Audit Deficiencies Got Much Worse Among Big 4 Firms in Canada

I came across an article on the site Canadian Accountant this morning that said Canada’s audit regulator, the Canadian Public Accountability Board, recently issued its annual inspection results for 2018, finding significant audit deficiencies increased from 15 in 2017 to 34 in 2018.

Thirty-four total significant deficiency findings might not seem that bad compared to U.S. audit firms inspected by the PCAOB. I mean, KPMG US alone had 26 audits that were significantly crappy of the 52 inspected by the PCAOB in 2017. But I think the most eye-catching thing, though, is that significant audit deficiencies (or “findings”) in Canada more than doubled year-over-year.

CPAB defines a significant inspection finding as “a deficiency in the application of generally accepted auditing standards that could result in a restatement.”

So I took a look at CPAB’s 2018 inspection report to see specifically how the Big 4 firms fared in 2018. Two seemed to do fairly well; the other two didn’t. The shitty thing is CPAB doesn’t disclose how many problem audits each firm had.

But first it’s worth noting that the 34 total deficiency findings in 2018 were from 32 firms inspected—14 that audit 100 or more reporting issuers and 18 that are typically inspected once every three years. Those 14 firms included:

  • Deloitte
  • Ernst & Young
  • KPMG
  • PwC
  • BDO
  • Grant Thornton
  • MNP
  • Raymond Chabot Grant Thornton
  • Davidson & Company
  • DMCL
  • Manning Elliott
  • RSM Canada
  • Smythe
  • UHY McGovern Hurley

Of these 14 firms, 122 audit engagement files were inspected by CPAB. The other 18 firms aren’t named in the report, but out of those firms, 18 audit engagement files were inspected.

Of the Big 4 firms in Canada, 80 audit engagement files were inspected, so an average of 20 per firm, which is much less than the 50ish audits on average that the PCAOB has inspected from each Big 4 firm in the U.S. in recent years.

In 2018, CPAB found 16 of the 80 engagement files had significant deficiency findings, up from six in 2017. That year 86 engagement files were inspected. So, the Big 4 came back down to earth in 2018 after an unusually good 2017.

In its report, CPAB said:

Two of the firms’ inspections results were comparable to 2017.

The other two firms experienced an increase in findings. One firm is expanding its root cause analysis to determine if additional factors are impacting its audit quality and amending its action plan, as required by CPAB. The other firm is developing a detailed action plan with both immediate and longer-term initiatives, including targeted communications of quality expectations to the partnership at large and a root cause analysis, to address these unacceptable results. All four firms must continue to focus on enhancing their quality management systems.

We’d love to know from our friends to the north who the two firms with the most deficiencies are. My guess is the firm addressing its “unacceptable results” begins with a “K” and ends with a “G,” based on the problems it seems to be having everywhere else in the world. But any guesses or confirmations are welcome.

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