US audit and accounting watchdog censures Ernst & Young Canada partner
US Public Company Accounting Oversight Board levies fine on Canadian accountant over treatment of receivables allowance in audit engagement
TORONTO, Jan. 4, 2023 – The Public Company Accounting Oversight Board has censured a partner at Ernst & Young LLP in Canada, fining the Canadian accountant $65,000, and barring him from being associated with a registered public accounting firm. The US audit watchdog censured Martin Lundie, CPA, CA, for deficiencies related to the 2019 audit of Just Energy, a public company based in Mississauga that trades on the TSX and NYSE.
Just Energy sells gas and electricity to residential and commercial customers in North America and the United Kingdom. Its two largest North American markets are both located in Texas, “JE Texas” and “Fulcrum,” the assets relevant to the order by the PCAOB. EY Canada had served as Just Energy’s auditor since 2011. In 2019, Just Energy filed restated financial statements, which precipitated a class-action lawsuit by Siskinds LLP, alleging material understatement in the company’s financial disclosures.
The lengthy, 17-page PCAOB order, states that Mr. Lundie, the engagement partner in 2019, “authorized the issuance of EY Canada’s audit reports expressing unqualified opinions on Just Energy’s financial statements and the effectiveness of Just Energy’s internal control over financial reporting.”
Receivables allowance understated in financial statements
The crux of the matter was related to the company’s method for determining its receivables allowance. According to the PCAOB, before fiscal year 2019, Just Energy recorded its receivables allowance based on incurred losses, in accordance with the then-applicable IFRS accounting standard. Starting with fiscal year 2019, Just Energy was required to — and did — adopt IFRS 9, Financial Instruments, which required loss recognition based on expected credit losses (“ECL”), versus incurred losses.
Mr. Lundie and the engagement team referred instead to Just Energy’s method for determining its receivables allowance — estimating the bad debt expense recorded on its income statement rather than directly evaluating the credit risk of the receivables on its balance sheet as of year-end — as an “income statement approach,” for reasons outlined in the order.
The order states that Mr. Lundie “failed to adequately evaluate the reasonableness of the receivables allowance, including by failing to sufficiently test the assumptions underlying the estimate and by failing to sufficiently test the accuracy and completeness of data on which that estimate was based.”
The aftermath for the company and its auditor
Mr. Lundie retired as a partner at EY Canada on December 31, 2022. He submitted a settlement offer without admitting or denying the watchdog’s findings, which allows him, after one year, to file a petition to the PCAOB for consent to associate with a registered firm. The Canadian accountant is a member of Chartered Professional Accountants of Ontario (CPA Ontario). No similar actions have been taken by CPA Ontario or the Canadian Public Accountability Board (CPAB).
An energy marketer, Just Energy and its cofounder were profiled in 2013 by Report on Business), and its Wikipedia page contains a number of controversies. The company has had a number of challenges in recent years. In 2019, after restating its financial results with an adjustment of accounts receivable, it sold its operations in the United Kingdom to Shell Energy Retail for up to roughly $17-million in 2019. In 2021, the company declared hundreds of millions of dollars in losses because of extreme winter weather in Texas, which led to a declaration of bankruptcy in the US and a filing for creditor protection in Canada. The company subsequently delisted its shares on the TSX Venture Exchange and its CEO took an immediate leave of absence for health reasons in December 2022.
The PCAOB publishes all its enforcement actions, including inspection reports and sanctions, on its website. The Lundie settlement was the fourth Canadian enforcement action published in 2022, following five in 2021. As reported previously by Canadian Accountant, the US audit watchdog’s counterpart in Canada, CPAB, underwent a consultation process in 2022 regarding its public disclosure and is expected to announce its conclusions in 2023.
Colin Ellis is a contributing editor to Canadian Accountant. Read the full PCAOB enforcement action here. Title image: EY Canada office tower, Toronto (iStock).