Maintain focus on audit quality during economic slowdown, CPAB report says

State of auditing in Canada sound, but challenges lie ahead

TORONTO, April 14 /CNW/ - Audit firms, company management and audit committees must maintain their focus on audit quality during the economic slowdown, the Canadian Public Accountability Board (CPAB) says in its 2009 report on its inspections of audits of public companies.

"The economic downturn that began in 2008 continued to be felt throughout 2009, affecting the financial statements of many companies," said CPAB Chief Executive Officer Brian Hunt. "Management and audit committees faced many challenges, including the need to provide enhanced financial statement disclosures. Auditors have a responsibility to evaluate the adequacy of such disclosures."

While CPAB's 2009 inspections confirm that the current state of auditing in Canada is sound, Hunt said a number of areas require improvement. "The report we are releasing today identifies the top four areas that, if addressed, would have the greatest impact on improving audit quality," he said. These four areas are:

    
    -   Enhancing the role of the second partner who conducts quality control
        reviews of each audit engagement
    -   Improving the evaluation of unadjusted errors in financial statements
    -   Enhancing the transparency of information that audit firms
        communicate to audit committees
    -   Enhancing the quality and transparency of financial statements
    

"While a number of these issues must be addressed by audit firms, we want to emphasize that all involved parties - including management and audit committees - have an important role to play to maintain audit quality," Hunt said.

In its 2009 inspections, CPAB noted a lack of transparency in the information some companies provided in their financial statements. "Although the responsibility for financial reporting rests with preparers of financial statements, CPAB believes that an important public interest role served by auditors is to impress upon their clients their accountability for the quality and transparency of financial statements," Hunt said. "Where there is a lack of transparency in reporting, the auditor should seek remediation by management or inform the audit committee."

Hunt noted that audit committees play an increasingly important role in oversight and corporate governance. "Lack of transparent communication between an audit firm and the audit committee may result in decisions that could have a significant impact on a company's financial statement," Hunt said. "Improving the two-way communication between auditors and audit committees contributes to audit quality, particularly during the current volatile economic environment and in light of the increasing complexity of financial reporting. Audit committees need to make sure they have all the facts and that their companies' financial disclosures are informative."

In addition to reporting on its inspections, the CPAB report identifies a number of challenges that have the potential to negatively affect audit quality in the months ahead.

"These include the ongoing weak economic environment, the pressure on audit partners to generate more revenues and the upcoming transition to International Financial Reporting Standards (IFRS) and new Canadian Auditing Standards," Hunt said.

Hunt said that CPAB is also concerned that some audit committees are pressuring firms to significantly reduce audit fees. "There will always be negotiations between audit firms and audit committees regarding what constitutes appropriate and fair audit fees," he said. "However, given that one of an audit committee's key priorities should be obtaining high quality auditing services, CPAB believes that audit committees should not focus unduly on fees or place unreasonable pressure on audit firms to arbitrarily reduce them."

In 2009, CPAB inspected 53 firms and reviewed 212 audit engagements. These included inspections of Canada's six National firms, recurring inspections of 28 Regional and Local firms and 19 follow-up inspections.

The top four issues identified in CPAB's 2009 report applied to firms of all sizes. CPAB also noted two additional major issues with respect to Regional and Local firms: A lack of audit planning for non-routine transactions; and the need for auditors to ask their clients to more thoroughly document the basis of the accounting for complex transactions.

CPAB used an extensive risk-based approach to select the firms and files it reviewed in 2009, paying particular attention to the audit work performed on financial statement items most likely affected by the economic downturn. Following each inspection, CPAB sent each firm a private report that provided feedback on audit processes, together with recommendations and/or requirements for improvement.

Firms are expected to implement the recommendations to CPAB's satisfaction within a prescribed period of time - typically 180 days.

The full public report of CPAB's 2009 inspections is available on CPAB's website at www.cpab-ccrc.ca.

The Canadian Public Accountability Board is an audit regulator that oversees auditors of Canadian public companies. CPAB's mission is to contribute to public confidence in the integrity of financial reporting of public companies by promoting high quality, independent auditing.

For further information: Brian Hunt, CEO, Canadian Public Accountability Board, [phone], [email protected]; Stephanie Sayer, Devon Group, [phone], [email protected]