The Canadian PCAOB Says One Big 4 Firm Keeps Screwing Up Audits But Won’t Say Which One It Is

Shall we speculate wildly which Big 4 firm is not meeting the Canadian Public Accountability Board’s generous standards?

The Globe and Mail reports:

One of Canada’s Big Four auditing firms continues to have a significant number of problems in its work, the national industry regulator has found.

For now, the Canadian Public Accountability Board, which oversees the firms that audit publicly traded companies, is not revealing the name of the firm, citing the confidentiality provisions of the law that established it in 2006.

That could change, however.

CPAB says in its midyear report of inspection results that one of the Big Four audit firms — Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP — had “significant findings” in more than 20 per cent of its audits. The other three had these significant findings in fewer than 10 per cent of audits.

The CPAB report [PDF] adds that the three firms doing well continue to make improvements to their system of quality management. “However, we continue to observe a high level of significant findings at non-annually inspected firms,” it said.

We have completed 61 of 67 planned file inspections across Canada’s four largest audit firms and identified significant findings in seven of those files. This compares to seven significant inspection findings across 75 inspections in 2021. Three of the four firms had fewer than 10 per cent of files with significant findings. One firm had findings greater than 20 per cent. CPAB has a target of no more than 10 per cent of files inspected with significant findings.

Comparing this to the 2021 annual report released in March of last year [PDF]:

In 2021 we inspected 134 audit files and identified significant findings in 38 files. This 28 per cent finding rate compares to 29 per cent across 119 files in 2020.

Two of the four largest firms met the target of no more than 10 per cent of files inspected with significant findings. One large firm that met the target in the prior year did not meet the target in 2021. None of the four largest firms had significant findings of more than 15 per cent.

CPAB’s quality management assessments are underway for the Big 4 plus a fifth annually inspected firm that also shall not be named. “Preliminary indications are that firms have continued to make progress in developing or refining controls to respond to deficiencies identified in 2021. Nevertheless, the level of significant inspection findings at one firm indicates that certain controls at this firm may not be designed appropriately or operating effectively,” it said.

The findings will be published in the March 2023 annual report, no firms will be named there either.

CPAB has released a proposal to start naming names via public inspection reports much like the PCAOB does however the process could take several years as it requires public comment and legislative changes. Beginning in 2023, CPAB will disclose significant enforcement actions imposed on a firm and recommendations which were included in a firm report but not addressed by the firm; in the longer term, CPAB will work on securing legislative changes which will allow for mandatory disclosure of issuer-specific significant inspection findings to the reporting issuer’s audit committee and individual public inspection reports for each audit firm inspected by CPAB.