Canada's audit firms have made little progress in improving the quality of their work and continue to demonstrate the same sorts of weaknesses that have been highlighted in past years, according to a new inspection of audit firms.
The Canadian Public Accountability Board, which oversees the work of audit firms, released its annual inspection report Tuesday, saying it is "disappointed" by the lack of progress being made on improving audit quality.
"The results of our 2011 inspections are disappointing," said chief executive officer Brian Hunt. "We are particularly concerned that, in many cases, the same systemic inspection findings are being identified year after year without significant improvement."
CPAB said its concerns are not limited to smaller regional firms, but also include the "Big Four" national accounting firms, which audit the books of about 94 per cent of Canada's publicly traded companies by market size. CPAB said it found deficiencies in between 20 per cent and 26 per cent of the audit files it reviewed at the Big Four firms, which include Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers.
"CPAB has told the firms that this deficiency rate exceeds what CPAB considers to be a tolerable limit," the inspection report says. "The firms concur with CPAB's assessment and, as a result, are implementing short-term and long-term action plans to improve audit quality."
The action plans to improve audit practices must include short-term actions to improve 2011 year-end audits as well as a longer-term plan to improve audit practices, CPAB said.
Most of the deficiencies occurred in "basic auditing procedures," the report added, and not in the audit of complex transactions. CPAB said it was concerned, for example, with audit work that relied on companies' internal controls, saying at times the wrong control is tested or the testing performed did not verify the control was working.
CPAB said audit quality issues arose more in some offices of the firms than others, which could be due to resource constraints or the nature of the clientele. In those cases, the firms have been asked to develop office-specific action plans to give more support and coaching to the staff.
The regulator also said it was broadly disappointed with the lack of "professional skepticism" it found among auditors. For example, CPAB said it reviewed a cash flow forecast to support a "going concern" analysis that was overly optimistic and not in line with historical results of the company, but it was unquestioned by the audit team.
In addition to reviewing the major audit firms, CPAB also examined the work of 10 smaller firms that had at least 100 publicly traded clients. It said it found deficiencies in Generally Accepted Audit Standards in 47 per cent of their audit files.
In many cases, CPAB said it required additional audit work to be done on the files.
Despite its concerns, CPAB said it believes investors should remain confident in the integrity of public companies' financial statements. The regulator also said Canada's inspection findings are "consistent" with those identified by audit regulators in other countries.