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Audit quality at risk in Canada, regulator warns

Brian Hunt, chief executive officer of the Canadian Public Accountability Board


Canada's accounting firms are facing growing pressure from companies to cut their audit fees despite a warning it could lower the quality of financial disclosure.

Brian Hunt, chief executive officer of the Canadian Public Accountability Board, said companies in Europe and the United States have been demanding auditors make significant cuts to their annual fees, and the trend has shown up in Canada since the economic crisis in 2008 and 2009.

"A lot of folks are feeling the company is under pressure, and one way we can save is to reduce the audit fee," Mr. Hunt said in an interview Monday. "The audit committees [of boards]are just asking for an arbitrary 30- or 40-per-cent cut. … What audit committees have to do is step back and think about what they're doing."

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Mr. Hunt said CPAB, which inspects Canada's audit firms annually, has no problem with companies negotiating lower fees in a competitive market, but said some companies have demanded cuts of up to one-third in their annual audit fees, sparking concern that audit quality will suffer.

Audit firms cannot easily slash their services because they must meet acceptable standards or risk being sanctioned by CPAB, Mr. Hunt said. Instead, to absorb the lost revenue they will reduce staff training or hire fewer young auditors.

The result, he said, is that a company's audit may not suffer in the first year, but quality will degrade over time with reductions in training and staff.

In a speech Monday to the Economic Club of Canada, Mr. Hunt said a good audit is a board's best assurance it is effectively carrying out its duties, and said companies should not view an audit as "a commodity, differentiated primarily on price."

Audit fees for large public companies vary widely depending on the industry, the complexity of the firm's operations and the business issues facing the company in a given year.

Canada's largest public company, Royal Bank of Canada, spent $24.3-million on audit and related fees last year, up from $23.2-million in 2009. BCE Inc., an example of a large non-financial company, paid $11.5-million last year for its audit, down from $13.9-million in 2009.

CPAB reported Monday that it placed "requirements" on three audit firms last year, while two firms that were sanctioned in 2009 continued to face the same requirements in 2010.

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Mr. Hunt said the sanctioned firms are either prohibited from taking new audit clients while under review, or are only allowed to take simple audit cases. He would not identify which firms are operating under the limitations, nor whether any of them are among Canada's largest accounting firms.

Mr. Hunt said while audit quality is generally good in Canada, he is concerned that it did not appear to improve last year. The regulator reviewed the work of 40 firms in 2010 – and did follow-up inspections of 29 others previously reviewed – focusing in particular on the largest four firms in Canada that audit the biggest corporate clients.

The regulator complains in its latest report that some of those firms appear to react to issues about audit files only when they are raised by CPAB inspectors, and are not implementing broader measures to improve quality throughout the firm.

Mr. Hunt said CPAB is urging firms to ensure that senior audit partners overseeing a file spend more time reviewing the work of junior auditors to bring better "professional skepticism" to a file.

CPAB also wants second-tier oversight by a quality-review officer – who typically reviews the highest-risk issues in an audit file – to become more rigorous. Mr. Hunt said engagement quality reviewers should be held more accountable for audit results by tying their compensation to the quality of the audit work.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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