Audit quality trend line positive, Canada's audit regulator reports
2013 inspections show overall improvement in quality, but sustainability is needed
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TORONTO - March 31, 2014 (www.investorideas.com newswire) The results of inspections conducted by Canada's audit regulator improved in 2013, but the risk of restatements is still too high at some firms, the Canadian Public Accountability Board (CPAB) said in its 2013 Public Report released today.
"The Big Four firms (Deloitte LLP, EY LLP, KPMG LLP, PwC LLP) have made significant progress in large part as a result of action plans CPAB mandated after 2011's disappointing inspection results," said CPAB Chief Executive Officer, Brian Hunt. "As a group, they've improved their results by more than 30 per cent in each of the past two years. While it's clear Canadian audit firms are taking the challenge to improve audit quality seriously, it's now time to focus on sustainability."
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.
"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," said Hunt.
However, not all firms are in the same place when it comes to the quality of their audits, nor have they all improved. CPAB says the pace of change needs to be accelerated 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. Specifically, firms need to focus on innovative, longer-term measures such as changing accountabilities within the audit practice/office, limiting who can do public company audits, and better recognizing audit quality in performance reviews. The deeper and longer changes are culturally embedded, the more sustainable they will be, the report says.
The report also points to 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, CPAB is often unable to access audit work done outside of Canada. The report says investors should be concerned when foreign laws and regulations impede or reduce the auditor oversight they've 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.
Transparency regarding CPAB's inspections was high on the 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."
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 and they audit approximately 99.5 per cent of the market capitalization of public companies trading in Canada. In 2013, CPAB inspected 49 audit firms and reviewed 195 engagement files. This included Canada's Big Four firms, 10 other firms reviewed annually, 20 regional and local firms, and 15 follow-up inspections.
The Canadian Public Accountability Board (CPAB) is Canada's audit regulator responsible for the regulation of public accounting firms that audit Canadian reporting issuers. CPAB operates independently from the provincial regulatory authorities who oversee the accounting profession. A world-class audit regulator and a champion of audit quality, CPAB contributes to public confidence in the integrity of financial reporting, which supports Canada's capital markets. CPAB operates from offices in Montréal, Toronto and Vancouver.
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