Two of Canada’s Big Four accounting firms failed to meet regulators’ standards for quality audits last year, part of a continuing increase in problematic work.
The Canadian Public Accountability Board (CPAB), which oversees firms that audit publicly traded companies, said in its annual report to be released Tuesday that a Big Four firm had issues in 29 per cent of the company audits CPAB examined, the same proportion as the firm had last year. Another Big Four firm, which met standards in 2022, fell below that level in 2023, with issues in 14 per cent of audits examined.
The Big Four accounting firms are Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP, but CPAB does not disclose the specific inspection results for each firm because of the rules crafted 20 years ago for its founding.
CPAB has been engaged in a multiyear effort to expand its transparency, first by disclosing enforcement actions based on its inspections. It’s currently seeking changes in provincial laws and regulations to allow for the release of condensed versions of its inspection reports.
Ernst & Young and KPMG declined to comment on their inspection reports Monday, while the other two firms could not be reached via e-mail. Firms that have responded to The Globe and Mail’s past questions about their inspections have cited the confidentiality rules of the CPAB inspection process.
Audit regulator says accounting firms still falling short
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 13 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 requires companies to have significant findings in no more than 10 per cent of a firm’s examined audits.
An audit firm that repeatedly has significant findings that it cannot or will not fix is subject to enforcement actions, which include penalties such as a prohibition on working with a specific client, a ban on taking on new clients, or termination of its registration with CPAB.
CPAB said it inspected 130 audit files in 2023 and found “the results were mixed, with inconsistency across all categories of firms.” The rate of significant findings – in 34 per cent of audits – was higher than the 33 per cent in 2022 and the 28 per cent in 2021.
“Certainly, we continue to be concerned with the level of significant findings at some firms, and will use a variety of regulatory tools to proactively encourage strong audit quality and to ensure adequate remedial measures are taken to address audit quality deficiencies,” Carol Paradine, CPAB’s chief executive officer, said in a statement.
Over all, CPAB inspected 63 files from the Big Four and identified significant findings in 10 files, or 16 per cent. In 2022, it identified findings in eight of 67 files, or just under 12 per cent.
In the list of other annually inspected firms apart from the Big Four, CPAB added Crowe MacKay LLP and De Visser Gray LLP in 2023. The list already included Davidson & Company LLP, DMCL LLP, Manning Elliott LLP, McGovern Hurley LLP, MNP LLP, Raymond Chabot Grant Thornton LLP and Smythe LLP.
It identified significant findings in 39 per cent of those nine firms’ audit files, or 15 of 38. That compares with 32 per cent, or 11 of 34, for the seven firms in the category in 2022.
CPAB says that of these nine, enforcement actions were in place for six with “unacceptable levels of significant findings over consecutive years.” Only three of the six had improved inspection results in 2023, CPAB said. “Decisions will be made in 2024 regarding the continuation, modification or termination of existing enforcement actions.”
Combining the Big Four with the other nine annually inspected firms yields a findings rate of nearly 25 per cent, up from 19 per cent in 2022 and back to 2021 levels.
Among the smaller, non-annually inspected firms, CPAB looked at 29 files and identified significant findings in 19, or 66 per cent. It’s an improvement from 2022, when there were significant findings in 81 per cent. But CPAB said the results are not comparable because the composition of the non-annually inspected group changes each year.
David Milstead