Audit regulator says accounting firms still falling short

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One of Canada’s Big Four auditing firms has a significant number of problems in its work for the second consecutive year, the national industry regulator has found.

In its mid-year report released Thursday, the Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, says the unnamed Big Four firm had “significant findings” in four of the seven company audit files CPAB has inspected so far. It will not meet CPAB’s target for an audit firm to have significant findings in less than 10 per cent of its 2023 examined audits. The same firm also failed to meet the target in 2022.

A significant finding means an accounting firm has fallen 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. Most significant findings require the auditing firm to carry out additional procedures to determine whether the client company must restate its financials due to material error. CPAB says there has been one restatement so far in 2023; in 2022, there were seven restatements

CPAB is not revealing the name of the problematic firm of the Big Four – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP – citing the confidentiality provisions of the law that established the oversight body in 2006. CPAB has begun naming firms that are under enforcement actions, but not ones that have an issue with significant findings.

Audit problems spread at Canadian accounting firms last year, industry regulator finds

“So unless there is a need for an enforcement action, we will not share the specific results of the Big Four,” CPAB spokesperson Susan Schutta said Thursday.

CPAB’s preliminary 2023 assessments found that seven of the 53 files it has inspected to date at the four largest firms, or 13 per cent, had significant findings. This is a slightly higher level of findings for these firms than the prior year, CPAB says, when eight of 67 inspections yielded significant findings.

The regulator is continuing inspections after the mid-year report, including firms smaller than the Big Four. 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 doesn’t choose the audit files it looks at randomly. Instead, CPAB says its selection of audits to examine is “biased towards higher-risk audit areas of more complex public companies or areas where the audit firm may have less expertise.”

In its mid-year report, CPAB also said firms are having trouble implementing a revised standard that requires auditors to have more robust risk identification and assessment procedures when examining their clients’ books.

CPAB gave examples of the problems it’s finding. It has examined audits where the company has a large number of large subsidiaries, but the accounting firms aren’t performing audit work to examine their revenue.

In other cases, the client company had significant amount of information only available in electronic form, with no physical documentation of transactions. Yet the auditing firm performed no testing of information technology or other controls.

And CPAB said it found a case where the auditors’ testing of sales transactions found multiple instances where the company said it was fixing errors – but the auditing firm’s engagement team “did not understand the reasons for the corrections.”