Annually, CPAB inspects all accounting firms with 100 or more public company clients and released its annual public inspections report on March 29, 2017. Our 2016 inspections of these 14 firms (which audit approximately 99.5 per cent of Canadian reporting issuers by market capitalization) indicate an overall decrease in significant findings compared to last year; however, audit quality continues to be inconsistent.
CPAB’s annual Big Four firm (Deloitte LLP, EY LLP, KPMG LLP, PwC LLP) public inspections report released in November 2016 also noted an overall improvement in quality but pointed to the ongoing theme of inconsistent audit execution. As a result, in addition to completing procedures to identify if restatements are required, evaluating root causes, and updating action plans, CPAB required these four firms to revise or amend firm guidance and methodologies to address systemic issues, identify and monitor key quality controls, and ensure issue escalation processes are effective.
Inspections results at the 10 other annually inspected firms (four national/network firms and six large regional firms that collectively audit slightly more than one per cent of all Canadian reporting issuers by market capitalization) showed improvement overall, but like the Big Four firms they continued to experience challenges in consistency of audit execution. Three of the four other/national network firms improved; one firm declined slightly. The six large regional firms have also made improvements -– overall audit quality was stable at four of these firms and improved at two since last year.
The firms inspected annually have implemented action plans and these initiatives have enhanced audit quality; public company audits in Canada are generally well done. Our risk-based model of inspecting specific files for significant deficiencies and identifying systemic issues has been effective in enhancing audit quality, yet consistency across firm practices and client engagements remains elusive. To further enhance audit quality CPAB has explored what the firms and we should do differently to drive quality improvements deeper into their organizations. As a result, to better identify and understand impediments to improving firm quality systems (actual workflow and monitoring that workflow) we will begin shifting our inspections focus to more operational reviews of firm structure, accountabilities, quality processes, and culture, while continuing to conduct file inspections to validate systems findings. We plan to develop and implement our new approach over the next two years beginning with the Big Four firms.
The review of auditing in foreign jurisdictions continued as a concern in 2016. Most firms have implemented policies and procedures aligned with Canadian standards regarding auditing Canadian reporting issuers with operations in foreign jurisdictions. However, the work of component auditors outside Canada is still an area of challenge for our inspection program. . As reported last year, CPAB has memoranda of understanding with a number of audit regulators in foreign jurisdictions; however, we continue to face limitations in accessing component audit work in certain others. We have proposed a regulatory way forward to the relevant Canadian securities authorities to access information and related audit working papers so we may fulfil our mandate. The Canadian Securities Administrators (CSA) are examining CPAB’s proposal to determine whether legislative amendments should be considered. We look forward to working together with securities authorities and other stakeholders to address these limitations as quickly as possible.
In addition to participating in the domestic regulatory agenda, to achieve our strategy CPAB is actively involved in issues related to auditing and audit policy internationally through our leadership in the International Forum of Independent Audit Regulators (IFIAR). CPAB vice chaired the organization in 2016 and I have been nominated to chair the board of directors beginning in April 2017 – these leadership roles assist us to drive positive change regarding matters of audit quality domestically and internationally.
To increase the dialogue about audit quality, in 2016 we further expanded our interaction with audit committees, with a focus on mid-market cap ($100-$500 million) reporting issuers. As part of our Industry Forum series we held two sessions focused on the mining and oil and gas sectors – providing a venue for audit committee members to share industry-specific issues and insights. Early feedback has been positive and similar events are planned for audit committee members serving the financial, retail and mid cap reporting issuer sectors in 2017.
To support the discussion regarding the use of audit quality indicators (AQIs, CPAB launched a pilot project with the audit committees of six leading Canadian public companies to explore what they, management and their auditors are currently doing in this arena. Our observations to date tell us that AQIs have significant potential to positively impact audit quality. We encourage audit committees, management and audit firms to continue to explore how AQIs can be integrated into their audit processes. CPAB will expand participation in the pilot in 2017.
We commissioned an independent third party survey of engagement partners and audit committee chairs regarding our Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol). The Protocol covers both the sharing of CPAB’s overall inspection results as well as the sharing of reporting issuer specific results with audit committees. (Firms auditing well over 90 per cent of the market capitalization of reporting issuers in Canada participate in the Protocol). Overall, respondents found our reports useful, easy to read, and timely. At the same time, they suggested including more specific, case-study style information and increasing CPAB’s involvement and participation in the communications of results. We are discussing the survey feedback with the firms we regulate as well as other key stakeholders and enhancements will be considered as we continue to work to improve audit quality.
We encourage everyone responsible for financial statements – preparers, audit committees and auditors – as well as the investing public, to continue to enhance their focus on audit quality.Brian A. Hunt, FCPA, FCA, ICD.DChief Executive Officer