On April 25, 2017, the Canadian Securities Administrators (CSA) published a consultation paper to obtain stakeholders’ views on introducing enhanced oversight requirements for foreign audit firms. Specifically, the paper discusses a proposal by the Canadian Public Accountability Board (CPAB) to amend National Instrument 52-108 Auditor Oversight (NI 52-108) to require foreign audit firms to register with CPAB as a Participating Audit Firm (PAF) should they be auditing a reporting issuers’ financial statements.
Foreign auditors, also referred to as “component auditors”, are often engaged when a reporting issuer’s operations are in a jurisdiction different from that of the issuer’s head office. In such instances, the issuer or its primary auditor may decide to engage a component auditor to conduct an audit on financials related to foreign operations.
Currently, NI 52-108 requires the primary auditors of reporting issuers to have a participation agreement with CPAB. One purpose of the participation agreement is to impose a regime for ensuring compliance with applicable rules and meeting certain professional standards. No such participation agreements bind component auditors, and, due to an inability to obtain working documents used in conducting a foreign audit, CPAB has been unable to enforce these rules and standards where such audit work is completed in a foreign jurisdiction. CPAB’s concern is that various stakeholders are not aware of the lack of audit oversight in such instances. Registration as a PAF would purportedly rectify the issue by providing a legal means by which CPAB could review a foreign firm’s work.
The paper identifies certain challenges that may arise from the new requirement, the first being that reporting issuers engaging component auditors directly or through their primary auditors may be disrupted where such foreign auditor refuses to be subject to CPAB inspection and the issuer is stuck finding a new auditor. This challenge may be mitigated by introducing an adjustment period during which issuers or primary auditors may present the requirement to component auditors and adjust audit firms as required without penalization. A second challenge discussed was that component auditors may charge additional fees to comply with the registration regime. However, the benefits of enhanced oversight to better comply with the expectations of stakeholders should outweigh the detriments of enhanced costs to issuers, especially in a competitive market where costs are not likely to skyrocket. The final challenge discussed was that the solution will not resolve barriers to access in all foreign jurisdictions. CPAB has identified China, Burkina Faso, Egypt, Ghana, Guatemala, and Zambia as jurisdictions that may remain inaccessible. Again, this limitation should not be used to stifle the benefits of proper oversight in many other jurisdictions.
In addition to the aforementioned amendment, the CSA is considering whether enhanced transparency on audit oversight difficulties is desirable. Currently, no disclosure is required to describe how foreign operations affect the audit process for an issuer, or CPAB’s lack of ability to inspect foreign audit work. However, the proposed disclosure requirement would only take place where CPAB requested and was denied access by a component auditor to audit materials as part of an inspection. Notably, if a different reporting issuer used the same component auditor but CPAB did not request access to inspect, no disclosure requirement would arise. Thus, the potential for negative publicity as a result of unequal enforcement of disclosure requirements may arise based solely on CPABs requests for disclosure.
The comment period for the consultation wrapped up in late June of this year. As of today, no updates on stakeholder comments have been provided. You can download the original consultation paper, CSA Consultation Paper 52-403, on the Canadian Securities Administrators website.