Audit problems spread at Canadian accounting firms last year, industry regulator finds

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Problematic audits are on the rise at Canada’s accounting firms, according to the industry’s national regulator, which found issues in a third of the audits it examined last year, up from 28 per cent in 2021.

The Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, said the increase came largely from problems at small firms with few listed clients, but there were issues all the way up the food chain. CPAB said one unnamed member of the Big Four accounting firms – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PwC LLP – had issues with 29 per cent of its inspected audits and has been directed to develop a “quality action plan.”

In 2022, 13 audit firms were operating under CPAB enforcement actions for most of the year, up from nine in 2021.

Seven companies have restated their financials since CPAB’s 2021 annual report: one client of the Big Four, three clients of other annually inspected audit firms and three of non-annually inspected firms. CPAB said three are in the cannabis industry, two are tech companies, one is a psychedelics company and one is in real estate.

All public accounting firms that audit public companies must register with CPAB, and any firm that audits at least 100 public companies gets reviewed annually. Those 11 accounting firms audit more than 7,000 companies representing 91 per cent of total market capitalization of Canadian public companies.

CPAB picks some of each accounting firm’s audits for review based on its assessment of high-risk factors. These include complex or emerging companies such as cryptocurrency or cannabis, or areas in which the audit firm may lack some expertise.

CPAB’s key performance metric is what it calls a “significant finding” – where an accounting firm falls short of accepted auditing standards for a material part of a company’s financial statements and has to go back and do additional work to support its audit opinion. CPAB’s standard is significant findings in no more than 10 per cent of a firm’s examined audits.

Three of the Big Four met that target.

Over all, CPAB inspected 67 files from the Big Four and identified significant findings in eight, or just under 12 per cent. In 2021, it identified findings in seven of 75 files, or just over 9 per cent.

The one Big Four firm with issues in 29 per cent of its files met the standard in 2021, CPAB said, while another firm that missed the target in both 2020 and 2021 met the standard in 2022. As a result, the remaining enforcement requirements placed on the latter firm were removed.

CPAB inspects seven other firms annually – Davidson & Company LLP, DMCL LLP, Manning Elliott LLP, McGovern Hurley LLP, MNP LLP, Raymond Chabot Grant Thornton LLP and Smythe LLP.

Over all, it identified significant findings in 32 per cent of those audit files, or 11 of 34, compared with 54 per cent, or 22 of 41, in 2021.

Combining the Big Four with the other seven annually inspected firms yields a findings rate of 19 per cent, down from 25 per cent in 2021.

“The improvements realized at annually inspected firms are encouraging given the significance of the reporting issuers audited by these firms,” CPAB said. “They reinforce the importance of a strong system of quality management to support the consistent execution of quality audits.”

Among the smaller, non-annually inspected firms, CPAB looked at 31 files and identified significant findings in 25, or 81 per cent. In 2021 it identified significant findings in nine of 18 files, or 50 per cent, but it said the results are not comparable because the composition of the non-annually inspected group changes each year.

CPAB has started a multiyear effort to increase the amount of information it releases on enforcement and other regulatory activities. It does not yet attach specific firms’ names to inspection results.

The Globe and Mail asked each of the Big Four firms if they were the one with the high 2022 significant findings rate. PwC and EY declined to answer, citing the confidentiality rules of the CPAB inspection process. Deloitte ignored the question and provided a statement about its commitment to professional standards. KPMG did not respond.