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Canada’s top audit regulator has banned Smythe LLP, a B.C. accounting firm, from taking on any new clients after it found problems in the firm’s work.

Smythe is the first Canadian accounting firm censured by the Canadian Public Accountability Board, which oversees the firms that audit Canadian publicly traded companies. CPAB’s only other previous public censure, announced in March, involved New York-based Marcum LLP.

The board says it had nine “significant inspection findings” in the four Smythe audits from 2021 and 2022 that it examined, including at least one in every audit. CPAB records 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.

CPAB said that after the 2021 inspection, it imposed requirements on Smythe that were designed to improve the firm’s performance. “The results of the 2022 inspection indicate that concerns over audit quality have not been sufficiently addressed,” CPAB said in an order released Tuesday.

Smythe did not immediately return a request for comment Tuesday. CPAB says it informed Smythe of the order, which took effect on April 21.

The audit regulator, formed in 2003 after a number of global accounting scandals, operated for nearly two decades with a policy of not disclosing actions it took after firm inspections.

However, CPAB has been attempting to liberalize its disclosures, subject to federal and provincial statutes. The Marcum action and Tuesday’s Smythe discipline are the first significant enforcement actions disclosed since CPAB’s policy changed Jan. 1.

The CPAB ban prohibits Smythe from accepting any new clients that are “reporting issuers” – essentially, companies that file financial statements with securities regulators. Any privately owned Smythe client that wishes to go public cannot keep Smythe as an auditor, according to the order.

That’s a more severe restriction than the one imposed on Marcum earlier this year, in which the firm was only prohibited from taking on “high risk” Canadian reporting issuer clients.

CPAB also is requiring Smythe to implement measures to improve audit quality, including an analysis of what happened, an audit quality action plan, testing of its operational controls and bimonthly meetings with CPAB staff.

The regulator says the client ban will continue until it’s satisfied Smythe “has demonstrated a sustained improvement in audit quality.”

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.

Smythe is one of 11 firms CPAB inspects annually because of the number of public companies it audits. The regulator said that at the time of the inspection, four Smythe partners audited about 117 reporting issuers.

CPAB did not release the names of the companies whose audits triggered the Smythe discipline. The board noted which Canadian audit standards Smythe violated, but didn’t provide specific details of the accounting judgments in question.

A review of 102 Canadian Smythe clients in a S&P Global Market Intelligence database shows nearly two-thirds are miners or other companies in the materials industry.

Globally, Smythe has only three public-company clients with market capitalizations above $100-million, all of which are valued at less than $200-million. The review of S&P data shows 87 Smythe clients with market capitalizations of less than $20-million.

In its annual report released last month, CPAB said one unnamed member of the Big Four global accounting firms – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PwC LLP – had issues with 29 per cent of its inspected audits and has been directed to develop a “quality action plan.” CPAB has not yet identified the firm.

Another Big Four firm that missed CPAB’s quality target in 2020 and 2021 – before CPAB put its new disclosure policy in place – met the standard in 2022 and had enforcement requirements removed.

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