CPAB released its fourth annual public report on our inspections of Canada’s four largest accounting firms (the Big Four ― Deloitte LLP, EY LLP, KPMG LLP, PwC LLP) on November 27, 2017.
CPAB had fewer inspection findings across Canada’s largest public accounting firms in 2017 compared to 2016 and 2015. We inspected 86 (2016:87) audit engagement files – six of those files had significant findings compared to 11 files in 2016 and 24 files out of 93 in 2015. A significant inspection finding is defined as a deficiency in the application of generally accepted auditing standards that could result in a restatement. There are two restatements to date.
While each Big Four firm demonstrated an acceptable level of inspection findings overall, CPAB continued to find exceptions where they did not execute consistently across the firm. The need to fully embed audit approach improvements into every practice and every engagement still requires more attention.
To better identify and understand impediments to improving firm quality systems and consistency in how audits are performed, we plan to evolve our inspection approach in 2018 to incorporate additional operational reviews of the effectiveness of firm structure, accountabilities, quality processes, and culture. In 2017 we are asking the firms to identify and articulate their key quality risks and the processes and controls they have in place (actual workflow and monitoring that workflow) to support high quality audits so we can better understand what steps might be missing, potentially contributing to continued significant findings. We believe that strong control processes and procedures at both the firm and engagement level will be fundamental to achieving further ongoing improvements in overall audit quality.
We plan to launch our new inspections approach in March 2018 at the Big Four firms. We expect to apply the new model to all other annually inspected firms in 2019 or beyond. As with any change, we know there will be learnings along the way and the opportunity to further develop and refine the proposed methodology in future inspection cycles.
We encourage all firms to commit to continuous improvement at every level of their organization. Firm action plans will play a critical role, as will addressing recurring inspection themes.
CPAB’s next public inspections report will be released in March 2018 and will include findings for all firms inspected in 2017.
Audit quality indicators
CPAB has increased its focus on the use and benefit of audit quality indicators (AQIs) as quantitative measures of the audit process. AQIs complement our evolving inspection strategy and should 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.In 2016, CPAB launched an AQI pilot project with audit committee chairs and their management teams. Participants were encouraged to select a limited number of indicators (five to 10) in the first year of the pilot covering audit execution, firm level metrics, management indicators, engagement team and client service indicators. Early benefits of using AQIs included a better understanding of the roles and responsibilities related to audit quality of management, audit committees and audit firms, and improved knowledge of and engagement in the audit process by all members of the audit committee. CPAB believes that AQIs are a useful tool for audit committees to broaden and deepen the dialogue around audit quality and supports increased awareness, discussion and collaboration regarding AQIs to develop good practices. To help advance this effort, CPAB continued the pilot through 2017 and encourages Canadian reporting issuers and their audit committee members to engage in the dialogue.
CPAB’s inspection activity of companies with foreign operations is often limited to engagement files accessible only in Canada because we currently have no legal means to compel access to work completed by component auditors. In many cases, the work we are able to access may represent only a small portion of the audit. As reported last year, in 2015 CPAB proposed a regulatory way forward to the relevant Canadian securities authorities to access information and related audit working papers so we may fulfill our mandate. The Canadian Securities Administrators (CSA) have issued a consultation paper and are currently reviewing the responses to determine next steps. CPAB looks forward to CSA’s proposals on this issue. (For a list of jurisdictions where CPAB is unable to access working papers, please visit www.cpab-ccrc.ca, Focus by Topic, Auditing in Foreign Jurisdictions).
Expanding our interaction with audit committees, with a focus on mid to smaller market cap reporting issuers, will continue. We will also publish information on how to evaluate the audit firm and audit risks, how audit committees are most effectively addressing their oversight role, and on industry-specific issues to explore with their auditors.
Effective regulation, proactive engagement, sustainable solutions
CPAB and other international audit oversight bodies are contributing to the increased emphasis on audit quality. We continue to influence the development of the international audit regulatory framework through our leadership position in the International Forum for Independent Audit Regulators (IFIAR). We are also active participants in Canada’s domestic regulatory agenda.
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