April 3, 2012 / 7:20 PM / in 5 years

Quality of some Canada audits seen as inadequate

TORONTO (Reuters) - Canadian auditing firms need to improve the quality of their work to assure they are fulfilling their responsibility to protect investors against corporate fraud and sloppy accounting, according to a watchdog’s report released on Tuesday.

The Canadian Public Accountability Board’s annual review, which examined 245 audits conducted by 88 firms, found the same weaknesses cropping up year and year without much improvement. It follows at least two other reports this year that identified weaknesses in Canadian auditing.

The board “believes the results of this review should be a wake-up call for Canada’s auditing profession,” it said in the report.

After the review, the board said it sought disciplinary action against seven of the firms, while additional firms also were given plans to improve their performances.

Audit firms are “identifying the risks, but they’re not following through on the execution,” Brian Hunt, the board’s chief executive, said in an interview.

A review of files by “Big Four” firms - Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers - found 20 to 26 percent of the cases fell short of Generally Accepted Auditing Standards. Among smaller firms, deficiencies were even more common.

Despite the weaknesses, Hunt said investors could still have confidence in the integrity of public company financial statements audited in Canada.

“Our inspections did not lead to many restatements, and firms are progressing on their remedial action plans,” he said.

SIMPLE CHECKS

The board found weaknesses in basic auditing procedures, such as a failure by firms to run simple checks on a company’s financial processes. In analytical procedures, firms sometimes didn’t assure the accuracy of underlying data. There was a shortage of auditing professionals in the offices of some firms, it said.

The report also found a general lack of supervision within the firms and a failure to have completed work reviewed by peers. There was inadequate professional skepticism by the teams conducting the audits to guard against fraud, it said.

The report follows the board’s February report on auditing of Canadian public companies with primary operations in China. It said auditors often fail to identify and assess the risks of material misstatement in financial disclosures. It said auditors often lack a sufficient understanding of the companies and the culture.

In March the Ontario Securities Commission, Canada’s most powerful securities regulator, issued a report on its review of Canadian stock listings by companies with most of their operations in China and other emerging markets.

That report found weak links at every stage of the listing process, including the role played by auditors.

The OSC initiated the review last year after Sino-Forest TRE.TO, a China-focused forestry company, was accused of exaggerating its assets.

Sino, which filed for creditor protection last week, is the most prominent of a dozen companies with Chinese operations whose accounting or disclosure practices came under fire last year. The spate of allegations shook investor confidence in the oversight of Canadian regulators.

Reporting By Jennifer Kwan

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