Stephanie Ostrowski Mar. 11, 2013, 3:50pm

WASHINGTON (Legal Newsline) - The former chief financial officer of a China-based petrochemical company has agreed to settle accounting and disclosure violations by paying more than $1 million combined.

According to the Securities and Exchange Commission announcement on Feb. 28, Keyuan Petrochemicals allegedly failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members.

In addition, Keyuan operated a secret off-balance sheet cash account to pay bonuses in cash to senior officers, travel and entertainment expenses, and rented an apartment for the CEO. There were also gifts to Chinese government officials, both cash and non-cash.

Former CEO Aichun Li participated in the company's failure to disclose the related party transaction, according to the SEC.

Li was hired in order to ensure the company was in compliance with the U.S. accounting and financial reporting regulations. However, she received information and was exposed to certain errors that should have indicated to her that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan's registration statements and quarterly reports that did not disclose material regarding party transactions.

"By omitting related party transactions from its financial statements, Keyuan deprived investors of a true representation of the company's business dealings," said Stephen L. Cohen, an Associate Director in the SEC's Division of Enforcement. "As CFO, Li failed to right these wrongs."

According to the complaint filed in Washington, D.C. federal court, Keyuan failed to disclose information between May 2010 and January 2011 in accordance with U.S. General Accepted Accounting Principles.

As a result of using an off-balance sheet cash account, the company's reported balances in its financial statement for cash, receivables, construction-in-progress, interest income, and general and administrative expenses were misstated.

In October 2011, Keyuan filed restatement of the financial statements for the second and third quarters of 2010 that disclosed related party transactions and off-balance sheet accounting for the first time.

To settle the charges Keyuan has agreed to pay $1 million penalty and Li will pay a $25,000 penalty. They also agreed to a permanent judgment enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li is also suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years, according to the agreement.

Keyuan and Li neither admit nor deny the charges. The settlement is subject to court approval.

The SEC's investigation is continuing.

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