The Canadian Public Accountability Board (CPAB) has warned that audit quality at the Big Four firm is inconsistent, Canada’s audit regulator found that significant inspection findings had increased across all four firms compared to the previous year and that improvement in the firm’s quality system was required.
CPAB has deliberately shifted focus in 2015 to inspect audits of companies with market caps of C$250m or less to understand if the Big Four’s audit quality improvements have been embedded throughout each of the firm’s audit practice, and in their approach to engagements of all sizes.
As such in its 2015 inspections, CPAB looked at 93 audit files of which around half were from of audits of small-to-medium size market cap, in contrast to the 27 out of 98 audit files from the same calibre businesses inspected the previous year.
CPAB reported that at three of the Big Four, one out of every four files inspected for companies with a market capitalization of C$250m or less held significant deficiencies in applied accounting standards.
Overall the number of files with significant findings has increased from 7 in 2014 to 24 in 2015. Two of the firms have comparable results this year with 2014, while the remaining two firms overall experienced challenges, one particularly with audits of companies with smaller market caps of which multiple significant findings were found.
While at the other firm significant findings were also noted in files of companies with market capitalisations greater than $250m, which is more so than in the other firms.
Brian Hunt, CEO of CPAB, recognises that apart from some exceptions, audit quality is being maintained at larger reporting issuers.
"However, our inspections of smaller reporting issuer audit files show a different result."
The report lists two main areas of concern: executing the basic audit principles, and understanding business processes relevant to financial reporting.
"Issues surrounding professional judgement, scepticism, complex accounting estimates and internal controls have also been considered by the CPAB report.
The CPAB has outlined a range of specific requirements the firms must adhere to, including the remediation of files found with significant failures in professional standards, evaluating what went wrong in the first place, improve training, undertaking a comprehensive quality control review, and delivering an action plan for the appropriate next steps.
Hunt says he is confident that the CPAB will collaborate with all firms to address the problems: "We are now working with all firms to ensure the quality improvements we’ve seen over the past two years are applied effectively, regardless of the size of the issuer or the size of the market."
