Ontario Securities Commission launches inquiries at multiple audit firms

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The Ontario Securities Commission says it has started inquiries at multiple accounting firms that have been caught committing ethical violations by other regulators.

The OSC didn’t explicitly name the firms, but Canadian or U.S. affiliates of three of the Big Four global firms – Deloitte LLP, PricewaterhouseCoopers LLP and Ernst & Young LLP – have entered agreements in the past 12 months with regulators to settle charges related to ethical lapses. The U.S. arm of the fourth, KPMG LLP, struck a settlement with the U.S. Securities and Exchange Commission in 2019.

The OSC said the scope of the review “does not presently include individual audits of reporting issuer financial statements previously filed with the OSC.”

Not all four firms commented Friday on the OSC announcement, but each have previously responded to the disclosure of the settlements by saying they are committed to having an ethical culture.

Mike Nethercott, a partner at Deloitte Canada, said in an e-mailed statement Friday, “We share with our regulators a steadfast dedication to compliance in strict accordance with the highest professional rules and standards.”

PwC Canada spokesperson Chiara Battaglia said her firm “is aware of the announcement made by the OSC this morning and are in the process of reviewing the request. We value the trust that our clients and community put in us, and we remain committed to ensuring that we continue to earn this trust every single day.”

All of the global accounting giants have separate legal structures in each country, so a settlement by the Canadian or U.S. firm may not reflect issues in other countries.

The OSC said it has a role in looking at the audit firms because they are “gatekeepers of Ontario’s capital markets” and “play a critical role in investor protection by ensuring that audited financial statements can be reasonably relied upon when making investment decisions. Any actual or perceived issues related to the integrity of financial reporting can undermine investor confidence.”

The OSC said Friday it “will communicate with and consult” the Canadian Public Accountability Board (CPAB), the national entity that regulates accounting firms that audit publicly-traded companies. CPAB previously entered into settlements with PwC and Deloitte, and said it would look at E&Y.

CPAB confirmed the collaboration with the OSC Friday in a statement, with spokesperson Susan Schutta saying it will “continue to address ethics issues through its inspection and enforcement processes, and where appropriate, through investigations.”

Canada created CPAB in the wake of multiple corporate scandals and audit failures at the turn of the century, just as the United States created its Public Company Accounting Oversight Board (PCAOB).

The OSC said it will “seek information about firm policies related to compliance with relevant ethical requirements and the operation of internal whistleblower programs” and “request details about firm procedures with respect to the dating of audit work performed and the implementation of internal training courses.”

The descriptions of the queries match the recent allegations against the firms.

In June, the SEC announced a US$100-million settlement with E&Y’s U.S. firm after 49 of its audit professionals cheated on exams required to obtain and maintain their Certified Public Accountant licences and hundreds of E&Y employees cheated on continuing professional education courses. The SEC said E&Y did not co-operate with the SEC’s investigation, leading to the sizable fine.

CPAB was not part of the U.S. investigation, but said in June it would launch an examination of E&Y’s Canadian operations to find out whether cheating occurred here.

In February, CPAB reached a settlement with PwC’s Canadian firm after more than 1,200 PwC professionals shared answers on tests in mandatory internal training courses from 2016 to 2020.

In September, 2021, CPAB also disciplined Deloitte’s Canadian firm after its employees falsified the date and time stamps on work papers for 29 different audits from 2016 to 2018 by changing the settings on their computers to a different date.

The enforcement orders called for public censure, the development of new internal procedures to prevent the problem from happening again and fines of $200,000 for PwC and $100,000 for Deloitte, designed to recoup CPAB’s investigation costs. CPAB cannot impose fines for economic damages or punitive reasons.

The two firms self-reported the problems to CPAB after whistleblowers raised the issue internally.

PwC’s Canadian unit settled over the same violations with the PCAOB for US$750,000. Deloitte’s Canadian unit settled with the PCAOB for US$350,000, for the same violations identified by CPAB.

In June, 2019, the SEC charged KPMG’s U.S. firm with altering past audit work after receiving stolen information about upcoming PCAOB inspections. The SEC also found that KPMG audit professionals cheated on internal training exams. KPMG agreed to settle the charges by paying a US$50-million penalty and taking other compliance measures.