Public Accounting Regulator Expands Oversight Powers

The Canadian Public Accountability Board (CPAB) recently amended its rules (Rules) applicable to accounting firms that participate in its oversight program. This marks the first amendment to the Rules since they were introduced almost 20 years ago. Notably, the new Rules expand CPAB’s investigatory and enforcement powers and include many administrative changes to bring the Rules up to date.

Expansion of Sanctions Jurisdiction

Previously, CPAB’s enforcement role was limited to sanctions or restrictions arising out of issues identified concerning an audit. The Rules have now expanded to provide that such steps may be taken for “material noncompliance” with registration or participation requirements or for providing “materially incomplete or inaccurate information” to the CPAB.

Expansion of Inspection Report Findings

During an investigation, CPAB previously provided draft inspection reports if there was a “significant identified weakness” in an audit firm’s system of quality control or significant deficiencies with respect to a specific audit. That has now been expanded to include “potential weaknesses or deficiencies” such that CPAB will now issue reports identifying potential issues and recommendations, where previously no report was issuable.

Expansion of Jurisdiction of Former Participating Audit Firms

Historically, CPAB’s jurisdiction over a participating audit firm ended at the expiry of a participation agreement or if participation was otherwise terminated in accordance with the Rules. CPAB will now maintain a continuing jurisdiction over participating audit firms that are in the middle of an inspection or investigation or if the conduct being investigated or inspected occurred during a period in which an audit firm was a participating audit firm.

This change is intended to address situations where audit firms would no longer be subject to CPAB jurisdiction due to termination of their participation agreement during an inspection or investigation. Until the completion of such inspection or investigation, the audit firm will be subject to CPAB’s regulatory jurisdiction.

The expansion of CPAB’s jurisdiction also includes past conduct during the period in which the firm was a participating audit firm. CPAB can now review past conduct and impose sanctions even where the audit firm no longer participates in CPAB’s oversight program or where the firm has no ongoing public company audits in Canada.

New Interim Measures and Relief

The amended Rules give CPAB new powers to impose interim measures in the event of certain identified events. These include an assignment into bankruptcy by a participating audit firm or its designated professional, or discipline by another professional regulatory authority. These interim measures may be imposed even where a participating audit firm has commenced an appeal under CPAB’s internal appeal process. Hearings for such measures are held in camera and must be heard within ten days of CPAB seeking the relief.

Expansion and Updating of Standards

The references in the Rules to audit standards have been updated, including to expressly reference and apply the Canadian Standards on Quality Management (CSQM 1 and CSQM 2).

Regarding foreign audit firms, the Rules respecting professional standards did not previously address quality control standards for audit engagements. While such standards have been prescribed by securities laws, the Rules have now been amended to include specific reference to compliance with National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards.

Publication of Review Proceedings

CPAB can now publish the outcome of any review proceedings. Previously, these outcomes were kept between CPAB and the participating audit firm. Such publications may be subject to redaction or may be withheld if there is a potential for third-party harm (including to reporting issuers).

Increased Fees

Application fees to become a participating audit firm have increased.

Blakes regularly advises clients on matters related to the CPAB and the accounting industry. For more information, please contact any member of our Litigation & Dispute Resolution group.