The Canadian Public Accountability Board (CPAB) has once 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 considered gatekeepers for the public markets, providing investors with reliable information through audited financial statements, and acting as a barrier to corruption.
However, the federal regulatory board’s findings — including enforcement action in place against four firms with “unacceptably high levels of significant findings over several years” — remain largely anonymized, so investors cannot know the specific inspection results.
And this lack of full disclosure raises several problems, says Jean-Paul Bureaud, executive director of FAIR Canada, a non-profit investors’ rights group based in Toronto.
“We do support much more transparency around CPAB’s work and its findings,” Bureaud told Glacier Media in an interview.
“Is the issue with that audit firm so significant, that it calls into question the reliability of the financial statements that were prepared by management?” asked Bureaud.
“Definitely, we think if it ever crosses that line it should always be disclosed, because you don't want investors who are trading on the basis of that financial information to continue to trade on something that CPAB — through its work — doesn't believe there's enough audit assurance to support it, right?” said Bureaud.
One accounting firm barred from accepting new audits
The board annually inspects what’s called Canada’s “Big Four” accounting firms (Deloitte, Ernst and Young, KPMG and PwC) as well as seven smaller ones, five of which are headquartered or have offices in B.C. Combined, these 11 firms audit about 97% of all Canadian public companies.
It is the latter seven firms where more significant problems have been found: just seven of 75 "Big Four" board inspections had significant findings whereas 22 out of 41 files from the other seven were problematic, according to the board’s annual report from March.
Those seven firms are: Davidson & Company LLP, DMCL LLP, Manning Elliott LLP, MNP LLP, Smythe LLP — all with offices in B.C. — as well as McGovern Hurley LLP and Raymond Chabot Grant Thornton LLP.
The board reports that “significant findings” (defined as a deficiency requiring additional audit work) have risen over the past five years, from about 25% of all 2017 inspections to a peak of about 65% of inspections in 2020 and then about 55% for 2021.
“Enforcement action is in place for four firms with unacceptably high levels of significant findings over several years,” states the report. Of those four, three are restricted from taking on new “higher risk” public companies and one is barred from taking on any new public companies.
“These types of restrictions are imposed when CPAB believes there is a risk to the investing public,” noted the report.
The report goes on to cite a number of lesser enforcement requirements placed on the firms, such as enhanced education training or independent monitoring.
But it’s unclear exactly what firm did what and what the board has done specifically to address the matters.
The five firms with B.C. offices either did not respond or declined to comment to Glacier Media on the board’s report.
“It's really, really hard to make heads or tails out of it,” said Bureaud, “because it's like two of the four, you know, seven of the 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 do support much more transparency,” said Bureaud.
For its part, the board says it's looking into how it discloses its oversight findings and enforcement actions to the public. A public consultation process ended last September, with most submissions supporting more transparency. To do this, the board claims securities legislation (managed by each province) will need amending. A decision on possible improvements is expected this year, the board claims.
Risk-based approach heightens severity of findings
The 2021 report, however, should be taken with a grain of salt as well, said Bureaud. That is because the board only inspected 134 audit files among over 7,000 public companies the accounting firms handle; and these files are chosen based on risk.
The board says inspections are not a “representative sample” of a firm’s audit work. Instead, the inspections are “biased” toward companies in higher-risk, complex or novel industries such as cannabis and cryptocurrency. For crypto companies, as an example, the board stated inspections revealed the auditors did not always obtain sufficient evidence to support 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 stated.
Most of the audit problems have been found in junior companies not listed on the Toronto Stock Exchange (TSX).
“In the past five years, the overall level of significant findings in other non-TSX listed entities has remained unacceptably high,” stated the board.
CPAB shares findings with B.C. regulators; no further action taken
The findings are of concern to the B.C. Securities Commission (BCSC), according to its chief accountant and Chief Financial Officer Carla-Marie Hait.
“Those seven firms do audit the financial statements of many reporting issuers for which the BCSC is the principal regulator. So, we are certainly paying attention to these inspection results and we are concerned,” said Hait, noting the rates of findings are of particular concern.
However, Hait too said while the report is concerning, the risk-based approach taken by the board must be taken in context and she noted only one financial statement has had to be re-stated over the past two years, according to the report.
The commission has a role to play with oversight of CPAB as its chair is a member of the board's Council of Governors.
Asked what the commission can do about the findings, Hait said, “The model we have in place is that CPAB is the primary regulator of auditors.”
Although, CPAB enforcement is “a risk factor that we consider in in our decisions to focus our resources on,” Hait said in an interview with Glacier Media.
Hait said the commission knows which firms have been subject to enforcement by CPAB, unlike the public. She said 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 overseeing B.C. accountants, said it is also privy to the board’s findings, unlike the public.
“We regularly review all of the results provided to us by CPAB for B.C. firms, and when it is appropriate, take additional regulatory action,” said Lisa Eng-Liu, vice-president of public practice regulation, via email.
Asked if CPABC has ever taken regulatory action against accountants or accounting firms stemming from the five years of rising findings against some B.C. firms, Eng-Liu responded: “We have not yet had an opportunity to discuss the specifics relating to year’s report with CPAB as it was just released. With respect to pointing to specific regulatory actions that stemmed from this or past reports, CPABC is not able to comment on specific files or actions taken due to confidentiality provisions in our legislation.”