The Ontario Securities Commission (OSC), Canada's largest securities regulator, has accused Ernst & Young of allegedly conducting improper audits of Chinese clothing and footwear retailer Zungui Haixi before it collapsed in 2011 following claims of fraud.

The regulator ordered a halt in trading of the retailer's stock, which was listed on the Toronto exchange, two years ago when Zungui Haixi said EY had stopped its 2011 audit pending an investigation into 'inconsistencies' in its bank documents.

OSC is now alleging that EY failed to act on a timely basis, despite there being a number of red flags in the company's financial statements, Reuters reports.

An EY spokeswoman in Canada said EY had brought the issues it uncovered to the attention of the audit committee and management, and eventually resigned as auditor.

The Canadian regulator alleges EY failed to comply with generally accepted accounting standards during audits of Zungi Haixi before its initial public offering in 2009 and in the 2010 annual audit. It also says that underlying evidence was not reviewed sufficiently, while a key staff member had little experience of auditing China-based companies.

EY's spokeswoman said the firm intends to 'vigorously defend' itself against the OSC's allegations. A hearing on the matter is scheduled for July 15.