letter dated November 12, 2019.
Subsequently, the Commission on November 14, 2019 ordered CMIC to take over the operations of R&L Investments to protect affected customer accounts.
On January 8, 2020, the OGA directed KLSA to submit its audit working papers, audit evidence and other audit related records from 2014 to 2018, for inspection. It would later issue a formal charge against the firm on February 19, 2020 for violation of the SRC, SRC Rule 68 and other applicable regulations.
KLSA admitted that it 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.
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, according to the OGA.
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.”