14 questions for the future of the audit profession

TORONTO – Is it possible that Canada’s auditors have adopted an unwise survival strategy?

In the past 10 years, a combination of weak standards (IFRS), generous Supreme Court decisions (Livent), and cases of financial trickery has severely limited the value of audited financial statements. There is little useful benefit, in my opinion, in the services that auditors are willing to provide. Exactly which concepts and quality standards do auditors legally stand behind?

Manipulated financial information is widely accepted in Canada and investor dollars are being squandered on suspect companies that report non-cash-based results. The marijuana sector is the most obvious example of this and — as was recently widely reported in The Globe and Mail, BNN, and other media outlets — many cannabis industry executives agree with my analysis.

Canada has not had a thorough, independent examination of the fairness of financial reporting since the era of the 1985 Alberta bank failures (1986-1987).  It’s time for regulators and the accounting profession to seriously consider the role of auditors in Canadian business.

If it were up to me, I’d ask them to start with these 14 questions:

1.   Whether the primary “customer” of the audit industry is corporate management (i.e., officers and directors) or more deserving investors and creditors, as the CPA Canada Handbook proclaims, when referring to “existing and potential investors … lenders and other creditors.”

2.   Whether the auditors’ ethical code is tolerant of the coaching of clients on how to circumvent reporting rules.

3.   Whether current reporting standards permit the hiding of losses, bloated cash flows and financial value fantasies.

4.   Whether negative impacts of related party transactions are to be measured and reported rather than buried.

5.   Whether generous remuneration schemes by corporate officers and directors should be hidden in vague note disclosures.

6.   Whether the definitions of what constitutes “audit evidence” should stress the importance of independent, third party, transaction-based data, as opposed to figures provided by management.

7.   Whether ethical behaviour and “presents fairly” are to be stressed subjects in education programs and on-the-job practice?

8.   Whether materiality clichés, such as percentages of sales or costs, should be replaced by requiring evidence of probable dollar impacts on the economic decisions of readers of financial statements.

9.   Whether losing a client because of disagreements over financial measurement and disclosure should ever end an auditor’s career.

10. Whether clear prohibitions of professional judgment should be established as to whether auditors can ignore nasty tax treatments by clients, by looking the other way.

11. Whether premature or hoped-for audited future revenue recognition is to remain permissible, and be recorded months or years in advance of mere “possible” cash receipt. (IFRS is no more than an extreme of non-cash accrual accounting, absent a time horizon.)

12.  Whether IFRS and other “balance of probability” guesses by management should be allowed or replaced by higher required levels of assurance.

13.  Whether gross exaggerations made in Court, such as how increased legal liability will lead to fewer auditors and less choice for Canadian business, holds any merit.

14.  Whether low-quality, easily-manipulated IFRS should still be supported in Canada through platitudes and falsehoods, at the cost of increasing investor losses.

Several decades in the previous century were required in Canada to improve financial reporting for investors and creditors. Why are many CPAs now sitting on their hands instead of demanding that our lawmakers take clear action about protecting investors? Silently rationalizing even a few of my 14 questions is unconscionable. 

The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers.

Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research. They are the co-authors of Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth. Learn more at Accountability Research Corporation and Rosen & Associates Limited.