Auditor Independence
Peter Mills
Melissa Langlois
December 11, 2012
1
Disclaimer
•
•
•
The following are solely the views of the Auditor Independence Working Group
(Working Group).
The Working Group continues to engage in stakeholder outreach and consultation
in order to consider the Canadian perspective.
A final paper is anticipated in early 2013.
2
Agenda
Discussion Item
Background
Working group members
The Canadian Environment
Enhancing Audit Quality - Objectives
Slide
4-7
8
9-11
12
Auditor Independence – Project Objectives & Guiding Principles
13-14
A Continuum of Alternatives
Mandatory Comprehensive Review
15-17
18-19
Other Proposals - Non-audit Services, Audit-only Firms, Joint Audits
20-22
Update on the Process
23-24
Questions
Further information on the Enhancing Audit Quality initiative can be found at:
www.cica.ca/enhancing-audit-quality-canadian-perspective/item64401.aspx
25
3
Background
•
Questions raised about the auditors’ role after the 2008 financial crisis
– Resulted in various global initiatives
•
Canada weathered the crisis well
– No financial system failures in Canada
•
Canada already has a commitment to:
– regulatory oversight
– high-quality accounting and auditing standards
– audit committee best practices
4
Background
•
Reforming the audit process has not been widely debated in Canada
– Canada is not immune to what is taking place globally
•
Important that Canada’s audit process and audit quality are consistent and
comparable internationally since
– Many Canadian entities now operating in an international environment
– Canada needs to be a good place to invest
5
Background
•
Canadian Public Accountability Board (CPAB) held an audit symposium
– December 2011
– policymakers decided it was important to forge a Canadian perspective
•
CPAB and CICA* formed a joint initiative - “Enhancing Audit Quality”
– Representatives from
• securities and audit regulators
• institutional investors/ financial institutions
• audit committee chairs
• lawyers
• Auditing and Assurance Standards Oversight Council (AASOC)
*Canadian Institute of Chartered Accountants
6
Background
•
“Enhancing Audit Quality Initiative”
– Oversight by a Steering Committee
– Released an overarching paper (initiative overview) August 2012
– Formed three groups:
Working Group
Discussion Paper
Deadline for Comment
Period
Auditor Reporting
Model
August 31, 2012
October 12, 2012
Auditor Independence
September 27, 2012
November 16, 2012
Role of the Audit
Committee
Not yet released
Not yet released
7
Working Group Members
•
•
•
•
•
•
•
Peter W. Mills, QC, B.Comm, JD, ICD.D, Corporate Director, Toronto (Chair)
William R. Bruschett, FCA, Grant Thornton, LLP, Toronto
Patrick G. Crowley, CA, ICD.D, Executive Vice President & Chief Financial Officer,
OMERS, Toronto
Gary B. Hannaford, FCA, Institute of Chartered Accountants of Manitoba, Winnipeg
Jane E. Kinney, FCA, Deloitte, LLP, Toronto
Andrew J. Kriegler, former SVP & Treasurer, The Canadian Imperial Bank of
Commerce (CIBC), Toronto
Paul R. Weiss, FCA, Corporate Director, Toronto
Observer
•
Kenneth J.A. Vallillee, FCA, Canadian Public Accountability Board (CPAB), Toronto
Project Manager
•
Melissa E. Langlois, CA, Deloitte, LLP, Toronto
8
The Canadian Environment
•
Approximately 6,000 reporting issuers in Canada and 1/3 are considered small
market capitalization companies (market capitalization and total assets under
$10m)
•
Large majority of public companies audited by the Big 7 – members of the Forum
of Firms (FOF)
– FOF members cannot use the exemption in our independence rules for small
cap companies
9
Features of the Canadian Environment
Feature
Description
Office of the Superintendent of
Financial Institutions (OSFI)
Supervises and regulates more than 450 banks
and insurers
Provincial Securities
Commissions
Each province and territory has its own securities
regulator and its own securities legislation
Canadian Securities
Administrators (CSA)
A voluntary umbrella organization of the
provincial and territorial securities regulators
referred to above
Regulatory Oversight
All public issuers in Canada have to be audited by
firms registered with CPAB and subject to its
inspection and discipline. CPAB, was established in
2002, and is a member of the International Forum
of Independent Audit Regulators (IFIAR).
Provincial Institute Reviews
Audit Partners subject to reviews by the provincial
accounting institutes
10
Features of the Canadian Environment
Feature
Description
Canadian Companies Listed on
US Exchanges
Approximately 250 companies are listed on US
exchanges - auditors may also be inspected by the
US PCAOB in addition to CPAB
Public Oversight of Standard
Setting
Establishment of the Auditing and Assurance
Standards Oversight Council (AASOC) to oversee
the work of the Auditing and Assurance Standards
Board (AASB) and the development of Canadian
auditor independence standards
Governance – Audit
Committees
Regulations that auditors must be independent of
companies they audit and audit committee preapproval of any services
Independence rules
Rule 204 in the Code of Conduct of the Chartered
Accountant Profession (similar rules for other
accounting bodies)
11
Enhancing Audit Quality - Objectives
The main objectives are three-fold:
•
Provide useful input to Canadian standard setters, regulators and others as they
consider potential changes in Canada.
•
Support the views of Canadians engaged in dialogue about various global
proposals
•
Set an appropriate context for further work to enhance audit quality in the future
12
Auditor Independence Project - Objectives
The working group was directed to respond to proposals on the appointment and
rotation of auditors and the services they should be permitted to provide, including:
•
•
•
•
•
Mandatory audit firm rotation
Mandatory tendering
Non-audit services
Audit-only firms
Joint audit
13
Auditor Independence Project - Guiding Principles
•
The Working Group used a framework of guiding principles to evaluate the global
proposals, including:
a) potential effect on independence
b) potential effect on audit quality
c) work effort and costs for audit committees, the companies and audit firms
•
The primary focus by the Working Group was on:
– Enhancing audit quality
– Reporting issuers
•
Reviewed background and potential benefits in each case before arriving at a
consensus view
14
A Continuum of Alternatives
•
Alternatives to attempt to address institutional familiarity threats (long tenure of
audit firms) were looked at in a continuum
•
Continuum includes:
– Mandatory audit firm rotation
– Mandatory tendering
– Mandatory comprehensive audit firm review by audit committees
15
A Continuum of Alternatives
•
Considered the effect on the following factors when evaluating the continuum:
– Independence
– Transparency
– Audit quality
– Governance impact
– Work effort/cost
16
A Continuum of Alternatives
•
Consensus – Mandatory Comprehensive Review of the Auditor (5 year basis)
– Audit committee led
– Greatest focus on audit quality and demonstrated exercise of professional
skepticism
– Greatest degree of public disclosure about the basis on which the audit
committee evaluates, retains or replaces an auditor
– Annual auditor assessments will continue
– Audit Committee Working Group to provide details around the process
– Considerate of proportionality and scalability for reporting issuers
– Provide most of the benefits with fewer of the issues and less cost
17
Mandatory Comprehensive Review of the Auditor
•
The Working Group’s recommendation included:
– Consideration of what should be done in the annual compared to the
comprehensive review
– Generating appropriate criteria, tools and guidance to assist the audit
committees in completing the review
– Consideration of the scope of reporting issuers subject to the regime, as well
as scalability
– Information from Regulatory inspection findings (which is currently not made
public)
18
Mandatory Comprehensive Review of the Auditor
•
The Audit Committee Working Group is now evaluating the concept and related
requirements
– Support the mandatory comprehensive review concept
– Working on operationalizing, guidance and tools
– Preliminary draft completed, with a discussion paper anticipated late
December 2012 or early January 2013
19
Non-audit services
•
Global proposals address further changes to non-audit services
•
Consensus – Continue the Canadian principles-based/prohibition approach to
non-audit services
– Recommends consideration of additional independence prohibitions for two
of the three differences* between the Canadian and SEC/PCAOB prohibitions
– Recommends further study on the third item
* Differences are providing personal tax services for individuals in
a financial reporting oversight role,
aggressive and confidential tax transactions and providing non-audit services on a contingency fee basis.
20
Audit-only Firms
•
EC is the only body proposing audit-only firms
– Based on percentage of market share by firms in the audit services of larger
public interest entities
•
Consensus – Audit-only firms were not supported
21
Other Audit Structures - Joint audits
•
Consensus – The IWG recommends the rejection of joint audits
•
Discussion on this topic is limited in global proposals
•
Canada previously had joint audits, and this requirement was removed. Reasons
for the change included:
– The potential division of responsibility associated with the approach
– Concern that some issues would fail to get addressed
– The potential to create incentives for management to choose the opinion of
the auditor that yields the most favourable result
– Concern that there could be less accountability, less auditor oversight, and
diminished quality of the financial statements
22
Status Update – Auditor Independence
•
Performed stakeholder outreach
– Presentation to some interest groups (e.g., Institute of Corporate Directors
(ICD))
•
Comment period closed November 16, 2012
•
Continuing to analyze the responses
•
Early January the working group will review analysis of the responses
23
Status Update – Auditor Independence
CPAB Symposium held November 30, 2012
• Representation from
– Canadian banking, investors, securities and audit regulators, audit
committees, and audit firms
– Steven Maijoor, Chair of the European Securities and Markets Authority
– Stephen Hadrill, CEO of the UK Financial Reporting Council)
– Steven Harris, Board Member of US Public Company Accounting Oversight
Board
– Nathalie Berger, Head of Unit Audit and Credit Rating Agencies, DG Internal
Market, European Commissions
•
At least in Canada there was wide support for mandatory comprehensive review
and the positions recommended on non-audit services, audit-only, joint audits
•
Audit Committee working group continues to work through operationalizing
mandatory comprehensive review
24
Questions?
25