Audit regulator says accounting firms still falling short, announced the headline of a recent Globe and Mail article.

Here’s some of what it had say:

• One of Canada’s Big Four auditing firms has a significant number of problems in its work for the second consecutive year, the national industry regulator has found.
• In its mid-year report released Thursday, the Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, says the unnamed Big Four firm had “significant findings” in four of the seven company audit files CPAB has inspected so far. It will not meet CPAB’s target for an audit firm to have significant findings in less than 10 per cent of its 2023 examined audits. The same firm also failed to meet the target in 2022.
• A significant finding means an accounting firm has fallen short of accepted auditing standards for a material part of a company’s financial statements, and has to go back and do additional work to support its audit opinion. Most significant findings require the auditing firm to carry out additional procedures to determine whether the client company must restate its financials due to material error. CPAB says there has been one restatement so far in 2023; in 2022, there were seven restatements
• CPAB is not revealing the name of the problematic firm of the Big Four – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP – citing the confidentiality provisions of the law that established the oversight body in 2006. CPAB has begun naming firms that are under enforcement actions, but not ones that have an issue with significant findings.

Indeed, CPAB’s report is so discreet on such matters that it stops at referring coyly to “Canada’s four largest audit firms,” not even reminding us of the names. Not that it matters, because the information isn’t exactly what you’d call “actionable.” Even if we knew the firm in question, it would hardly provide a basis for distrusting all audit reports signed by that entity, and even if one did take such a stance, what would be the consequence, that one should avoid (or at least adjust one’s pricing of risk for) taking any stake in the underlying entities? The report seems roughly equivalent to yelling that there’s a fire somewhere, but then declining to tell you where or how big it is, let alone whether it’s burning anywhere close to the flammable curtains.

This largely reflects the delicate and fraught negotiations under which CPAB was formed some twenty years ago, at a time of heightened concern about audit quality (it was one of a package of initiatives often collectively referred to as building “investor confidence”): the focus back then, if I remember correctly, was more on a quasi-collaborative approach to enhancing audit quality than on transparency and culpability (for example, a Globe and Mail story from 2008, titled “Piecemeal System Hampers Watchdog”, pointed out various concerns and constraints shaping CPAB’s work). There’s no question, I think, that CPAB’s existence has injected a necessary additional structure and rigour into the Canadian audit universe, but it’s just about equally clear that the cost-benefit equation (like all such equations) can’t keep rising forever. The use of “falling short” in the recent headline suggests that perfection, or something close to it, is a reasonable object, that anything else is inherently “problematic.” But when one considers the multiple pressures and tensions operating on the audit model (high salary expectations, extreme competition for people and evolving expectations for work-life balance at the entry level, increasing complexity of accounting standards and the transactions and models to which they’re applied, constant changes in technology and attendant risks, the volatility of the global environment within which this all has to be assessed etc. etc.), such expectations appear wildly unrealistic, and counterproductive in ramping up the compliance-driven pressure that makes audit less appealing as a career path.

We should perhaps consider, if only as a thought experiment, that the flawed audit model might actually be working about as well as it ever will, and that the conversation around it needs to be modified and deescalated accordingly . Even by its own criteria, it’s sometimes unclear from CPAB’s report what we’re meant to be outraged about: for instance a cited case in which “Revenue testing identified multiple instances of transactions that required correction by the reporting issuer but the engagement team did not understand the reasons for the corrections” could be read in several different ways. As we previously addressed, KPMG recently opined that “AI will never replace people and KPMG will always have human knowledge in the audit loop.” Although I generally tend to agree, it’s also more than possible that over-hyped expectations of audit will only help to starve it further of people, ultimately making the AI part of the loop necessarily more prominent than anyone truly wishes for…

The opinions expressed are solely those of the author.