The audit work by Canada’s big four accounting firms was inconsistent in 2015 and needs improvement, the Canadian Public Accountability Board (CPAB) announced on Monday.
In its public report on the 2015 inspections of Canada’s four largest accounting firms (Deloitte LLP, EY LLP, KPMG LLP and PwC LLP), the regulator notes that “significant inspection findings” increased across all four firms compared with the prior year, and that the firms’ quality systems need improvement.
The CPAB’s inspections in 2014 focused on audits of larger cap companies, and this year it shifted its focus to the audit work done on smaller firms. Those 2015 inspections found 24 “significant findings”, compared with just seven in 2014.
“With some exceptions, firm action plans have generally helped maintain audit quality in larger engagements. However, our inspections of smaller reporting issuer engagement files show a different result,” the CPAB report says. “The impact of action plans on the quality of audits of companies with mid and smaller market capitalizations and conducted by smaller audit firm offices is not evident. This suggests that quality processes are not generating consistently good results for all firm audits.”
The CPAB’s inspections found “numerous instances where internal controls work was not well done,” the CPAB report adds, “calling into question how internal controls are tested, the engagement team’s execution of audit fundamentals and understanding of business processes, and the effectiveness of the audit.”
As a result of its findings, the CPAB is requiring the firms to make a number of changes, including” bolstering their systems of quality control for medium and smaller market cap companies; carrying out comprehensive reviews of their quality control systems; and enhancing their training; among other things.
The CPAB will continue to conduct risk-based inspections, with a particular focus on mid to smaller market cap issuers, in 2016. “This work will include a deeper examination of firm quality control systems, and in particular a review of firm culture and tone at the top, organizational structure, accountability, risk identification and staffing,” the CPAB report says.
The regulator also intends to continue expanding its interaction with audit committees, with a focus on mid to smaller cap issuers. “We will also publish information on how to evaluate the audit firm and audit risks, how audit committees are most effectively addressing their oversight role, and on industry-specific issues to explore with their auditors,” the CPAB report says.
The CPAB report also notes that audits of operations in foreign jurisdictions remains a concern for the audit regulators, as it still faces limitations in accessing audit work in certain markets. “We continue to engage with the relevant Canadian securities regulators to make the changes necessary to assist CPAB in obtaining access in order to fulfill our mandate of regulating participating firms,” the CPAB report says.