Canadian securities regulators are planning to increase the amount of disclosure required by audit firms when they are facing restrictions as a result of problems with their work, further boosting scrutiny of audit firms.
The Canadian Securities Administrators, an umbrella group for Canada’s provincial securities regulators, said Thursday that it will require audit firms to notify securities regulators if they have had any sort of remedial actions imposed on them by the Canadian Public Accountability Board, which is the overseeing body for audit firms. The requirement will tighten up current rules that only require companies to report on CPAB “sanctions,” which has been narrowly interpreted and has led to little disclosure.
“Auditors are key gatekeepers, so it is important to improve the extent of information securities regulators receive when the Canadian Public Accountability Board identifies significant audit quality issues,” said CSA chair Bill Rice, who is also head of the Alberta Securities Commission.
“Receiving information about audit firms enables securities regulators to better assess systemic issues and consider, in a timely manner, whether regulatory action is needed. This in turn will increase investor confidence in the quality of financial reporting in Canada.”
The new standards would also require audit firms to notify their clients in writing within two days if they are not in compliance with any remedial action imposed by CPAB.
The CSA rules would require foreign-based companies seeking a stock exchange listing in Canada to have to comply with all the Canadian audit disclosure rules. Companies filing a prospectus would also have to disclose if their audit firms do not fall under CPAB’s scrutiny, which would typically mean they are foreign-based audit firms The CSA said it is also proposing rules that would require companies to publicly report when their audit firms resign or are terminated within 14 days, rather than the current 30-day reporting standard.
As extra security, both the departing audit firm and the newly retained audit firm would be required to notify regulators within three days if a company has not provided the required public disclosure about an auditor change within the 14-day time limit.
The changes are designed to tighten up disclosure rules first adopted in 2003 when CPAB was created as a new body to oversee firms that audit the books of publicly traded companies.
The CSA said Thursday that it has decided not to make substantive changes at this time to the existing rules for notifying audit committees about remedial actions imposed by CPAB, but said it will reconsider the issue after seeing what happens with a separate initiative under way at CPAB.
In May, a committee led by CPAB and industry participants recommended that more information should be given to audit committees of companies about audit firms, especially if CPAB has reviewed an audit firm’s work on a specific company’s books and has made recommendations for improvements. The committee recommended CPAB work with audit firms and company representatives to develop a new protocol for increasing information to audit committees.
The CSA said it will request updates on the work to develop the protocol and will consider further changes once it is prepared.
The CSA proposals are out for public comment until Jan. 15.