PCAOB releases two new, divergent inspection reports for Canadian accounting firms

TORONTO, September 2, 2024 – The Public Company Accounting Oversight Board in the United States has released two new inspection reports on the same day that vary widely. The US audit watchdog released one inspection report for Deloitte LLP, a member of the Big Four, and the largest accounting firm by revenue in Canada. It also released an inspection report for Kreston GTA LLP, which is based in Markham, Ontario and is a member of Kreston Global. 

Under the Sarbanes-Oxley Act, registered accounting firms outside the United States are subject to PCAOB inspections in the same manner as US firms. Since the inception of the PCAOB's international inspection program in 2004, the PCAOB has conducted inspections of one or more registered firms located in more than 50 non-U.S. jurisdictions, including Canada. In 2023, Deloitte Canada was the principal auditor for 37 clients under PCAOB jurisdiction, and Kreston GTA was the principal auditor of five. 

Deloitte Canada continues its successful run of US inspection reports

The PCAOB inspected five audits conducted by Deloitte in 2023. In four of the five, Deloitte was the principal auditor, and the US audit watchdog found a significant deficiency rate of 20 per cent. The PCAOB did not state whether Deloitte was the principal auditor of “Issuer A” in which the deficiencies were found. The deficiencies were related to revenue and in general were the result of inadequate testing and evaluation procedures. 

In a new section of the reports, in which firms are asked to disclose any potential instances in which auditor independence was compromised, Deloitte brought forth issues related to financial relationships and non-audit services, among others. The PCAOB did not identify any instances of potential non-compliance related to maintaining independence. 

Deloitte Canada has had a record of successful inspection reports under the five-year stewardship of chief executive officer Anthony Viel. Since 2015, when the firm had a deficiency rate of 100 per cent on seven audits, Deloitte’s deficiency rate has fallen gradually to no more than 20 per cent over the past four years. In its response to the report, Deloitte reaffirmed its commitment to audit quality. 

Kreston GTA respectfully disagrees with the PCAOB

According to a 2023 market report by Audit Analytics Ideagen, Kreston GTA audits three companies registered with the US Securities & Exchange Commission, two of which are in the mining sector. The PCAOB inspected three audits conducted by Kreston GTA in 2023 and found a significant deficiency rate of 20 per cent. The firm was the principal auditor in all three engagements. 

The US audit watchdog, which focused its inspections on income statement and balance sheet accounts, did not identify any audits with an incorrect opinion on the financial statements. It did, however, identify multiple deficiencies in all three audits, and 18 deficiencies related to non-compliance with PCAOB standards or rules. Whereas the PCAOB identified two issues related to the maintaining of independence, Kreston GTA did bring any independence issues to the attention of the American audit regulator.

In its response to the report, the firm “respectfully” disagreed with most of the findings cited by the PCAOB, and stated: 

Considering all the facts and circumstances related to certain findings, we believe the engagement team has obtained sufficient appropriate audit evidence, and any contrary conclusion is patently erroneous.

The firm also noted that it had worked with an “external consultant with over then [sic] ten years prior inspection experience with the PCAOB.” Kreston GTA also affirmed that it “continues to be steadfast in our dedication to making audit quality our top priority.” 

The Kreston GTA response is virtually the same as a response provided by PKF Antares Professional Corporation in a report released earlier this year. As noted by Canadian Accountant, the PCAOB found multiple-defiencies in one of the audits of the Calgary-based firm, for a company in the consumer staples business. 

Both replies referred to an external consultant with over 10 years of prior experience with the PCAOB. Both firms used similar language and called contrary conclusions “patently erroneous.” In August 2023, the Canadian Public Accountability Board — the equivalent of the PCAOB in Canada — released an enforcement action against the firm, prohibiting PKF Antares from “accepting new medium and high-risk reporting issuer audit clients.” 

Deloitte Canada and Kreston GTA represent audit market forces

The four largest accounting firms (Deloitte, Ernst & Young, KPMG, and PwC) audit 90 per cent of public companies by market capitalization in Canada. These are typically corporations listed on the Toronto Stock Exchange — names familiar to many Canadians —  of which many are multinational corporations listed on both US and Canadian exchanges. Smaller accounting firms pursue much smaller public companies on the TSX and secondary markets. 

Accordig to the Audit Analytics Ideagen report, Canadian accounting firms audit just two per cent of public companies registered with the US SEC. Homegrown national firm is the leader, with a 13.64% market share among all Canadian firms, and Kreston GTA, with three SEC registrant clients, at just over two per cent. 

Colin Ellis is a contributing editor to Canadian Accountant.