Audit Quality Improves in Canada, but at Added Costs

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By Peter Menyasz

Canada’s audit regulator reports continued improvement in audit quality in 2017 but is urging accounting companies to strengthen quality management during the audit process.

The focus on managing for quality will further improve audits, but could also mean higher costs for clients as accounting firms boost resources, Carol Paradine, president of the Canadian Public Accountability Board, told Bloomberg Tax Law.

Increased monitoring of quality during the audit process is the best option to further improve overall quality by identifying and addressing issues before audits are completed, said Paradine, who was installed as the regulator’s president in March.

A decrease in significant issues—inadequate use of professional judgment and skepticism and errors in significant accounting estimates—in audits reviewed by the regulator led to a pilot project in 2017 with two major accounting firms to focus on overall processes and controls and quality management during the audit process, Paradine said.

The pilot project will now be extended to the other large accounting firms. It will include requests to review how new clients are accepted, how background checks on auditors are performed, and the strength of hiring, training, and ongoing education processes, she said.

The firms will also more frequently assess progress on audits to ensure issues aren’t created by last-minute efforts to complete work as deadlines near for filing financial statements, she said. Some firms have already added project management structure to monitor progress, making it easier to detect when an audit team is struggling and more resources are needed, she said.

The regulator isn’t mandating how accounting firms should improve quality management, but the increased focus on monitoring audits will mean more work, she said.

“That could result in additional resource needs,” she said.

Quality Requires ‘Substantial Investment’

Richard Olfert, managing partner for regulatory, quality, and risk management with Deloitte LLP in Winnipeg, confirmed that additional audit quality monitoring requires a “substantial investment” in hiring, training, and other costs.

“The cost of doing audits has gone up. We’re doing our best to manage that,” Olfert told Bloomberg Tax.

But the additional scrutiny also offers potential savings by avoiding restatements that can add even greater cost to the audit process, Olfert said. Improved quality also promotes transparency and investor confidence, he said.

The audit regulator’s latest report confirms that the industry responded well to a “temporary spike” in audit issues and restatements in 2015, and has since resumed the year-over-year trend of fewer audit issues, Olfert said.

The new emphasis on quality management emanates from Deloitte’s evolution from quality reviews after audits are completed to more quality checks during the process, Olfert said. For example, determining if the audit team has the right skills at the right time during the process is “incredibly important,” he said.

BDO LLP is pleased with the “sustained improvement” shown in the regulator’s latest report, said Janet Stockton, the company’s national professional standards partner. The company will continue to ensure its internal control processes support its commitment to quality audits, she told Bloomberg Tax in a statement.

“We regularly review and update our quality management processes, taking into consideration the industry-wide issues raised by CPAB in its annual inspection report,” Stockton said.

None of the other Big Four firms—Enrst & Young LLP, KPMG LLP, or PricewaterhouseCoopers LLP—nor other national and large regional firms covered by the CPAB’s annual report, offered comment on it.

Automation Boosting Audit Quality

Increased use of automation by public companies in preparing records and books is also enhancing audit quality, Paradine said. And accounting firms are increasingly using data analytics and artificial intelligence to make it easier to review thousands or millions of data points, she said.

“It creates the opportunity to perform a much more effective audit,” Paradine said.

Automation already is being used to test unusual journal entries—such as unexpected recording of entries after a company’s books have closed—to ensure that major issues are addressed as early as possible in the audit process, Paradine said.

Olfert agreed, noting that automated tools can significantly improve the consistency of audits, allowing for more consistent reporting and enhanced testing of journal entries. It allows auditors to be more specific in identifying the highest-risk issues—for example, spotting problems in mortgage portfolios, he said.

“That has given us a leg up,” Olfert said.

Deloitte April 3 released a report, based on a survey of its audit and assurance partners across Canada, highlighting areas where chief financial officers and audit committee chairs could improve their companies’ financial reporting and governance activities.

The report covered issues including the effectiveness of finance teams, internal controls, data management strategies, oversight of outsourced services and external parties, risk management processes, audit committees, oversight of financial reporting and controls, oversight of internal and external audit processes, and attention to risks.

Fewer Issues, Restatements in 2017

The regulator’s 2017 report, issued March 27, identified 15 significant findings, including three restatements, among 128 files reviewed. That is down from 24 deficiencies in 135 files in 2016. The 43 findings in 144 files in 2015 represented a sharp increase from the 32 findings in 174 files in 2014.

The 2017 findings confirm that Canada’s public accounting firms have sound methods in place, and in most cases are meeting audit standards, the report said.

“However, recurring inspection findings indicate the need to manage audit quality through robust and effective quality management processes, embedding quality along the full audit cycle, not just assessing it at the end through internal and external inspections,” it said.

The report highlighted ongoing issues with basic audit procedures, inadequate use of professional judgment and skepticism, and errors in significant accounting estimates.

In addition to the Big Four accounting firms, the regulator reviews files from four other national firms—BDO, Grant Thornton LLP, MNP LLP, and Raymond Chabot—and six large regional firms—Davidson & Company LLP, DMCL LLP, Manning Elliott LLP, RSM Canada LLP, Smythe LLP, and UHY McGovern Hurley LLP.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bloomberglaw.comTo contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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