US audit watchdog releases audit inspection reports for national accounting firms Deloitte Canada, MNP LLP

TORONTO, July 14, 2024 – The Public Company Accounting Oversight Board in the United States released two new audit inspection reports this past week for Deloitte Canada and MNP LLP. After finding fault with Canadian audit quality in recent years — not only with regional accounting firms but with members of the Big Four in Canada — the US audit watchdog found little fault in its most recent reports. 

MNP received a clean bill of health from the PCAOB for two audits inspected in 2022. According to the inspection report, the PCAOB found “no deficiencies that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements.” 

The conclusion is in stark contrast to the PCAOB’s previous inspection of MNP, which occurred in 2019, when it found deficiencies in 67 per cent of the three audits it reviewed. 

Deloitte Canada’s inspection report focused on five audits inspected by the PCAOB — the same number inspected by the PCAOB in 2021. In both cases, the US audit watchdog found deficiencies in 20 per cent of the audits reviewed, four of which were audits in which the Big Four accounting firm was the principal auditor. In Deloitte’s audit of “Issuer A,” the PCAOB identified deficiencies in the firm’s financial statement audit related to revenue, for which the firm identified a fraud risk. 

New section on independence prompts firms to report

In 2023, the PCAOB unveiled a new section in its inspection reports, focusing on auditor independence and transparency, under the stewardship of PCAOB Chair Erica Y. Williams. “We are committed to making our inspection reports as valuable as possible for investors, audit committees, and others, and today we take another significant step in advancing that goal by shining a greater light on independence violations and more,” said Williams. “These enhancements will provide relevant information that investors have asked for and support improvements in overall audit quality.” 

The changes would appear in reports for PCAOB inspections completed in 2022. Both Deloitte Canada and MNP LLP complied with the changes by self-identifying issues that may have impaired the firm’s independence. In Deloitte’s case, the firm reported instances of potential non-compliance related to financial relationships between the firm and its audit clients; non-audit services; contingent fees; audit committee pre-approval; and indemnification clauses in engagement letters. 

MNP also reported instances of potential non-compliance related to indemnification clauses in engagement letters, as well as audit committee pre-approval, and tax services for a person in a financial reporting oversight role. Both firms declared that in all instances that its objectivity and impartiality were not impaired. 

PCAOB-registered firms among the largest auditors in Canada

According to the Canadian Public Accountability Board — the Canadian equivalent of the PCAOB — the four largest accounting firms (Deloitte, Ernst & Young, KPMG, and PwC) audit approximately 90 per cent of public companies by market capitalization in Canada. These are typically corporations listed on the Toronto Stock Exchange — names familiar to many Canadians — and the PCAOB has issued nine Big Four inspection reports in the past three years. 

In 2023, Deloitte had 37 issuer audit clients in which the firm was the principal auditor, and MNP had 31. An issuer is a public company that issues securities and files with the US Securities and Exchange Commission. 

Colin Ellis is a contributing editor to Canadian Accountant.