Audit watchdog’s talks with China over access to audit files still on hold
The chief executive of Canada’s auditing watchdog says that talks aimed at giving the regulator access to files related to the audits of Canadian firms in China broke off earlier this year and have yet to resume.
“We had been negotiating access arrangements with China, and that has recently stopped,” said Carol Paradine, CEO of the Canadian Public Accountability Board. “I think the whole trade environment between Canada, China, the U.S., et cetera, has had an impact on that.”
The CPAB watches over accounting firms, specifically those that audit Canadian companies that have raised money from investors by issuing stock or bonds (reporting issuers). To ensure an audit is sound, the CPAB seeks access to any substantial work done abroad on the foreign operations of those companies.
This would usually entail asking an accounting firm to contact any “component” auditors outside of Canada to access their working papers, Paradine said in an interview with the Financial Post. Some jurisdictions have restrictions on such information leaving the country, which the CPAB could try to gain access to by working with local authorities or by travelling there as part of the inspection, she added.
But in a report last week, CPAB noted that “certain countries,” including China, are still blocking the regulator from inspecting audit work being done there.
“On the matter of access to audit work performed outside of Canada, CPAB continues to experience barriers as we conduct our inspections,” the report said. “Investors should be concerned when foreign laws and regulations impede or reduce the level of auditor oversight that they have come to expect in Canada.”
On the same day its latest report was released, the Canadian Securities Administrators (which, along with the Office of the Superintendent of Financial Institutions and the Canadian Institute of Chartered Accountants, created CPAB in 2003) published proposed rules that could compel some reporting issuers and audit firms to ensure the CPAB is given “enhanced access” to working papers, particularly in other countries.
Paradine said the proposals would help put the board’s access on par with that enjoyed by its counterpart in the U.S.
It would not open up China, though, which has long irked outsiders over a lack of access to the audit files of Chinese companies. Relations between China and Canada have also become strained since the arrest of a Huawei Technologies Co. Ltd. executive last year in Vancouver.
Although the last correspondence was in February, the talks with China have not formally ended, Paradine said, adding that some personnel they had been speaking with may have left their positions.
Paradine said they were at the stage of drafting documentation, “but until you’ve completed discussions, negotiations … it’s hard to tell where it would have ended up.”
CPAB continues to experience barriers as we conduct our inspections
The report released by the CPAB last Thursday was an overview of the audit quality assessments it had completed so far this year of Canada’s four biggest public accounting firms: Deloitte, Ernst & Young, KPMG and PwC.
CPAB reported three out of the four firms (it did not say which) had seen improvements.
“It is CPAB’s expectation that audit firms should achieve a performance target of at least 90 per cent of files inspected with no significant findings by 2021,” the report said. “Currently, one firm is meeting this target; we have observed that this firm is also the most advanced in formalizing its quality management systems.”
Significant findings are “deficiencies in the application of generally accepted auditing standards that could result in a restatement of the company’s financials,” the report said.
Paradine said that the CPAB sees the 2021 goal as a realistic one because, at various times, they’ve seen other members of the Big Four beating that target.
Out of the 66 audit engagement files the board has reviewed so far this year (out of 72 due to be checked by the end of 2019), there were significant findings in 12, which was lower than last year.