TORONTO, Jan. 31 /CNW/ - Canadian public accounting firms of all sizes
will need to do more to improve audit quality and adhere consistently to
internal and professional standards, the Canadian Public Accountability Board
(CPAB) said today in its fourth public report on its inspections of accounting
"We have made recommendations for improvement to every firm inspected,"
said CPAB Chairman Gordon Thiessen. "In addition, we have imposed requirements
on three of the regional and local firms, meaning they cannot accept new audit
clients until they have satisfactorily implemented our recommendations."
Thiessen said no restrictions or sanctions were imposed on any firms as a
result of this round of inspections. One small firm inspected in 2005 that
failed to comply with CPAB's requirements had its registration cancelled in
"CPAB's 2006 inspections showed that nearly all of its 2004 and 2005
recommendations have been implemented effectively," Thiessen said. "Each firm
has also provided written commitments that the problems CPAB identified in
this round of inspections will be remedied."
Inspections of the Six National Firms
Canada's six national firms - BDO Dunwoody LLP, Deloitte & Touche LLP,
Ernst & Young LLP, Grant Thornton Canada (practising as Grant Thornton LLP and
Raymond Chabot Grant Thornton LLP), KPMG LLP and PricewaterhouseCoopers LLP -
audit more than 4,500 public companies and other reporting issuers in Canada,
representing about 70 per cent of the total market share by numbers of clients
and CPAB estimates more than 90 per cent if measured by market capitalization.
CPAB inspected these firms in 2005/6.
The report says that each firm has made progress since CPAB's inspections
in prior years. The firms also have strong quality leadership and generally
effective controls over human resources, client acceptance and continuance.
They also continue to work to comply with independence standards. However, the
report says the firms must improve in two areas:
- Performance on Audit Engagements - Of 121 audit engagements selected
by CPAB for review in the six firms (primarily high-risk files),
9 engagements had serious deficiencies in the documentation of the
work done. In five other cases, financial statements had to be
reissued, restated or corrected in the subsequent year. For each file
with audit deficiencies, CPAB required the firm to either carry out
further audit work or to add documentation to the audit file.
- Quality Control and Quality Monitoring - Before an audit opinion is
signed, a quality control review is to be conducted by a partner in
the firm other than the one responsible for the engagement. CPAB
found in some cases that the reviewing partner spent insufficient
time on the review or conducted it too late in the process. While the
national firms have effectively designed quality monitoring programs,
CPAB found that two firms' implementation of these programs lacked
"While high quality audit work was evident throughout our inspections of
the national firms, we were nevertheless disappointed that our work identified
such a large number of instances where engagement teams did not fully comply
with an aspect of Generally Accepted Auditing Standards (GAAS) or with the
firms' own policies and procedures," said CPAB CEO Keith Boocock. "We expect
that each firm will share our sense of disappointment and will work diligently
to impress upon its partners and staff the need to improve compliance in
Inspections of Regional and Local Firms
CPAB inspected 21 mid-size and small firms operating on a regional or
local basis between October 1, 2005 and September 30, 2006. While the
inspections showed that firms are striving to continuously improve audit
quality, CPAB reports that several firms must improve in three areas:
- Auditor Independence - CPAB is concerned that several of the firms
reviewed had either no independence policies and procedures or have
ones that are insufficient or not being followed.
- Performance on Audit Engagements - Out of 120 files CPAB reviewed
(primarily high-risk files), 13 contained significant Generally
Accepted Accounting Principles (GAAP) deficiencies that required
restatement and 30 showed significant GAAS deficiencies. As a result
of its inspections, CPAB imposed requirements on three firms, meaning
they cannot accept any new audit clients until they have implemented
all of CPAB's recommendations. For each file that had audit
deficiencies, CPAB required the firm to either carry out further
audit work or add documentation to the file.
- Quality Control and Quality Monitoring - Before an audit opinion is
signed, a quality control review is to be conducted or overseen by a
partner in the firm other than the one responsible for the
engagement. CPAB found that several reviews were conducted too late
in the process, were too superficial and/or were conducted by firm
personnel who lacked the required seniority and experience. CPAB also
found that the mid-size and small firms varied significantly in the
extent and quality of quality monitoring policies. Five of the mid-
size firms, as well as one small firm, did not have a quality
monitoring program in place.
"Overall, many of the mid-size and smaller firms have adequate systems
but in too many of them, we see a need for a greater partner commitment to
improve the emphasis on quality," Boocock said.
CPAB has sent each firm a private report that includes specific
recommendations. The firms have 180 days or less to implement the
recommendations. CPAB will follow up in 2007 to ensure they have implemented
the recommendations to CPAB's satisfaction.
"All firms continue to co-operate with CPAB and we are encouraged by
their understanding that the public interest requires them to place greater
emphasis on audit quality and getting it right every time, with no tolerance
for substandard performance," Thiessen said.
In its report, CPAB also says its reviews of some individual audit
engagements were restricted by lack of access to documents because of legal
privilege. "While CPAB understands concerns about legal privilege, any
restrictions on its reviews are contrary to the objectives of CPAB," Boocock
said. "While the passage of Bill 151 in Ontario and Bill 7 in Quebec will
significantly improve CPAB's situation, the Board continues to seek statutory
authority in other jurisdictions to have access to privileged information
without negating that privilege."
"Over the past three years, CPAB has instigated a number of changes to
improve the quality of audits in this country," Thiessen said. "Most of these
recommendations have been implemented and should enhance the credibility of
financial statements of public companies and confidence in Canada's capital
markets. This credibility should be further enhanced by the new audit
standards that have been issued regarding quality control, management
representations and the authority of auditing standards."
CPAB provides independent public oversight of accounting firms that audit
reporting issuers. Auditors of reporting issuers are required to be members in
good standing with CPAB. As of September 30, 2006 a total of 246 Canadian
accounting firms and 40 foreign accounting firms had registered to become
participants in the CPAB oversight program.
For further information:
For further information: Linda Dundas, Vice President, (416) 913-8262,
firstname.lastname@example.org, Visit www.cpab-ccrc.ca