The results of inspections conducted by Canada's audit regulator showed signs of improvement last year, but the risk of restatements remained too high at some firms, the Canadian Public Accountability Board said in a report released Monday.
Overall, CPAB's 2013 inspections indicate that audit methodologies at firms are generally sound and the majority of audits are well done. There were four restatements of financial statements (two per cent of files inspected) as a result of CPAB's inspections work in 2013.
The Big Four firms have made significant progress, largely as a result of action plans that were mandated after disappointing inspection results for 2011,” according to CPAB CEO Brian Hunt. “As a group, they’ve improved their results by more than 30 percent in each of the past two years,” he said in a statement. “While it’s clear Canadian audit firms are taking the challenge to improve audit quality seriously, it’s now time to focus on sustainability. It's encouraging to see some firms embedding audit quality initiatives throughout the audit process—changing organizational structures, redeploying resources to better support local audit teams, and incorporating additional quality monitoring from start to finish—rather than bolting them on at the end of the audit.”
However, not every Canadian firm have has improved its audit quality. The CPAB said the pace of change needs to accelerate at some firms, while the breadth of change must be expanded at others.
“Having seen action plans at the country’s largest audit firms positively impact audit quality, we have expanded this requirement across all of the firms CPAB inspects annually,” said Hunt.
Sustainability still must be addressed, the CPAB pointed out. Specifically, firms need to focus on innovative, longer-term measures such as changing accountabilities within the audit practice or office, limiting who can do public company audits, and better recognizing audit quality in performance reviews. The deeper and longer that changes are culturally embedded, the more sustainable they will be, according to the report.
The report also identified auditing in foreign jurisdictions as another challenge to audit quality. In addition to the complexity for the audit firm of navigating a different culture and set of rules, the CPAB is often unable to access audit work done outside of Canada. The report said investors should be concerned when foreign laws and regulations impede or reduce the auditor oversight they have come to expect in Canada.
“Management, audit committees, auditors and other professional advisors need to be fully aware of the additional risks they take on when working in foreign jurisdictions,” said Hunt.
Inspection transparency was high on the CPAB’s regulatory agenda in 2013. “This year a new protocol will be introduced whereby audit firms will share a copy of our annual Public Report with all audit committees, as well as any significant file-specific inspection findings with each audit committee where their audit has been inspected by CPAB,” said Hunt. “We believe increased information sharing will improve dialogue among the audit firm, the audit committee and management on how the audit firm is responding to audit quality issues identified in our report.”
The CPAB's 2012 and 2013 Public Reports show the firms that focused on consistency of audit execution continue to achieve the most improvement. “CPAB encourages all firms to make consistent execution a key priority—this will go a long way to enhancing audit quality in the longer term,” said Hunt.
Every year, CPAB inspects all firms that audit more than 100 reporting issuers. There are currently 14 firms in this category that audit approximately 99.5 percent of the market capitalization of public companies trading in Canada. In 2013, the CPAB inspected 49 audit firms and reviewed 195 engagement files, including Canada’s Big Four firms, 10 other firms that are reviewed annually, 20 regional and local firms, and 15 follow-up inspections.
The CPAB’s 2013 Public Report is available at www.cpab-ccrc.ca.