YBM's U.S. auditors drag feet over testifying
Friday, July 31, 1998
YBM's U.S. auditors drag feet over testifying
By SANDRA RUBIN
The Financial Post
Deloitte & Touche LLP is apparently refusing to testify voluntarily at an Ontario Securities Commission hearing into YBM Magnex International Inc., throwing Canadian regulators into a quandary -- and next month's scheduled hearing into doubt.
The refusal may also goad the country's most powerful securities regulator into adopting new rules for Toronto Stock Exchange-listed companies using auditors outside Canada to ensure they can be called to account when there's a problem.
YBM, a Philadelphia-area magnet manufacturer, was riding high on the TSE in March, with a share price of more than $20 and a market capitalization of almost $1 billion.
Once included in the TSE 300 index, the shares (ybm/tse) have been under a temporary cease trade order since May 13, the day FBI agents raided its headquarters in an organized crime probe supervised by the U.S. Attorney's Office.
The battered firm took another hit last month when Deloitte & Touche resigned as its auditors without signing the 1997 financial statements.
The OSC said in its original cease trade order the accounting firm had suspended its audit in April after expressing concerns of "one or more illegal acts ... which may have a material impact on the 1997 financial statements."
Deloitte demanded an independent review of some operations and told YBM it would decide whether it was willing to remain its auditor after seeing the result.
When it quit June 26, Deloitte said it still had concerns of "error or fraud," despite the report by a committee of independent YBM directors that found no evidence of criminal activity.
The OSC scheduled a permanent cease trade hearing for Aug. 10 and set aside two weeks for testimony and arguments.
Deloitte, whose special re-audit of YBM's 1996 financial statements paved the way for the company's entry into the big times on the TSE, was widely expected to be the regulator's star witness.
But the U.S.-based accounting firm is reportedly concerned about the legal implications of voluntary testimony on any lawsuit stemming from YBM's vaporized value. It has said privately it is extremely unlikely it will appear, although it's still weighing its options.
OSC counsel Jay Naster is on vacation and could not be reached to determine whether he will ask for an adjournment.
But YBM lawyer Joseph Groia said he is prepared to go ahead and argue the company's position without calling Deloitte.
"I won't ask for an adjournment but, on the other hand, I don't think the hearing will go ahead without Deloitte," he said.
"It is extremely difficult for the commission to conduct its case without them -- in fact, it would be extremely difficult for either side to prove its case without Deloitte."
The regulator can go to the Ontario courts for a "letter of request" that would compel Deloitte to submit to a videotaped examination and cross-examination in the U.S. The tape would then be played at the OSC hearing.
That could take up to eight weeks, delaying the hearing and forcing investors to wait even longer for a decision on when and whether the stock will trade again.
While not talking specifically about YBM, OSC chairman David Brown said yesterday the commission is looking at accountability of foreign-based auditors.
"It's not an issue we've addressed before. It is one we should be looking at and I've asked our own auditing people to give me some advice."
Brown said he doesn't see the OSC requiring the use of Canadian auditors, except as a last resort.
"There's a number of ways the issue could be addressed. For example, we could ask for an undertaking at the time a non-Canadian accounting firm were to sign a statement that we relied upon that it would appear in Canada if necessary. That's a possibility."
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