June 18 , 2013
Canadian consultation provides homegrown response to international audit proposals
TORONTO--How best to maintain auditor independence and enhance professional skepticism are among the key recommendations emerging from a Canadian consultation effort that examined proposed international reforms aimed at adding value to financial reporting.
The Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board (CPAB) launched the Enhancing Audit Quality (EAQ) initiative to gain stakeholder input on developments taking place in jurisdictions hardest hit by the financial crisis, such as Europe and the United States.
The goal of the proposed reforms is to improve the relevance and quality of the audit function.
Three working groups of prominent Canadian business people carried out the EAQ effort examining questions about enhancing audit quality, developing consultation papers and inviting comments on their analysis and conclusions. A steering group provided oversight.
"All of the issues that the working groups examined were through the lens of how they would affect audit quality in Canada," explained David Brown, chair of the EAQ Steering Group. "Generally, the international proposals have triggered timely and thoughtful analysis and debate among investors, auditors, regulators and standards setters globally."
The three working groups each addressed a specific focus area: the auditor reporting model, auditor independence and the role of audit committees in external auditor oversight.
"The single most contentious issue addressed in the report is the potential threat of a lack of audit firm independence from an institutional perspective," said Brown, a Canadian lawyer and former chair of the Ontario Securities Commission. International regulators have suggested a number of remedies ranging from subjecting audit firms to term limits to calling for mandatory retendering of audits.
"The conclusions of the EAQ initiative are that mandatory audit firm rotation or mandatory retendering are not the best approaches," noted Brown. "The preferred approach is having audit committees perform a periodic review of their audit firm at least every five years, resulting in a recommendation to retain or replace the audit firm. A report summarizing the results of the comprehensive review should then be included in an entity's public disclosures which would strengthen transparency."
It is noteworthy that other jurisdictions are now beginning to explore the benefits of the Canadian suggested comprehensive review. Such reviews would go beyond assessing independence threats to also focus on issues such as the application of auditor skepticism with the aim of enhancing audit quality. The overriding benefit is that audit committees can use the comprehensive review to support their ongoing oversight of the external auditor with the best interest of shareholders in mind.
It was also felt that the audit committee's evaluation of auditors would benefit from having increased information about CPAB's inspection findings. CPAB's current annual report includes summary information about the results of audit firm inspections. Providing access to relevant CPAB inspection findings will support audit committee oversight and evaluation of auditors.
The Canadian Public Accountability Board (CPAB) is Canada's audit regulator, dedicated to protecting the investing public's interests. CPAB regulates the auditors of Canadian public companies through its national inspection program. CPAB's risk-based inspection process focuses on key audit risks that could have the greatest impact on audit quality. By promoting high-quality, independent auditing, CPAB contributes to public confidence in the integrity of financial reporting, which supports our capital markets.
CPA Canada is the national organization representing the Chartered Professional Accountant (CPA) profession in Canada. The Canadian Institute of Chartered Accountants (CICA) and The Society of Management Accountants of Canada (CMA Canada) created the organization on January 1, 2013, to support unification of the Canadian accounting profession under the CPA banner. CPA Canada is responsible for providing services to CAs and CMAs on behalf of CICA and CMA Canada as well as to CPAs and CGAs participating in the unification effort. CPAs will serve the public interest across all sectors of the economy with integrity, sound ethical practices, disciplined regulation and proven strategic management and financial expertise. Accounting bodies representing almost 90 per cent of Canada's professional accountants are committed to unification or have already merged under the CPA banner.