The Canadian Public Accountability Board (CPAB) has again raised “serious concerns” against several Canadian accounting firms, some of which are responsible for auditing the lion’s share of public companies registered in British Columbia.
Accountants are seen as gatekeepers to public procurement, providing investors with reliable information through audited financial statements and acting as a barrier to corruption.
However, the federal regulator’s findings – including enforcement action in place against four companies with “unacceptable levels of material findings over several years” – remain largely anonymized, so investors cannot know. specific inspection results.
And that lack of full disclosure raises several issues, says Jean-Paul Bureaud, executive director of FAIR Canada, a Toronto-based nonprofit investor rights group.
“We support greater transparency around CPAB’s work and its findings,” Bureaud told Glacier Media in an interview.
“Is the issue with this audit firm so significant that it calls into question the reliability of the financial statements prepared by management?” Bureaud asked.
“Certainly we believe that if it ever crosses that line, it should still be disclosed, because you don’t want investors who are trading on that financial information to continue to trade on something that CPAB – through its work – don’t believe there’s enough audit assurance to back it up, don’t you?” Bureaud said.
Accounting Firm Prohibits Accepting New Audits
The council annually inspects what are known as Canada’s “big four” accounting firms (Deloitte, Ernst and Young, KPMG and PwC) as well as seven smaller ones, five of which have headquarters or offices in British Columbia. Together, these 11 firms audit approximately 97% of all Canadian public companies.
These are the last seven firms where the most significant problems were discovered: only seven of the 75 inspections by the “big four” council produced significant results, while 22 of the 41 files of the other seven were problematic, according to the annual report. of the council in March.
These seven firms are: Davidson & Company LLP, DMCL LLP, Manning Elliott LLP, MNP LLP, Smythe LLP — all with offices in British Columbia — as well as McGovern Hurley LLP and Raymond Chabot Grant Thornton LLP.
The council reports that “significant findings” (defined as a deficiency requiring further audit work) have increased over the past five years, from around 25% of all inspections in 2017 to a peak of around 65 % of inspections in 2020, then around 55% for 2021.
“Enforcement measures are in place for four companies with unacceptable levels of material discoveries over several years,” the report said. Of these four, three are barred from taking new “higher risk” companies public and one is barred from taking new public companies.
“These types of restrictions are imposed when CPAB believes there is a risk to the investing public,” the report noted.
The report goes on to cite a number of less stringent requirements placed on companies, such as enhanced training or independent oversight.
But it’s unclear which company did what and what the council did specifically to address the issues.
The five companies with offices in British Columbia either did not respond or declined to comment to Glacier Media on the council’s report.
“It’s really, really hard to face or face,” Bureaud said, “because it’s like two out of four, you know, seven out of 11. And in some ways, you know, it just creates suspicion and makes people think, ‘What are they hiding?’ And they’re not trying to hide anything, so we’re in favor of a lot more transparency,” Bureaud said.
For its part, the council says it is studying how it discloses its monitoring findings and enforcement actions to the public. A public consultation process concluded last September, with most submissions supporting greater transparency. To do this, the board says securities legislation (administered by each province) will need to be changed. A decision on possible improvements is expected this year, the board says.
Risk-based approach increases severity of outcomes
The 2021 report, however, should also be taken with a grain of salt, Bureaud said. Indeed, the council inspected only 134 audit files among more than 7,000 public companies managed by the accounting firms; and these files are chosen based on risk.
The board says the inspections are not a “representative sample” of a firm’s audit work. Instead, inspections are “biased” in favor of companies in high-risk, complex, or new sectors such as cannabis and cryptocurrency. For crypto companies, for example, the council said inspections found that auditors were not always obtaining enough evidence to substantiate the existence and ownership of digital currencies. In the cannabis industry, significant findings included insufficient evidence to estimate the fair value of biological assets, the report said.
Most of the audit problems were found in smaller companies not listed on the Toronto Stock Exchange (TSX).
“Over the past five years, the overall level of material discoveries in other entities not listed on the Toronto Stock Exchange has remained at an unacceptable level,” the board said.
CPAB Shares Findings with BC Regulators; no further action taken
The findings have the BC Securities Commission (BCSC) concerned, according to its chief accountant and chief financial officer Carla-Marie Hait.
“These seven firms audit the financial statements of numerous reporting issuers for which the BCSC is the primary regulator. So we are certainly paying attention to these inspection results and are concerned,” Hait said, noting that find rates are of particular concern.
However, Hait also said that while the report is concerning, the risk-based approach taken by the board must be taken in context and she noted that only one audit had to be completely redone in the past few years. past two years, according to the report.
The commission has a role to play with the Board of Governors of the Board of Directors as a member of the Canadian Securities Administrators.
Asked what the commission can do about the findings, Mr. Hait replied, “The model we have in place is that CPAB is the primary auditor regulator.
While CCRC’s enforcement is “a risk factor that we consider in our decisions to focus our resources,” Hait said in an interview with Glacier Media.
Hait said the commission knows which companies have been subject to CPAB’s enforcement, while the public does not. She said the BCSC has never taken its own extra-regulatory action against an accounting firm.
Meanwhile, the Chartered Professional Accountants of British Columbia (CPABC), the regulatory body that oversees accountants in British Columbia, said they were also aware of the board’s findings, while the public was not.
“We regularly review all results provided to us by CPAB for BC firms and, where appropriate, take additional regulatory action,” said Lisa Eng-Liu, vice president of public practice regulation. , by e-mail.
Asked if CPABC has ever taken regulatory action against accountants or accounting firms following five years of escalating findings against some B.C. firms, Eng-Liu replied, “We don’t have not yet had the opportunity to discuss the details of the year’s report with CPAB as it has just been released. With respect to specific regulatory actions arising from this report or past reports, CPABC does not is not in a position to comment on specific cases or actions taken due to the confidentiality provisions of our legislation.