• Tue. Nov 29th, 2022

Why is the Ontario Securities Commission reviewing the ethics of Canadian audit firms?

ByChad J. Johnson

Sep 25, 2022

TORONTO, September 25, 2022 – The Ontario Securities Commission has announced that it will be conducting targeted investigations of public accounting firms that audit Ontario reporting issuers. Audit oversight generally rests with the Canadian Public Accountability Board (CPAB), the national body that oversees Canadian public accounting firms, which also conducts audit inspections.

OSC says its decision is the result of ethical violations identified by regulators in Canada and other jurisdictions [our italics]. He will ask for specific information on the internal policies and procedures of audit firms. Although audit inspections are the responsibility of the national audit oversight body, the OSC says the scope of their review does not currently [our italics] include individual audits of reporting issuers’ financial statements previously filed with the OSC.

Under its enabling legislation, CPAB must report to the OSC and the Ontario government on its activities and submit an annual report on its affairs. (The OSC in turn is a member of the co-ordinating group of securities regulators known as the Canadian Securities Administrators or CSA.) The timing of the announcement coincides with recently released enforcement actions not only by CPAB, but by America’s audit watchdog, the public company. Accounting Supervisory Board (PCAOB).

Public PCAOB reports point to ethical lapses in Canadian accounting firms

The announcement indicates that the OSC will seek information about the company’s policies relating to compliance with relevant ethical requirements and the operation of internal whistleblower programs. As Canadian Accountant reported, PwC Canada voluntarily disclosed to regulators that its employees shared responses to mandatory internal training courses and were fined earlier this year.

The OSC will also request details of the firm’s procedures with respect to the dating of audit work performed and the implementation of internal training courses. Deloitte Canada was fined a year ago for dating working papers over a 16-month period. And, as Canadian Accountant reported, Vancouver-based Hay & Watson was censured earlier this month by the PCAOB for backdating its working papers, in relation to a California-based company listed on a Canadian stock exchange.

In its statement, the OSC said, “As the guardians of Ontario’s capital markets, auditors play a vital role in protecting investors by ensuring that audited financial statements can be reasonably relied upon when making investment decisions. Any real or perceived problem with the integrity of financial reporting can undermine investor confidence. »

Under the Biden administration, the PCAOB appears to be increasing its audit inspections and enforcement action, after eliminating Trump administration appointees at the Securities and Exchange Commission. In 2021, the US audit watchdog issued five enforcement actions against Canadian companies, more than the previous two years combined. Unlike in Canada, where the National Audit Inspector does not publish the names of the firms he inspects, the PCAOB provides inspection reports to the public that name the firm and provide more details, including the name of the lead audit partner and the written response. of the firm. These actions have contributed to the perception of greater transparency of verification inspection in the United States than in Canada.

Are the OSC and CPAB communicating effectively?

A year ago, the Auditor General of Ontario, Bonnie Lysyk, released a value-for-money audit of the OSC, which largely focused on the relationship between the provincial securities regulator and the CCRC. The Auditor General has found that the OSC has limited authority to require formal communication from CPAB.

As part of the OSC’s ethics investigations, the Commission said it will “contact and consult with CPAB,” which will continue to address ethics issues through its inspection and review processes. ‘application. The OSC noted in its statement that CPAB has, to date, imposed enforcement actions on two of the four largest firms, in response to self-reported breaches of professional standards.

What the OSC might do if it is not satisfied with internal controls is an open question. Generally, CPAB is responsible for inspection and compliance, including internal controls. However, in 2014, EY Canada agreed to pay an $8 million fine for its audit of Sino-Forest, under the Commission’s no-challenge rules. As part of the settlement, the accounting firm agreed to change its internal policies on emerging markets, following allegations that it failed to exercise sufficient professional skepticism in conducting its audits. (Ernst and Young, the global brand that includes EY Canada, is currently modeling a split of its audit and advisory business lines, driven by increased regulatory oversight and enforcement.)

Earlier this year, the Ontario government announced significant governance changes at the OSC, selection Grant Vingoe as the first dedicated CEO, and by appointing Heather Zordel as thExecutive Chairman of the Board, who is responsible for the overall stewardship of the OSC, including strategic planning and board governance.

Colin Ellis is editor of Canadian Accountant.