Canada’s top audit regulator has banned a U.S. accounting firm from taking on any new risky Canadian clients after it found problems in the firm’s examinations.
The Canadian Public Accountability Board, which oversees the firms that audit publicly traded companies, says that it had “significant inspection findings” in the two audits it looked at by New York-based Marcum LLP. The board reaches a significant finding when a firm falls short of accepted auditing standards for a material part of a company’s financial statements and has to go back and do additional work to support its audit opinion.
Marcum’s failures rose to the level of 10 distinct violations of the Rules or Professional Standards that govern audits, CPAB said, including “identifying and assessing the risks of material misstatement through understanding the entity and its environment.”
While CPAB has announced disciplinary actions against firms in the past, Friday’s announcement is the first under the board’s new policy of disclosing significant enforcement actions imposed on firms as a consequence of its inspections.
The CPAB ban prohibits Marcum from accepting new “high risk” Canadian reporting issuer clients, including those resulting from initial public offerings, reverse takeovers or other transactions. CPAB says it and Marcum have agreed on a definition of “high risk” for the purposes of the ban.
CPAB also required Marcum to inform the audit committee of each of its Canadian high risk reporting issuer clients of the ban and pay the costs of enhanced regulatory oversight and monitoring of the firm’s compliance.
The enforcement actions took effect on Feb. 21.
All public accounting firms that audit public companies must register with CPAB, and any firm that audits at least 100 public companies gets reviewed annually. CPAB picks some of each accounting firm’s audits for review based on its assessment of high-risk factors, such as complex companies, or areas in which the audit firm may lack some expertise.
CPAB said Marcum, which does not have an office in Canada, had 21 Canadian audit clients who were “reporting issuers,” which means they file audited financial statements with securities regulators. CPAB is not naming the two public-company clients of Marcum whose audits it inspected.
Trade publication Accounting Today named Marcum the 15th-largest U.S. firm in 2022, with US$800-million in revenue and 368 partners in 30 offices. The company, which was founded in 1951, did not reply to The Globe and Mail’s request for comment Friday.
According to S&P Global Market Intelligence, Marcum audits a number of Canadian-listed cannabis companies. Florida-based Trulieve Cannabis Corp. TRUL-NT-U-CN is its biggest Canadian-listed client by revenue and market capitalization, and is one of the firm’s five biggest clients.
Other Canadian-listed cannabis companies include Chicago-based Cresco Labs Inc. CL-CN; New York-based iAnthus Capital Holdings Inc. IAN-CN; Florida-based Jushi Holdings Inc. JUSHF and New York-based Acreage Holdings Inc. ACRG-B-U-CN which counts former U.S. House speaker John Boehner and former Canadian prime minister Brian Mulroney as directors.
CPAB has previously described the results of its firm inspections, but has not disclosed the names of the firms, even when problems arise. CPAB said in its midyear report of inspection results last October that one of the Big Four firms – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP – had “significant findings” in more than 20 per cent of its audits. The other three had similarly significant findings in less than 10 per cent of audits.
“The level of significant inspection findings at one firm indicates that certain controls at this firm may not be designed appropriately or operating effectively,” CPAB said in its report.
CPAB also said it completed 2022 inspections of audits at 12 smaller audit firms and found significant findings in 11, a level that “continues to be unacceptably high.”