Vancouver accounting firm Smythe LLP first Canadian audit firm to be publicly censured by regulator under new disclosure rules
Changes to enforcement disclosure rules by CPAB means more transparency from audit regulator, more public scrutiny of Canadian auditors
TORONTO, May 13, 2023 – For the first time in the history of Canadian audit regulation, a Canadian accounting firm has been publicly censured in an enforcement action by the national audit regulator. The Canadian Public Accountability Board (CPAB) has censured Smythe LLP, a mid-size firm based in Vancouver, for deficiencies found in four audits inspected over two years in 2021 and 2022.
Smythe is prohibited from accepting new reporting issuer audit clients, including those resulting from initial public offerings, reverse takeovers or other transactions. The ban was imposed on April 21, 2023 and will last until Smythe “has demonstrated a sustained improvement in audit quality.” The public censure will remain on the CPAB website for four years until the restriction has ended.
The announcement is a notable change from past practices in Canada’s audit and accounting landscape. As part of a first phase of disclosure changes, effective January 2023, CPAB is now disclosing all “significant enforcement” actions arising from regulatory assessments. The regulator is also making public some details of weaknesses, deficiencies or recommendations related to inspections.
Smythe: a successful regional accounting firm
Smythe LLP is a regional accounting firm with offices in Vancouver, Langley and Nanaimo, British Columbia. It was founded in 1980 by former partners of Gardner McDonald, who were merging with an international CA firm, one of whom (Barrie Smythe) retired in 1988 to run Craigmont Mines.
Smythe has a roster of small cap (less than $250-million in market capitalization) companies typical of a regional accounting firm. As reported by the Globe and Mail, “Smythe has only three public-company clients with market capitalizations above $100-million, all of which are valued at less than $200-million.”
According to data provided to Canadian Accountant by Audit Analytics, Smythe gained six new audit clients in 2022, with a combined total of 45-million in market cap. These six publicly traded companies earned Smythe about $390,000 in new audit fees.
The enforcement action does not disclose the name of the reporting issuer whose audits were deficient. Instead, CPAB provides a list of the deficiencies identified during CPAB’s 2022 inspection, which violated Canadian Auditing Standards. These include documentation, evidence and accounting estimates, as well as the new Canadian Standard on Quality Control 1 (CSQM 1).
Smythe LLP will be subject to increased CPAB oversight through bi-monthly meetings and will be required to pay a monetary assessment to recover enhanced monitoring costs incurred by CPAB.
Two censures announced, more to come?
An American accounting firm, Marcum LLP, was the first firm under the new disclosure rules to have its censure announced publicly by CPAB. The regulator announced in March that Marcum, which is based in New York and has no offices in Canada, was prohibited from accepting new “high risk” Canadian cients. Marcum had a number of cannabis and cryptocurrency sector companies as clients and was censured after CPAB inspected two of its audit files in 2022 and identified nine significant inspection findings.
In its most recent annual inspection report, CPAB identified one member of the Big Four (Deloitte, Ernst and Young, KPMG, PwC) that did not meet its inspection target in 2022, with 29 per cent of files with significant findings. This unidentified firm was directed to develop a “quality action plan,” which helped two firms that did not meet the CPAB target in 2021, to meet the target in 2022.
Despite the censure of Smythe, CPAB reported a notable improvement in audit quality at mid-tier accounting firms in 2022, but non-annually inspected firms (including foreign firms) are a concern. As reported by Canadian Accountant, CPAB has identified disclosure practices as a critical risk to public confidence and, notably, the regulator states that implementation of changes to its rules is its sole risk mitigation strategy.
By Canadian Accountant staff. Read the CPAB enforcement action here. Top image: iStock.