British accounting scandals a warning to Canadians

TORONTO, January 2, 2019 – Canadian accountants and auditors long ago acknowledged that, in order to call yourself a “professional,” you had to demonstrate that ongoing obligations were owed to the public. One of the several ways of complying with such obligations includes staying abreast of what is occurring in financial reporting in Canada and in other countries. How are other countries addressing growing public concerns about accountants? For example, when financial collapses occur, is the role of financial reporting analyzed in sufficient detail? Are immediate improvements essential in Canada? 

At the present time, accounting-related scandals in the United Kingdom, especially recent corporate multi‐million dollar financial failures, are receiving considerable attention in the U.K. media. The high-profile collapses of previously well-regarded British brands such as Carillion, BHS, and Patisserie Valerie have led to public hearings and threats to break up the Big Four and their advisory practices. 

Yet coverage in Canada has been close to zero. Can we call ourselves “professional” accountants in Canada if we ignore valid public issues elsewhere around the world? 

Respect for auditing has declined in the U.K. Is Canada next?

Some Canadian accountants ignore financial collapses in the U.S. by brushing them aside as “deficiencies in U.S. GAAP.” England and Wales are different, however, because of the U.K.’s heavy involvement as one of the creators of IFRS. Its role in the UK failures obviously should be of deep concern to Canadian accounting and auditing professionals, primarily because of the heavy usage of IFRS in Canada.

It should be obvious to Canada’s lawmakers that embarrassing collapses are destined to occur in several Canadian industries. Examples include the cannabis companies; several real estate entities, including some REITs; corporate pension fund organizations, especially those holding massive percentages of difficult‐to‐value infrastructure assets; and the many Canadian companies that are front‐ending revenue recognition (e.g., as occurred with Nortel and certain finance entities).

Nevertheless, Canadian lawmakers and most regulators seem unaware of dangers. Those who have tried to alert our lawmakers to seriously faulty Supreme Court of Canada decisions (e.g., Livent, Hercules Managements) and major flaws in IFRS are also brushed aside. Immature “buck‐passing” excuses are repeatedly employed by lawmakers. Inaction simply increases the dollar‐level of eventual oncoming financial disasters. Such inaction has been steadily demonstrated over the past 20 plus years in Canada.

Investors restless over being ignored

In my opinion, provincial securities regulators seem inclined to downplay the word “professional” and the introductory paragraphs to proclaimed standards such as IFRS. Published accounting standards refer to reporting to shareholders and investors (i.e., the “public”), including those who are contemplating an investment in a company.

Further, the vital, commonplace wording of Canadian audit reports, among other matters, specifies audit procedures “… obtain reasonable assurance about whether the financial statements are free from material misstatement … whether due to fraud or error …” and “… An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management …”

The words “free from material misstatement” and “reasonableness” draw auditors directly back to a user, such as the public investor. Too often the wording in audit reports is ignored, given the wording that exists within the financial statements themselves.

For example, those who choose to believe that IFRS obligates or requires the reporting of nonsense “current” dollars (e.g., marijuana gross and net profits), and the ignoring of professional responsibilities to public investors, should state precisely where such a priority ranking is demanded as a clear auditing and reporting standard. Show us where and how wild management estimates constitute “reasonableness” dollars.

Although the importance of the word “investors” was ignored by Canada’s Supreme Court in 1997 and again in 2017, the Canadian concepts of “professionalism” and “standards” cannot remain at odds with much of the rest of the world. Too many Canadian auditors seemingly disregard or contradict IFRS’ stated “concepts,” which define who are the investors.

Meanwhile, the Canadian accounting profession must monitor what is occurring in the U.K. The accounting profession and its regulators have lost the faith of the British public and politicians. Canadian investors are watching those developments and are becoming more restless about being ignored. A made-in-Canada accounting scandal of similar proportions would have nasty consequences.

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.