Canada’s audit industry regulator is considering disclosing more about the problematic audits it finds and the names of the accounting firms that perform them.
The Canadian Public Accountability Board, which oversees the firms that audit publicly traded companies, is also considering making it mandatory for audit firms to tell client companies when CPAB has made “significant findings” about the quality of a company’s audit.
CPAB, which began work on the possible changes to its disclosure policy last year, has launched a consultation, seeking public comment until the end of September. Some changes would require signoff from provincial accounting or securities regulators, or perhaps changes to laws.
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’s key performance metric is what it calls a “significant finding” – where an accounting 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. One example of a deficiency, CPAB said, is “overreliance on management representations without corroboration with third-party evidence.”
At the time CPAB issued its 2020 annual report in April, it had reviewed 119 audits and made significant findings in 35 of them, or 29.4 per cent. But while CPAB reports statistics in groups, by firm size, it does not disclose inspection findings by firm, citing the confidentiality provisions of the Canadian Public Accountability Board Act of 2006.
That means investors, and even the boards of directors of public companies themselves, do not know which audit firms have the best record at avoiding the significant findings of the CPAB. Sometimes, a company’s leadership doesn’t know CPAB found the audit of its finances to be flawed.
In its request for public feedback issued this week, CPAB said there is a range of disclosure practices among audit regulators internationally, with many providing information on the inspection results of individual audit firms. The U.S. Public Company Accounting Oversight Board releases partly redacted inspection reports on Canadian audit firms that audit U.S. companies.
“In considering the current environment including high rates of inspection findings, a demand for additional disclosures from our certain stakeholders and our public interest responsibility, a change to our disclosures in this area is likely warranted,” CPAB said in its feedback request.
CPAB is also considering changing its rules to make the sharing of the results of individual audit file inspections with the companies’ audit committees mandatory. Currently, the system is voluntary, and audit firms willing to do so have signed a protocol for sharing.
As of January, just 102 of the 161 audit firms under CPAB’s purview had signed the protocol and share inspection findings. CPAB says of the 35 files with significant inspection findings in 2020, just 24 were reported to an audit committee. In 2019, that number was 35 out of 47.
CPAB says it does not believe mandatory disclosure would have much impact on how quickly it can complete inspections or how long it will take audit firms to fix their problems. “This change has the potential to improve audit quality and enhance the protection of the investing public by providing additional information to support the audit committee’s oversight of the auditor,” it said.
The group Chartered Professional Accountants of Canada said Tuesday it welcomes CPAB’s decision to undertake the consultation and “looks forward to any changes to CPAB’s policies that might result.”
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