Audit firms are doing a better job of scrutinizing the books of Canadian companies, but their work remains uneven and auditors need to apply more "professional skepticism," according to a new review of auditing in Canada.
The Canadian Public Accountability Board, which oversees the work of audit firms, released its annual inspection report Thursday, concluding that audit deficiencies fell by 30 per cent overall in 2012 compared to 2011, and by 33 per cent at the "Big Four" major accounting firms.
The improvement came after CPAB issued a highly critical report about audit work in 2011, complaining the firms had made little progress in improving their work and continued to show the same weaknesses year after year. Saying it was "disappointed" by the lack of progress, the regulator ordered the four largest firms in late 2011 to develop action plans to improve their processes.
"These action plans resulted in an overall improvement in the inspection results for the Big Four firms," said CPAB chief executive officer Brian Hunt. "However, not all the Big Four firms demonstrated the same level of improvement. Firms that focused on the drivers of consistency in audit execution performed better."
He said results for 2013 should be even better because the firms did not have their new processes fully in place for last year's audits. The Big Four firms, which audit 98 per cent of Canada's publicly traded companies by market size, are Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers.
CPAB reviewed the work of 61 audit firms and 236 companies' audits. The audit review, which focuses on higher-risk clients, led to five restatements of companies' financial statements last year, representing two per cent of files reviewed by the oversight body.
The regulator said auditors still need to apply more "professional skepticism" when reviewing companies' finances, which includes changing their internal cultures so that processes and behaviours change.
For example, CPAB recommends audit firms rotate the senior members of their teams regularly to avoid complacency or the dangers of familiarity, and should ensure senior team members have more opportunities to work with junior staff to "transfer their knowledge."