The need to navigate the puzzle pieces of Canada's provincial regulatory system is hampering efforts to crack down on auditors in this country, says Nick Le Pan, chair of the Canadian Public Accountability Board.
"The system doesn't handle change," he said in an interview.
About five years ago, in the aftermath of accounting scandals from Enron to WorldCom, a handful of prominent Canadians set out to create a watchdog for auditors. It was part of this country's many-faceted response, which differs from the strict rules the U.S. imposed with the Sarbanes-Oxley Act.
The mandate for the Canadian Public Accountability Board (CPAB) was written in Mr. Le Pan's office when he was head of Canada's banking regulator. The bylaws were hashed out in David Brown's office when he was chair of the Ontario Securities Commission (OSC).
Five years on, Mr. Le Pan believes the organization has "actually started to become effective."
For instance, in its most recent review of the big six firms - BDO Dunwoody LLP, Deloitte & Touche LLP, Ernst & Young, Grant Thornton Canada, KPMG LLP and PricewaterhouseCoopers LLP - it looked at 130 audit files, and found deficiencies in 11 of them. In five cases, it believed the financial statements of the public companies that had been audited would need to be reissued, restated or corrected the following year. In each case, the auditors agreed to carry out more work or add more documentation to the file.
Aside from the big six, CPAB investigates dozens of smaller auditing firms, and while it's seen improvements, "we still believe there's a ways to go," Mr. Le Pan said.
So far, when the organization has found problems, it has dealt with the auditors directly. If it chose to ratchet the pressure up a notch, it could go to the board of the company that's been audited. In the most serious cases, it would disclose its findings to the securities commissions, which could make them public.
But CPAB is reluctant to do that, because its officials could be held personally liable.
"As you get to the stage where the stakes go up, [if]we're going to report somebody publicly, that's a big thing," Mr. Le Pan said.
"If we don't have statutory protection, my board is legitimately worried that, as we get to these higher levels where the consequences are bigger for the audit firms, that we will be tied down endlessly in [law]suits because there isn't statutory protection for CPAB, for directors, for officers."
Other regulators, such as the OSC or the Office of the Superintendent of Financial Institutions, have statutory immunity for acts committed in good faith.
"We're now in the smaller group of firms - not the big guys, the smaller guys - we're getting repeat offenders," Mr. Le Pan said. "We need to ratchet up the consequences, that's normally how a regulator would work. Well, our ability to ratchet up the consequences may be constrained because of this."
While "it's not a snazzy, top-of-the-line kind of thing, it's important that it get done, and it just takes a long, long time to handle that kind of change in our system," he said.
A law to amend the Chartered Accountants Act in Quebec is now in place. Ontario has passed, but not proclaimed, the Canadian Public Accountability Board Act. And Mr. Le Pan travelled to Calgary this week to talk to some finance officials and professional bodies about legislation he hopes will be brought forward in Alberta.
A lack of legal backing is also preventing CPAB from accessing all of the documents it believes it requires to properly assess audits - mainly legal opinions that companies or auditors have sought.
"Without statutory protection for CPAB to have access to those, audit firms might - and I'm not saying they're being malevolent here - they might naturally say, 'gee, we don't really want to give you that part of our audit file,' " Mr. Le Pan said.