The Canadian Public Accountability Board issued another report this week, and sugarcoated as it was, it revealed some familiar north-of the-border auditing issues for the Big Four.
The CPAB, Canada's answer to the U.S. Public Company Accounting Oversight Board, is required to submit at least one public report annually. Its first, released in October 2004, focused more generally on the work the Big Four accounting firms were doing. The second report was based on the inspection of 23 public accounting firms, which collectively audit more than 5,500 public companies, about 80 percent of Canada's public companies.
In those reports, the CPAB recommended nearly across the spectrum that substantial improvements needed to be made to firm's internal controls, their tendency to accept clients that pose an unacceptable risk and their failure to implement new auditor independence rules.
The reports struck a chord familiar to anyone who has read the recent reviews of auditors working in the United States.
The CPAB's latest, released just in time for the holidays, again revisits the job being done by the Big Four. After flipping through a few pages praising the firms' "strong quality leadership," "tone at the top," and "generally effective controls over client acceptance and continuance, human resources and quality monitoring," the gist of the report is finally revealed.
Reminiscent of the PCAOB's first inspection reports, just issued this fall, the Canadian inspections found more than a little fault in the 87 audits examined. Five audits were deemed "unacceptable," with each of the Big Four being responsible for at least one of the files. Here are some of the CPAB report's other lowlights:
"In all five cases, the common shortcoming was insufficient appropriate audit evidence to support the unqualified audit opinion that was given. One of these cases involved a material misstatement in the financial statements ... In addition to the fundamental problem of insufficient evidence to support the opinion that was given, some of these audits had other areas of serious weakness. For example, one file had an incomplete summarization of errors detected during the audit, and a failure to follow the advice that was received from national office technical experts ... Another file had a large number of planned audit steps that had not been completed and incomplete work papers that gave the overall impression of poor supervision and review ... there was a significant number of other engagements where, although CPAB was able to accept the file in its totality, the quality of the working paper files was below standard. For a number of these engagements, CPAB recommended that appropriate remedial action be taken, such as obtaining further evidence to support the firm's audit report ... [and] the file be cleared by a relevant partner of the firm with quality responsibilities."
Audits, as a matter of course, are tricky things, requiring CPAs to have access to a wide range of internal documents, accountants with extraordinary levels of technical expertise, and firms to be willing to expose themselves to a certain amount of liability and responsibility. That's part of the reason why the Big Four remain the Big Four, overseeing ridiculously high percentages of market capitalization in both the United States and Canada.
Change can't be expected to happen overnight, but its hard to tell from the outside looking in whether the oversight boards are filled with nitpicky inspectors, or whether the Big Four aren't doing the properly doing the jobs they're paid the big money to do. The judgment gets even trickier to sort out when these public reports are being released more than a year after the inspection took place and the players remain largely anonymous.
A year from now, maybe the small audit samplings that make their way under the regulators' microscopes will receive glowing reviews across the board. Until that happens, I hope the boards inspecting both stateside and up north subtract a few of the needless niceties from their reports and offer up some sort of real and easily understandable comparison as to how well the Big Four are truly performing audit-wise. The tone at the top is all well and fine, but most of us care more about the bottom line.
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