* Auditor quits after Sino granted creditor protection
* Ernst says Sino has not cleared up financial issues
* Toronto Stock Exchange delists Sino-Forest shares
By Euan Rocha and Jennifer Kwan
TORONTO, April 5 (Reuters) - Ernst & Young LLP has resigned as Sino-Forest's auditor and the embattled Chinese forestry company's shares are now set to be delisted, just days after a Canadian court granted Sino creditor protection and months after fraud allegations triggered a stampede out of its stock.
Sino-Forest's Toronto-listed shares tanked last June after a short-seller accused it of exaggerating the size of its forestry assets. The company says the allegations have paralyzed its business and forced it to seek bankruptcy protection.
Ernst & Young, which faces lawsuits over its work for Sino, said on Thursday it was resigning, effective immediately, partly because Sino still couldn't resolve outstanding issues in relation to its 2011 annual financial statements.
Al Rosen, a forensic accountant with Rosen & Associates, said Ernst & Young's move to step down is no surprise.
"An auditor under these circumstances would tend to resign," he said. "This would not be unusual at all."
The auditor's announcement came just a few hours before the Toronto Stock Exchange announced that it will delist shares of Sino-Forest, as of May 9.
The exchange said the delisting was imposed due to Sino-Forest's failure to meet its continued listing requirements in the face of its creditor protection filing.
Sino-Forest is the most prominent among a spate of accounting scandals that have tainted the image of Chinese companies listed in North America. The accusations have prompted trading halts, delistings, lawsuits and regulatory probes in both the United States and Canada.
The case has also prompted a series of Canadian reports that, in part, found weaknesses in the work of auditing firms in general, and specifically with audits of companies based in emerging markets.
Sino secured creditor protection from the Ontario Superior Court of Justice last week under Canada's Companies' Creditors Arrangement Act (CCAA)- the equivalent of U.S. Chapter 11 filing.
Regulators stopped trading of Sino's stock last August and initiated an investigation that is still under investigation. After Sino's creditor protection filing last week, the Toronto Stock Exchange put the company on review for delisting.
The company's internal investigation into the fraud allegations proved inconclusive and was unable to clear Sino-Forest of allegations leveled by the short-seller, Carson Block, and his firm, Muddy Waters.
Sino-Forest and its executives, along with its underwriters and auditors, are all facing possible class-action lawsuits. Unable to dispel the fraud allegations, Sino has failed to file financial results for 2011, prompting its auditor to step down.
Sino has said it planned to sue Block, along with his firm and other unnamed parties for more than $4 billion in damages. Block earlier this week countered that Sino-Forest ought to be thriving if it has done no wrong.
Earlier this week, a watchdog's report noted that Canadian auditing firms need to improve the quality of their work to assure they are fulfilling their responsibility to protect investors against corporate fraud and sloppy accounting.
The Canadian Public Accountability Board's annual review, which examined 245 audits conducted by 88 firms, found the same weaknesses cropping up year and year without much improvement.
A review of files by "Big Four" firms - Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers - found 20 to 26 percent of the cases fell short of Generally Accepted Auditing Standards. Among smaller firms, deficiencies were even more common, according to the report.
In March the Ontario Securities Commission, Canada's most powerful securities regulator, issued a report on its review of Canadian stock listings by companies with most of their operations in China and other emerging markets.
That report found weak links at every stage of the listing process, including the role played by auditors. The OSC's review of emerging market issuers stemmed from the allegations against Sino-Forest.