Two of the Big Four accounting firms failed their audit inspections in 2023 — but we don’t know who

Click here to read the 2023 annual inspections results of the Canadian Public Accountability Board.

TORONTO, April 6, 2024 – It will take at least two more years before the public knows which accounting firms fail to meet the audit inspection targets of the Canada’s audit watchdog. The Canadian Public Accountability Board announced this week that two of the Big Four failed their 2023 audit inspections but could not disclose their names. CPAB is “in the process” of pursuing changes to its governing legislation that would allow the regulator to provide the same transparency common in the United States. 

The 2023 CPAB Annual Inspections Report reveals that two of the four largest Canadian accounting firms did not meet the audit regulator’s inspection targets. CPAB sets a target of no more than 10 per cent of files inspected with “significant findings,” which is defined as a deficiency “where the audit firm must perform additional audit work to support the audit opinion and/or is required to make significant changes to its audit approach.” 

While two of the four firms had just one file each with a significant finding in 2023, one of the two firms has missed the target for the second year in a row, and has not shown general improvement. It had six files (29 per cent) with significant findings in both 2022 and 2023. 

The largest firms, commonly called the Big Four, comprise the Canadian affiliates of Deloitte, Ernst and Young, KPMG, and PricewaterhouseCoopers. According to CPAB, the Big Four audit 90 per cent of “reporting issuers” (i.e., public companies) by market capitalization. 

Ninety-nine foreign firms, which are not annually inspected, audit roughly 8.5% of the remaining reporting issuers. The remaining 1.5% of reporting issuers are divided up between 90 Canadian accounting firms both annually and non-annually inspected. 

Mid-tier Canadian firms and foreign show mixed inspection report results

The nine mid-tier Canadian accounting firms that CPAB inspected last year include national homegrown firm MNP (based in Alberta) and regional auditors in British Columbia and Quebec. CPAB inspected 38 of the firms’ engagement files last year and found significant findings in 40 per cent. While this is below the five-year average, two firms had significant findings in 50 per cent or more of its files. 

Of the nine other annually inspected firms, enforcement actions were in place for six with unacceptable levels of significant findings over consecutive years. As reported by Canadian Accountant, enforcement actions against auditors in British Columbia was one of the biggest stories of 2023, as the audit regulator censured five BC firms. 

Foreign firms audit a significant portion of Canadian public companies by market capitalization. Unlike mid-tier Canadian firms, whose 1,855 reporting issuers make up just one per cent of the market, foreign firms have cornered 8.5% of the market through just 380 reporting issuers. These include the high-risk audits of crypto and cannabis companies. According to CPAB, “The level of inspection findings at the non-annually inspected firms is unacceptably high.” 

Audit regulator’s transparency goals will take time

CPAB has taken steps to expand the information it discloses publicly but the results of some measures may not be seen until at least 2026. The regulator believes that more transparency is aligned with public and investor expectations and will improve audit quality “by increasing the motivation to address audit quality deficiencies in a timely manner.” It also recognizes that “proposed changes are aligned with disclosures made by audit regulators in many international jurisdictions.” 

Two measures were introduced in 2023 that have significantly increased transparency. The regulator now publishes significant enforcement actions against firms. In 2023, this led to more information provided on foreign accounting firms, and audit issues at several BC firms. CPAN also discloses recommendations which were included in a firm report but not addressed by the firm. 

Two more measures could have even more of an impact: publishing the inspection reports of individual firms, and mandatory disclosure of reporting issuer-specific inspection findings to their audit committee. The first of these measures would align CPAB with the standard provided by the US audit watchdog (the PCAOB), and allow media to report the name of an audit firm that has failed to meet inspection targets, as well as the firms that demonstrate exemplary audit inspection results. 

CPAB anticipates that the necessary approvals will be completed by the end of 2024 but “implementing these proposed rule changes requires amendments to the CPAB Act,” at the discretion of the Ontario legislature and the government of Premier Doug Ford. 

According to CPAB, “If the required rule and legislative changes are complete by the end of 2024, we anticipate the changes to be effective for our 2025 inspections with mandatory audit committee reporting occurring throughout 2025 and our first public inspection reports on the 2025 inspections published in early 2026.” 

Colin Ellis is a contributing editor to Canadian Accountant. Read more about CPAB’s disclosures strategy.