Canadian public accounting firms of all sizes will need to do more to improve audit quality and adhere consistently to internal and professional standards, the Canadian Public Accountability Board (CPAB) said today in its fourth public report on its inspections of accounting firms.

“We have made recommendations for improvement to every firm inspected,” said CPAB Chairman Gordon Thiessen. “In addition, we have imposed requirements on three of the regional and local firms, meaning they cannot accept new audit clients until they have satisfactorily implemented our recommendations.”

Thiessen said no restrictions or sanctions were imposed on any firms as a result of this round of inspections. One small firm inspected in 2005 that failed to comply with CPAB’s requirements had its registration cancelled in September 2006.

“CPAB’s 2006 inspections showed that nearly all of its 2004 and 2005 recommendations have been implemented effectively,” Thiessen said. “Each firm has also provided written commitments that the problems CPAB identified in this round of inspections will be remedied.”

Canada’s six national firms – BDO Dunwoody LLP, Deloitte & Touche LLP, Ernst & Young LLP, Grant Thornton Canada (practising as Grant Thornton LLP and Raymond Chabot Grant Thornton LLP), KPMG LLP and PricewaterhouseCoopers LLP – audit more than 4,500 public companies and other reporting issuers in Canada, representing about 70% of the total market share by numbers of clients and CPAB estimates more than 90% if measured by market capitalization. CPAB inspected these firms in 2005/6.

The report says that each firm has made progress since CPAB’s inspections in prior years. The firms also have strong quality leadership and generally effective controls over human resources, client acceptance and continuance. They also continue to work to comply with independence standards.

However, the report says the firms must improve in two areas — Performance on Audit Engagements and Quality Control and Quality Monitoring.

Of 121 audit engagements selected by CPAB for review in the six firms (primarily high-risk files), nine engagements had serious deficiencies in the documentation of the work done. In five other cases, financial statements had to be reissued, restated or corrected in the subsequent year. For each file with audit deficiencies, CPAB required the firm to either carry out further audit work or to add documentation to the audit file.

Before an audit opinion is signed, a quality control review is to be conducted by a partner in the firm other than the one responsible for the engagement. CPAB found in some cases that the reviewing partner spent insufficient time on the review or conducted it too late in the process. While the national firms have effectively designed quality monitoring programs, CPAB found that two firms’ implementation of these programs lacked rigour.

“While high quality audit work was evident throughout our inspections of the national firms, we were nevertheless disappointed that our work identified such a large number of instances where engagement teams did not fully comply with an aspect of Generally Accepted Auditing Standards (GAAS) or with the firms’ own policies and procedures,” said CPAB CEO Keith Boocock. “We expect that each firm will share our sense of disappointment and will work diligently to impress upon its partners and staff the need to improve compliance in future.”

CPAB provides independent public oversight of accounting firms that audit reporting issuers. Auditors of reporting issuers are required to be members in good standing with CPAB. As of September 30, 2006 a total of 246 Canadian accounting firms and 40 foreign accounting firms had registered to become participants in the CPAB oversight program.