Accounting firms falling short

Canada’s four largest accounting firms still have some work to do to improve audit quality and achieve consistent adherence to internal and professional standards, according to the Canadian Public Accountability Board (CPAB).

“While a number of recommendations have been made to each firm, they have all made progress since we first inspected them in 2004, and each one has given us written commitments that the problems we identified in this round of inspections will be remedied,” said CPAB chairman Gordon Thiessen.

This is the third public report issued by CPAB, which examined the practices of Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP. These four firms are responsible for auditing more than 4,000 public companies, accounting for 90% of the market capitalization in Canada, making their own compliance regimes vital to the overall capital markets.

Shortfalls in internal compliance with policies and procedures were cited in the report. All four firms have policies in place governing investment by key employees in companies they deal with. More than half of the individuals governed by these policies were found to be in breach of the policy.

For the most part, the violation in question was that the individual had not reported their investment, but at each firm there were cases of staff holding investments which were prohibited by the firm.

The CPAB notes, however: “There is no evidence in any firm of improper motivation in holding or failing to report holdings of client securities.”

The board also found “serious deficiencies” in five of 87 audit which it reviewed, finding they were not conducted in accordance with Generally Accepted Auditing Standards (GAAS). In each audit, CPAB said there was “insufficient appropriate audit evidence to support the unqualified audit opinion that was given.”

The CPAB has issued private reports to each of the firms, outlining corrective measures and giving the firms 180 days to implement the recommendations. The board will re-examine all four firms in 2006.

“CPAB is encouraged by the continuing co-operation it is receiving from all four firms and their understanding that the public interest requires them to place greater emphasis on audit quality,” Thiessen said.

On the up-side, CPAB says all four firms have substantially implemented all of the recommendations made by the board in 2004.

“The firms have strong quality leadership and tone at the top and have generally effective controls over client acceptance and continuance, human resources and quality monitoring,” said CPAB CEO David Scott.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com