Up north, the Canadian equivalent of the PCAOB has said that audit quality in America’s hat is on the decline and that the level of significant findings at non-annually inspected firms is “concerning.” This is per the Canadian Public Accountability Board’s 2022 Annual Report [PDF].
Problematic audits are on the rise at Canada’s accounting firms, according to the industry’s national regulator, which found issues in a third of the audits it examined last year, up from 28 per cent in 2021.
The Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, said the increase came largely from problems at small firms with few listed clients, but there were issues all the way up the food chain. CPAB said one unnamed member of the Big Four accounting firms – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PwC LLP – had issues with 29 per cent of its inspected audits and has been directed to develop a “quality action plan.”
In 2022, 13 audit firms were operating under CPAB enforcement actions for most of the year, up from nine in 2021.
Seven companies have restated their financials since CPAB’s 2021 annual report: one client of the Big Four, three clients of other annually inspected audit firms and three of non-annually inspected firms. CPAB said three are in the cannabis industry, two are tech companies, one is a psychedelics company and one is in real estate.
A psychedelics company? Man, we are in the wrong country.
Of the seven restatements required since CPAB’s 2021 annual report, three were cannabis companies, an industry that accounted for one restatement the prior year.
The following inspected audit areas resulted in several restatements:
business combinations (mergers and acquisitions), revenue and long-lived assets.
- The reasonableness of deferred taxes not recorded by management in connection with business acquisitions was not evaluated.
- Insufficient understanding of the arrangements with customers to evaluate whether revenue should have been recognized.
- Insufficient evidence to support significant assumptions used in an asset impairment analysis.
In October, the CPAB — which does not put specific firms on blast as a rule — said that audit quality at three of the Big 4 was acceptable (“significant findings” in fewer than 10 percent of audits inspected) and just one firm had significant findings (we call those deficiencies down here in Burgerland) in more than 20 percent of audits inspected. CPAB has a target of no more than 10 percent.
“This inconsistency is an unacceptable trend,” said Carol Paradine, CPAB’s chief executive officer. “CPAB is taking regulatory action to deal with specific concerns on a firm-by-firm basis.”
Consistent with the inspection insights it published last fall, CPAB continues to observe that firms with strong systems of quality management are more likely to meet the target of fewer than 10 per cent of files with significant inspection findings. Audit firms and their leadership are expected to implement systems of quality management to foster a quality-driven culture.
“High-profile ethical breaches in Canada and internationally underscore the importance of ensuring audit firms have a culture that prioritizes and supports ethical behaviour and decision-making at all levels,” said Paradine.
Over the past five years, audit quality at the Big 4 improved from 2018 to 2020, with a gradual rise in significant findings since.
TSX = Toronto Stock Exchange.
Here’s another interesting bit of info from CPAB’s annual report: while the rest of the entire industry struggles with talent acquisition and retention, employee retention at CPAB remains high at 94 percent. So that’s nice.
GET IT TOGETHER, CANADA.