Canadian audit watchdog CPAB sanctions third BC accounting firm this year

TORONTO, June 30, 2023 – Vancouver accounting firm Manning Elliott has become the latest public company auditor in British Columbia to be sactioned by the Canadian Public Accountability Board. Since the year began, CPAB has publicly censured three Canadian auditors of “reporting issuers” and all three have been based in Vancouver.

Almost half of the seven mid-size firms that CPAB inspects annually, according to its Annual Inspection Results Report, have been sanctioned this year. The regulator sanctioned Dale Matheson Carr-Hilton LaBonte LLP (DMCL), which has four offices in British Columbia, on May 31, 2023. DMCL was prohibited from accepting new elevated and high-risk reporting issuers.

As reported by Canadian Accountant, CPAB also censured Vancouver accounting firm Smythe LLP on April 21, 2023 — the  first Canadian audit firm to be publicly censured by regulator under new disclosure rules. Smythe’s sanction is  the most serious. It is prohibited from accepting any new reporting issuers.

Sanctions impact bottom lines at the firms

The sanction of Manning Elliott was imposed on June 19 as the result of “significant” findings in the inspection of four reporting issuer files. All four files had at least one significant inspection finding. In its enforcement action report, CPAB noted that the firm was already the subject of enforcement actions, due to significant findings in audits conducted in 2020 and 2021. CPAB’s concerns over audit quality “still have not been sufficiently addressed.”

Among the violations of Canadian audit standards by Manning Elliott was identifying and assessing the risks of material misstatement through understanding the entity and its environment. However, in its enforcement actions, CPAB does not name the entities audited, or provide any details as to business sectors or environment. Manning Elliott is prohibited from accepting new high and medium risk reporting issuer clients, which CPAB allows firms to define, but must be acceptable to the regulator.

The sanctions help explain why all three firms performed poorly in the annual rankings of new audit client engagements, as reported by Canadian Accountant, based on data provided by Audit Analytics. In 2019, DMCL had led all mid-tier firms with 31 new audit clients, but in 2022 the firm gained seven. Smythe and Manning Elliott gained six and zero respectively.

Why Vancouver? Why now?

The new transparency rules of CPAB not only name the firms but also reveal that audit deficiencies have been an ongoing concern. To have three Vancouver-based accounting firms censured inevitably raises questions. As reported by Canadian Accountant, however:

It is important to note that, according to CPAB, the Big Four firms audit 98 per cent of all Canadian reporting issuers by market capitalization, typically on the TSX. That leaves the mid-tier audit firms to capitalize on new business trends (such as cannabis or cryptocurrency) and work exclusively in venture exchange markets such as the TSX Venture Exchange and the Canadian Securities Exchange.

Mid-tier accounting firms typically engage higher risk clients — and the regulatory responsibilities of audit them — than the Big Four. For example, all three firms had been flagged by the US audit watchdog, the Public Company Accounting Oversight Board, in recent years.

The PCAOB censured DMCL in 2021 over its audits of two companies, one a mineral exploration and development company, the other a manufacturer of electric vehicles. The PCAOB cited deficiencies and compliance failures in their inspections of Smythe and Manning Elliott in 2022.

All three firms are now subject to “enhanced oversight,” which includes measures such as an external professional to perform internal quality monitoring of quality management and individual completed audit engagements, plus professional education and training. All three accounting firms will bear the cost of enhanced oversight and monitoring until the censures are lifted.

Colin Ellis is a contributing editor to Canadian Accountant.