Dealers concerned that auditors lack expertise

As one CO at a Vancouver-based member regulated by the Toronto-based Investment Industry Regulatory Organization of Canada pointed out: “My biggest concern is how they carry [out] … their auditing process. Provide us with guidance, show us the rules on best practice, and if you don’t know them, then why are you in here auditing us?”

When an auditor lacks expertise, he or she could be more harmful than helpful to a firm’s compliance processes. Says a CO at another Vancouver-based IIROC-regulated firm: “[The regulator’s] people come in, say we’re doing 10 things wrong, they put in a procedure and we work on it. Then they come in later and say, ‘It was all wrong.’ This is not the way to do things.”

COs at other firms said the qualifications of some auditors are questionable. According to an official at an Ontario-based firm regulated by the Mutual Fund Dealers Association of Canada: “Some don’t have the experience in auditing, and they’re fresh out of accounting school. They don’t know the difference between a labour-sponsored fund and a hedge fund.”

Although dealers pin their frustration on the fact “auditors haven’t walked in their shoes,” regulators say dealer frustration with auditors has a lot to do with ageism.

For example, the average age of an MFDA employee is 35. When an auditor in this age group shows up to review a family-run dealer that has been in the business for 30 years, there are often questions about that auditor’s credentials, says Larry Waite, president and CEO of the MFDA. “There is a perception that we have kids working here,” he says. “You then have dealers in their 60s, who have been working [in the industry for] 30 years, thinking, ‘How could these kids possibly know my business?'”

However, an individual cannot get hired as an auditor at an SRO or a provincial securities commission without some industry experience. “All of the auditors that we hire we expect to have industry experience,” says Maureen Jensen, senior vice president, surveillance and compliance, with IIROC. And they must be chartered accountants.

The lack of experience perceived by dealers, Jensen adds, is actually the result of an auditor having more experience in one area of financial services than another.

To fill those knowledge gaps, regulators often make training the focus of a newly hired auditor’s position. IIROC mandates that all of its new employees learn all of its audit modules. Before a new auditor visits a firm, he or she must spend time learning about its business model in advance. IIROC also pairs new auditors with those that are more senior to ensure that nothing gets missed when auditing in the field.

The regulator also cross-trains its auditors to understand the various departments, such as compliance and enforcement, so the organizational arms operate in sync with each other. Finally, auditors attend lunch-and-learn sessions, in which a speaker from the field comes in to shed light on a particular subject.

But no matter how much education, training and experience auditors receive, Jensen says, there will always be a discrepancy in knowledge between them and dealers.

Some dealers do appreciate an auditor making the effort to understand their business. “The more experienced auditors are principles-based; the less experienced are more rule-based,” says a CO at a Toronto-based IIROC-regulated firm. A more principles-based auditor is more likely to accept creative methods of compliance from dealers, since he or she will have a deeper understanding of business practices and why the dealer keeps records the way it does.

IE