Enhancing Audit Quality: Canadian Perspectives Auditor Independence Summary of Responses to Discussion Paper and Conclusions

Transcription

1 Enhancing Audit Quality: Canadian Perspectives Auditor Independence Summary of Responses to Discussion Paper and Conclusions May 2013

2 Enhancing Audit Quality: Canadian Perspectives Auditor Independence Summary of Responses to Discussion Paper and Conclusions of the Auditor Independence Working Group The Auditor Independence Working Group (IWG) issued a Discussion Paper in September 2012 setting out its views on independence proposals of various global bodies. The IWG consulted with stakeholders during the period October-November 2012 to determine whether they agree or disagree with the IWG s views. This summary includes 32 responses to the Discussion Paper and the results of the Canadian Public Accountability Board (CPAB) Symposium. The respondents are listed in Appendix 1. The IWG noted that six responses to the Discussion Paper were from international organizations (European Commission, ASIC, Australia FRC, Germany AOC, FEE, and AFM). These responses are grouped for analysis purposes in the summary as regulatory body foreign. Read the Discussion Paper, responses to it, and a summary of responses on the Canadian Institute of Chartered Accountants (now Chartered Professional Accountants of Canada) website. To be fully informed as to the responses, readers should refer to the complete documents. This summary presents the following for each major set of proposals: A. A brief overview of the nature of the proposals. B. The IWG s consensus views on those proposals as set out in Chapter 8 of the Discussion Paper and an analysis of the responses to the Discussion Paper on the proposals. C. The IWG s conclusions based on the responses received. The summary sets out the major proposals as follows: Proposals to Address Institutional Familiarity Threats Non-audit Services Audit-only Firms Joint Audits Other General Comments Responses Included in this Summary (Appendix 1) 1

3 Acronyms Used in this Summary ACWG CPAB EC EU IWG MCR PCAOB SEC UK FRC Audit Committee Working Group Canadian Public Accountability Board European Commission European Union Auditor Independence Working Group Mandatory comprehensive review US Public Company Accounting Oversight Board US Securities and Exchange Commission UK Financial Reporting Council See Appendix 1 for the acronyms and abbreviations of respondent names. 2

4 Proposals to Address Institutional Familiarity Threats A. Overview of proposals to address institutional familiarity threats The IWG looked at the following as a continuum of alternatives: 1. mandatory audit firm rotation; 2. mandatory tendering; and 3. mandatory comprehensive audit firm review by audit committees (mandatory comprehensive review). These three alternatives all attempt to address institutional familiarity threats that may affect the independence of long-serving audit firms. Current mandatory audit partner rotation rules only address the individual familiarity threat. These three alternatives also have the potential to enhance audit quality to varying degrees through greater auditor oversight by the audit committee, greater transparency around the role of the audit committee in overseeing the audit, and potential changes to audit firm culture. Mandatory audit firm rotation In October 2010, the European Commission (EC) issued a Green Paper to address financial market regulatory reform in reaction to the 2008 global financial crisis. The proposed regulations, issued in November 2011, included mandatory rotation of audit firms after six years (with an extension to nine if joint audits are used), with a cooling-off period of four years. The US Public Company Accounting Oversight Board (PCAOB) issued a concept release in August 2011 on ways to enhance auditor independence, objectivity and professional skepticism. The concept release included mandatory audit firm rotation as one alternative for consideration. In discussing that alternative, they did not specify or indicate a specific term. Mandatory tendering Mandatory tendering has been most recently proposed by the UK Financial Reporting Council (FRC), which would like to see FTSE 350 companies put the audit contract out to tender at least every 10 years, on a comply-or-explain basis. The UK FRC proposal recognizes that there is the prospect of European Union (EU) action (presumably on mandatory audit firm rotation). It also states that targeted and proportionate action to improve practice at the national level may help to alleviate the pressure for more prescriptive action at the EU level. Mandatory comprehensive review Mandatory comprehensive review (MCR) was initially mentioned by CPAB in its response to the PCAOB concept release on independence and auditor rotation as an alternative to mandatory audit firm rotation. MCR would include a requirement to disclose the justification either for retention or replacement of the auditor, as well as the process the audit committee went through to reach that conclusion. 3

5 B. IWG Views (paragraphs 45 and 46 of the Discussion Paper) and Analysis of Responses 45. The IWG recommends mandatory comprehensive review as both audit committees and auditors would focus more on audit quality and on the exercise of professional skepticism. Audit committees would undertake a comprehensive review process and make related disclosures at least every five years, while continuing their annual auditor assessments. This recommendation will be further developed by the ACWG. 46. Although the IWG agrees that all of the concepts proposed might improve auditor independence to varying degrees, it does not support mandatory audit firm rotation and mandatory tendering because of the potential negative consequences to audit quality and associated company governance. The disruption in the audit services marketplace would be disproportionate to the significance of the problem the concept aims to address (e.g., institutional familiarity risks given that other alternatives exist). Analysis of Responses Stakeholder Group Support no change Support mandatory comprehensive review Support audit firm rotation or tendering Regulatory body Canadian Regulatory body foreign 1 Industry association 1 1 Large firm 6 Small firm 2 Accounting body Academic 1 Public company 2 Large investor 2 Individual 2 Total responses

6 Those who do not support change Six respondents believe that the current rules are appropriate in the Canadian environment. (EPCOR Utilities Inc., Canadian Oil Sands, Art Korpach, ICABC, CPPIB, ICAO) Three respondents believe that audit committees do not necessarily have the knowledge or skillsets to perform MCR. (Public Trust Committee, ICAO, ICABC) Three respondents raised concerns over increased costs, time and effort resulting from the alternatives. (EPCOR Utilities Inc., CPPIB, ICABC) Two respondents expressed concerns that MCR may not result in the expected benefits since it would either be a paper exercise or information may be coming from management. (Sean Johnson, Asper School of Business) Those who support mandatory comprehensive review These respondents raised many of the challenges to mandatory audit firm rotation and mandatory tendering identified by the IWG. They believe that, although Canada felt less of an impact of the financial crisis, MCR has the potential to lead to increased audit quality. The key reasons for these views are that MCR: improves transparency around the auditor reappointment process; addresses the concerns of institutional familiarity threats on independence; represents a natural extension of duties that the audit committee already has that is, overseeing and reviewing auditor performance; focuses on professional skepticism and other aspects of audit quality in addition to independence; and reinforces the critical role of audit committees/governance. They also supported many of the concerns related to mandatory tendering and mandatory audit firm rotation stated in the Discussion Paper. Several concerns were raised by respondents that were to be considered by the Audit Committee Working Group (ACWG), including the need to: develop appropriate criteria, tools and guidance to assist audit committees in carrying out MCR and related disclosure requirements; consider challenges for audit committees for smaller issuers; evaluate a scaled approach to reduce the impact on the market; articulate how MCR will differ from the annual assessment of the auditor; and avoid focusing on fees rather than the quality of the audit firm when performing the process. Some of the respondents encouraged the disclosure of CPAB s inspection results since this would assist audit committees in evaluating audit quality, but stated that there needs to be an appropriate balance between privacy and transparency objectives. 5

7 Those who do not support mandatory comprehensive review and support audit firm rotation or tendering One respondent who supports mandatory audit firm rotation or mandatory tendering believes that more critical selection of the statutory auditor or audit firm will contribute to the quality of the audit. (AFM) C. IWG Conclusions There was no consensus among respondents to the MCR proposal in the IWG s Discussion Paper. Those supporting no change still indicated a strong preference for MCR in place of either mandatory rotation or mandatory tendering. Concerns with MCR focused mainly on a lack of guidance and tools for carrying it out. Guidance and tools were later dealt with by the ACWG. The IWG notes that the ACWG supported the IWG s recommendation that the audit committee perform a comprehensive review at least every five years. The ACWG s Discussion Paper discussed the role of the audit committee when conducting a comprehensive review of the audit firm and sought views. The IWG also notes that feedback to the ACWG Discussion Paper indicates support for the proposed mandatory comprehensive review and that, when the ACWG reconsidered its conclusions in light of feedback received, it concluded that no changes are required. The IWG finds the results of the feedback the ACWG received to its Discussion Paper on MCR are persuasive and has concluded that the following views relating to proposals to address institutional familiarity threats, expressed in paragraphs 45 and 46 of the Discussion Paper, do not need to be amended: The IWG recommends audit committees undertake the MCR process and make related disclosures at least every five years. The IWG does not support mandatory audit firm rotation and mandatory tendering because of the potential negative consequences to audit quality and associated governance. 6

8 Non-audit Services A. Overview of proposals relating to non-audit services The EC proposals addressed further changes to non-audit services. These changes include a requirement for permissible non-audit services to be approved by the audit committee. In addition, certain services will: require pre-approval by a Member State designated competent authority; be prohibited and can never be provided; and be capped at 10% of total statutory audit fees (permitted related audit services). These proposed changes differ from the current Canadian rules in that they would increase the number of prohibited services, require an additional body outside of the audit committee to preapprove the performance of certain services, and require audit committees to consider a threshold of services that can be provided. B. IWG View (paragraph 51 of the Discussion Paper) and Analysis of Responses 51. The IWG recommends the continued use of the Canadian principles-based approach to evaluating threats to, and safeguards for, the provision of non-audit services, with appropriate rule-based prohibitions for services when threats cannot be overcome. The IWG identified three differences between the Canadian and SEC/PCAOB prohibitions and recommends that those establishing independence rules in Canada assess these differences on a rule by rule basis. The three differences are personal tax services for individuals in financial reporting oversight role, aggressive and confidential tax transactions and providing non-audit services on a contingency fee basis. The IWG would support additional prohibitions with respect to the first two in the Canadian independence rules. The IWG recommends further study on the question of non-audit services being performed on a contingency fee basis to assess the impact on auditor independence. 7

9 Analysis of Responses Stakeholder Group Support additional prohibitions Do not support additional prohibitions Regulatory body Canadian 2 1 Regulatory body foreign Industry association 2 Large firm 6 Small firm 1 Accounting body 3 Academic 1 Public company Large investor Individual Total responses 11 5 Those who support additional prohibitions on non-audit services Seven respondents agree with the IWG s view supporting two additional restrictions on non-audit services that would align to US Securities Exchange Commission (SEC)/PCAOB rules. (KPMG, CBA, CSA, PwC, E&Y, Deloitte, CPPIB) Three respondents believe it would be beneficial to align with international rules. (KPMG, E&Y, Deloitte) One respondent suggested prohibition considerations be made based on size criterion rather than public/private criterion. (Asper School of Business) One respondent recommended a distinction be made in the services provided by audit firms by separating the services designed to provide assurance regarding the information provided by the audit client for external users of this information, from services for the audit client itself. Further restrictions on services that are non-assurance should not be provided. (AFM) Those who oppose proposals on non-audit services Non-audit services should be subject to a case-by-case analysis in accordance with the conceptual approach and that a variety of work attracts talent and highly-skilled resources. (FEE) Three respondents believe additional prohibitions are not warranted and that Canadian rules are appropriate. (CPA Quebec, ICABC, Collins Barrow) Four respondents believe the provision of tax services for people in financial reporting oversight roles would not impact independence. (Grant Thornton, MNP, ICAO, ICABC) 8

10 C. IWG Conclusions There was limited support for the provision of tax services for persons in financial reporting oversight roles. Those who did not support further restrictions in this area stated that these services are not a component of the financial statements and therefore would not be subject to audit, and that the services are limited to merely compiling information. There were concerns over the definition of aggressive and confidential tax transactions. The IWG concludes that the following views relating to non-audit services, expressed in paragraph 51 of the Discussion Paper, do not need to amended: The IWG supports additional prohibitions in independence rules with respect to personal tax services for individuals in financial reporting oversight role and aggressive and confidential tax transactions. The IWG recommends further study on the question of non-audit services being performed on a contingency fee basis to assess the impact on auditor independence. 9

11 Audit-only Firms A. Overview of proposals relating to audit-only firms The EC is the only body proposing audit only firms. EC proposals would operate by preventing audit firms, which have a high percentage of the market for audit services of larger reporting issuers from performing non-audit services. B. IWG View (paragraph 55 of the Discussion Paper) and Analysis of Responses 55. The IWG recommends the rejection of the audit-only proposal. Analysis of Responses Stakeholder Group Support auditonly firms Oppose auditonly firms Regulatory body Canadian 1 Regulatory body foreign Industry association 2 Large firm 6 Small firm 1 Accounting body 4 Academic Public company Large investor Individual 1 Total responses 0 15 Those who oppose audit-only firms The following comments were made by those who oppose audit-only firms: Several respondents believe that an audit-only firm would adversely impact on audit quality. Audits are performed better with specialized resources and well-rounded professionals. (KPMG, CBA, Collins Barrow, Grant Thornton, AFM, MNP, ICABC, CPA Quebec) Audit-only firms would lose the ability to attract top talent. (CBA, Grant Thornton, E&Y, FEE, ICAO, MNP, ICABC, CPA Quebec, Deloitte) One respondent believes existing independence rules are sufficient to address threats to independence that might be eliminated or reduced by audit-only firms. (CPPIB) 10

12 C. IWG Conclusions There was consensus among Canadian stakeholders that audit-only firms would be inappropriate. IWG concludes that the following view relating to audit-only firms, expressed in paragraph 55 of the Discussion Paper, does not need to be amended: The IWG recommends the rejection of the audit-only proposal. 11

13 Joint Audits A. Overview of proposals relating to joints audit The EC initially proposed joint audits in its Green Paper on Audit Policy in Although the joint audit concept was later removed from the EC proposals, it was retained as a means of extending mandatory audit firm rotation from six to nine years. B. IWG View (paragraph 60 of the Discussion Paper) and Analysis of Responses 60. The IWG recommends the rejection of joint audits. Analysis of Responses Stakeholder Group Support joint audits Oppose joint audits Regulatory body Canadian 2 Regulatory body foreign Industry association 2 Large firm 6 Small firm 1 Accounting body 4 Academic Public company Large investor Individual 1 Total responses 0 16 Those who oppose joint audits Many respondents stated that joint audits can lead to inefficiencies. Several respondents also raised concerns that costs would be higher. (Art Korpach, CBA, Collins Barrow, E&Y, FEE, ICAO, Deloitte) Some expressed concerns over key issues being overlooked and other coordination concerns. (CBA, E&Y, AFM, FEE, ICAO, Deloitte) All respondents agreed with the concerns raised by the IWG. (CSA, Grant Thornton, PwC, CPPIB) 12

14 C. IWG Conclusions There is consensus with the IWG s view on joint audits. The IWG concludes that the following view relating to joint audits, expressed in paragraph 60 of the Discussion Paper, does not need to be amended: The IWG recommends the rejection of joint audits. 13

15 Other General Comments A variety of additional concerns and considerations were raised by many respondents in their comment letters. Some of the items related to the composition and authority of the IWG in recommending changes, as well as the information considered during their process. These general comments were reviewed by the IWG but did not impact the decisions previously made by the IWG. 14

16 Appendix 1: Responses Included in This Summary Respondent Regulatory Bodies Canadian Regulatory Body Foreign Industry Association Large Firm Small Firm Accounting body Academic Public Company Large Investor Individual 1. AFM X 2. AOC X 3. Art Korpach X 4. ASIC X 5. Asper School of Business, University of Manitoba X 6. Australia FRC X 7. BOC Mark Carney X 8. Canadian Oil Sands X 9. CBA X 10. CGA X 11. Collins Barrow X 12. CPA Quebec X 13. CPPIB X 14. CSA X 15. Deloitte X 16. EPCOR Utilities Inc. X 17. Ernst & Young LLP X 18. European Commission X 19. FEE X 20. ICABC X 21. ICAO X Summary of Responses to the Discussion Paper 15

17 Respondent Regulatory Bodies Canadian Regulatory Body Foreign Industry Association Large Firm Small Firm Accounting body Academic Public Company Large Investor Individual 22. ICD X 23. KPMG X 24. MNP LLP X 25. Mowbrey Gil LLP X 26. OMERS* X 27. OTPP* X 28. Patrick Cowan X 29. PWC X 30. Public Trust Committee X 31. Raymond Chabot Grant Thornton LLP X 32. Sean Johnson X TOTAL *OTPP and OMERS did not provide written feedback; however, comments made at the CPAB Audit Quality Symposium were accounted for in this analysis. ** Responses from the various provincial institutes of accountants are based on the results of a survey. The survey was completed by a small percentage of members. Summary of Responses to the Discussion Paper 16

18 Acronyms and Abbreviations AFM: Netherlands Authority for the Financial Markets AOC: Auditor Oversight Commission Germany ASIC: Australian Securities Investment Commission Australia FRC: Australia Financial Reporting Council BOC: Bank of Canada CBA: Canadian Bankers Association CGA: Certified General Accountants Association of Canada CPA Quebec: Ordre des comptables professionnels agréés du Québec (CPA) CPPIB: Canadian Pension Plan Investment Board CSA: Canadian Securities Administrators E&Y: Ernst & Young LLP FEE: Federation of European Accountants FRC: Australia = Australian Government Financial Reporting Council ICABC: BC Forum Institute of Chartered Accountants of British Columbia ICAO: Institute of Chartered Accountants of Ontario ICD: Institute of Corporate Directors OMERS: Ontario Municipal Employees Retirement Systems OTPP: Ontario Teachers Pension Plan Public Trust Committee: Public Trust Committee of the CICA Summary of Responses to the Discussion Paper 17