Canada’s four largest public accounting firms have more work to do in a number of areas to improve audit quality and achieve consistent adherence to internal and professional standards, the Canadian Public Accountability Board (CPAB) aid today in a third public report on its inspections of accounting firms.

Today’s report covers the CPAB’s 2005 quality inspections of the four largest public accounting firms in Canada: Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP.

It found all the firms have more work to do in two areas: auditor independence and performance on audit engagements

On the question of independence, the CPAB said in testing the investment holdings of the firms’ partners and senior staff for compliance with their policies and procedures, it is finding “an unacceptable rate of exception”.

The firms are in the midst of auditing compliance with independence requirements, and the CPAB found, “The results of the audits to date are startlingly poor in all firms. In each of the four firms, more than 50% of the individuals subject to audit were found to be in violation of at least one aspect of firm policies. Most of the exceptions involved the failure of individuals to input into the investment monitoring system some of their investments. However, each firm found cases where the non-reported investments were securities on the firm’s prohibited investment list.”

It also found, “there is also a need for continued improvement with respect to performance on audit engagements”. It reports that out of a total of 87 audit engagements selected for review in the four firms, “five engagements had such serious deficiencies that we concluded that those audits were not conducted in accordance with generally accepted auditing standards. A significant number of other engagements had departures from firm and professional standards.”

The CPAB says that the scope of its reviews of some individual audit engagements was restricted by lack of access to documents because of legal privilege. “While we understand concerns about legal privilege, any restrictions on our reviews are contrary to the objectives of [the] CPAB, and we are urgently seeking statutory authority to have access to privileged information without negating that privilege.”

Apart from this issue, the CPAB says it is encouraged by the continuing co-operation it is receiving from all four firms and, given the improvements required in a number of areas, their understanding that the public interest requires them to place greater emphasis on audit quality.

Each firm inspected has received a private report from CPAB that includes specific recommendations. Each firm has accepted the CPAB’s recommendations and has provided written commitments that problems identified will be remedied. The firms have 180 days to implement the recommendations.

As for last year’s recommendations, the CPAB says, “Progress has been made by each firm since our initial quality inspections in 2004, and substantially all of the recommendations made to the firms following those initial quality inspections have been implemented. In particular, the firms have strong quality leadership and tone at the top, and generally effective controls over client acceptance and continuance, human resources and quality monitoring.”

It notes that, combined, the big four firms audit more than 4,000 entities that are public companies or other reporting issuers in Canada, representing about 63% of the total market by number of clients and, it estimates, more than 90% if measured by the market capitalization of the entities audited.