Focusing on audit quality - Brian Hunt - YouTube

So let us get started.

It is a full agenda and the first thing up is audit quality.

Now Brian, not long ago, you held a very successful symposium that you hosted.

There were a number of international guests talking about some of those developments and

a lot of discussion about of what is happening in the Canadian market place, so I will turn

it over to you to talk about some of the implications for audit committee members.

Well Don, thanks very much.

I appreciate being at this morning and the opportunity to speak to a thousand plus directors

on some of the issues around audit committees and the focus that we have this morning.

What I want to do is cover a little bit in terms of the relationship that CPAB has with

audit committees, some external auditors, relationship with audit communities and the

management as well management of the organization’s and their relationship and then the chart

that you are looking at.

One of the things at CPAB we started in this past year in 2014 will continue it into 2015

was to outreach two audit committees and I am really asking the question of how can we

enhance or help them enhance our audit quality and make them hopefully more effective in

what they are doing and I think we have had a number of initiatives around that.

One of the keys we think to this is making sure that and Don mentioned this in our transparency

efforts.

We have done a public report for a number of years.

This year in 2014 in March, we started sharing with audit committees significant findings

that CPAB has.

These are findings that, in our view, the auditors have not done enough audit work to

support the opinions, so, they are rather significant, but we have developed protocol

with the firms, which shared this information.

We think that is a huge step forward in the whole area of transparency, but one of the

things that we in talking to audit committees as we have reached out.

We are encouraging and one of the things we are trying to do is by greater transparency

and hopefully utilization of our public report, which is strictly come out in March.

We put the big four report O in November and that was really at this request of some of

the audit committees in order to get in early update in terms of our significant findings

and also assist audit committees as they approach their own year-ends.

Most of the year-ends in Canada are around December 31.

So, one of the things that we have been trying to work with audit committees on is to ensure

that there is a robust discussion between the external auditors, management and the

audit committee and we think if there is a robust discussion, we will improve audit quality

and one of the things we have chatting about is talking audit committees and getting them

to reflect a little bit in terms of in their meanings are they very much in a compliance

mode or they moving towards governance or in a governance mode and what I mean by that

is a difference in terms of compliance is really going through in saying yes the audit

has been completed, yes we got a clean opinion, meeting is concluded, we had some discussion

but not a lot.

When you start to move towards or we referred to governance mode, you really addressing

some of the key audit lists and we think this is so important as you plan your audit, you

identified key risks, have those risks been mitigated.

Have you discussed with management and the auditors in a robust fashion in terms of how

you came, how are estimates were developed, how valuations were developed?

Has there been disagreements between management and the auditors and how the process developing

those types of things are the tough issues, even though they may have been resolved before

they got the audit committee, has the audit committee really dealt in and had some good

discussion around that.

So, one of our focus is what can we do at CPAB to encourage a more robust discussion

between the auditors, the audit committees and management.

We think that is key to in the long-term enhancing audit quality.

  Also wanted to touch this morning on and Don

has talked about our symposium and with our symposium last in December last year.

Lot of international developments, Canada is not an island as Don has said.

There are a number of developments that are occurring in Europe and in United States that

will impact us.

For example, in Europe mandatory firm rotation has been put in place by the European Union.

It is over a 20-year period and I will not get into all the details around that, but

I think that something that people should be looking at and I think one of the key to

that mandatory firm rotation is you need to think about that in terms of where somebody

might say well it is 20 years I do not have to worry about it for a while or I do not

really have an operating subsidiary in Europe.

Well, there are two things I would raise with the group.

One, if you watch in terms of the 20 years, the Netherlands and the European Union has

been indicated to the 28 member states that they should feel if free, if they wish to

raise the standard and that would mean implementing a different standard than the 20-year mandatory

firm rotation and they should feel free to go ahead and do that.

The Netherlands for example moved to an eight-year-old mandatory firm rotation.

I understand they are going to change that to a 10-year mandatory firm rotation.

So, in Europe you may have very different requirements in different countries, so you

need to be aware of that.

You also need to be aware that there is a term used in Europe about public interest

entity.

So you do not really need to be raising capital in Europe, you do not need to have a subsidiary

there, but if you have a significant business operation in those jurisdictions, you may

be swept up in some of these rules.

So that is something that I would encourage everyone to have a real good look at.

We are also aware that there is going to be an expanded audit report.

IAASB approved that sometime in 2016 and 2017.

We will see an expanded audit report, which will include I think the key to this is key

audit matters.

The US is also looking at this and then US tells us that they will have something out

in a timely fashion in 2015 and they will be right there with the Europeans in terms

of implementation.

So, in those expanded report, has been going to have to report of past fill go from one

page to probably to seven pages, what has been referred to as key audit matters.

These are matters that are key to the audit what has been important, what is some of the

more challenging audit areas.

Again, does this make this more relevant I think that’s a real challenge and I think

that is where some of this is coming from in the European committee.

One of our concerns in all of this is it is implemented that it does not become boiler

plate and I think that is something that we all need to really focus on.

Because if it becomes boiler plate, we will go from past fill one page report to a past

fill boiler plate on critical key audit matters to five or seven pages and I do not think

we will get what we are looking for.

Also, wanted to just touch on one another thing that is coming up in a number of people

asked me as we go to audit committees, how do you measure audit quality and that is a

challenge, A number of folks looked at that, but I think we are developing tools internationally

and I think the US is taking the lead in this.

It’s tools which will help audit committees determine whether they have had a quality

audit or not and one of those areas is key audit, audit there quality indicators and

hopefully in the discussion Don, we will get into some of this as to what those are, but

I think those are areas and they are trying to get it down to probably 15 or 20 key audit

indicators, so if you can do that and you can put some context around it, I think it

will be a tool for audit committees to really work with their auditors in evaluating audit

quality.

Let me move may be to, I will say the domestic front in terms to coming back to Canada and

while what I just spoke about in international will definitely impact Canada.

I think that there are some things that we have been doing in Canada that I would to

raise with you folks this morning.

  I have mentioned the protocol CPAB wants to

be more transparent.

We want to see that our public report is more utilized by audit committees, but also importantly

is that our key audit findings, these are significant risks I shared with audit committees

and again, we are trying to create that robust discussion between management, the auditors

and the committee and give you some additional tools to evaluate audit quality, but also

to highlight areas where we would have some concerns.

I want to touch on two things; one is we spent a lot of time looking at auditing in foreign

jurisdictions and I think that is a key challenge.

If you are doing business in a foreign jurisdiction, I would encourage you as you have gone into

that business, I am sure you looked at the different cultures the different business

practices different legal structures.

That is really no different when you are doing an audit and I would encourage you all to

have a real hard look at this in terms of what is the culture in that jurisdiction,

what are the business practices in the jurisdiction and what are the legal structures in particular

and it is not that you cannot audit in those jurisdictions, but I think you need to really

ask your auditors how are they adjusted their audit procedures to reflect a different culture

or a different business practice.

In some jurisdictions, we have learned over the last number of years that you cannot rely

on bank confirmations that we rely here on in Canada.

So, you have got still established that there is other money in the bank or there is not.

So, what procedures do you use to do that?

So, I would encourage you to think through that carefully and discuss that with your

auditors.

Also, want to touch on some trends in the audit fees and that is an area that we do

have some concerns in relation to.

This is not from our perspective.

We do not want to interfere in a competitive marketplace.

We understand that there is a good back and forth with the audit, the audit committees,

the auditors, management, etc., and what the fee should be, but we do get very concerned

when we hear about fees dropping by 40% or 50%.

That to us is unrealistic, there are certain efficiencies you can drive, but for a fee

to drop by 50%, it just does not make sense and what you really not think about from an

audit committee perspective, is that audit committee is that audit firm going to put

the resources necessary to do an effective audit and I think those are some of the issues,

but also it is not just the current audit that is coming up, instead that audit five

or six years from now and one of the things that we are concerned about is CPAB is that

we have a viable audit market down the road and if we see fees continuing to decline or

if margins continue to be squeezed because it is not just the decline, it is where the

fees do not rise, so the firms all have to pay their salaries in terms of staff more

the cost of office spaces increasing, so the margins are being squeezed as well.

So, when the firms or if the firms stop investing in their people or training in regards to

experience globally, internationally, doing a number of things like that, that is a real

challenge, so I would encourage you all the really think about this in terms of where

audit fees are headed, is not a reasonable fee for the services being provided.

So, those are just some of the things that I wanted to search on this morning Don.

Brian, thank you.

I know a very full agenda that you are working with desirous in attendance at the symposium.

One of the things I find very interesting is, is this whole issue understanding what

do we mean by audit quality?

and it is a difficult concept, how do you explain what should audit committees be looking

for?

Obviously, you refer to audit quality indicators, which I think will help audit committees get

a better handle on it, but may be a bit more about that what is audit quality and indicators

to help audit committees understand that.

  Well, I think from an audit committee point

of view you develop an audit plan you discus that with the auditors you discuss that with

management.

That plan identifies your key order risks, your key business risks.

Are they being mitigated in terms of that robust discussion that I think needs to take

place between the audit committee, management and the auditors?

Have those key risks been mitigated and if they have, I would say to you probably 99%

of the time you have got a quality audit, but in order to maybe we have that discussion

in an effective manner.

There are certain key audit quality indicators that may be of assistance and let me just

give you just one example, I mean one of the ones that they are looking at is, the amount

of time that the engagement partner or partners spends on a particular engagement?

Is that 25% of their time or is that 30% of their time that may in itself not be the sole

indicator, but it is really trying to put context around that.

So, when they spent 30% of their time on the particular auditor whatever it happens to

be.

Was that putting out fires?

Was that value added?

What was actually being done during that period?

Is that the norm, is that something that if you compare and audit of a similar size and

another engagement partner was spending 60% of their time.

Is that something that the audit committee should be concerned about, but those are all

discussions that what I think will lead to enhance audit quality by asking the auditor

to explain why may be 60% of the partners time was spent on disengagement versus 30%

or 25%, but it really is key to put the context around that to make sure that you fully understand

as to what was being discussed during that period.

Now Jim and Patricia, you serve on audit committees, your experiences in terms of audit quality.

What is it you are looking for in your committees and meanings in terms of the audit quality

and may be even how do you differentiate there is audit quality and then audit service are

those two separate things you look at different, but may be Jim I will start with you and Patricia

your thoughts on it too.

I think it is a big struggle for audit committees and I think that the issue of what is audit

quality is a challenge and as Brian eluded, we can only get at in it directly because

you do not want the audit committee getting audit files and ploughing into that level

that is what CPAB is all that for, that is what they are supposed to do kind of thing,

but I think the audit committee can get a good reading on several things, one is what

is the quality of the audit plan and does the audit plan really address and line up

their risks identified in the audit plan, they set a line up with the audit committee

assessment or risk, and there is a reconnection there kind of thing.

What is the quality of the reporting and what are the findings.

What is the information is coming back.

What is the level of communication between the auditor and the audit committee and are

we dealing with Medusa or are the auditors surfacing some standard issues and reports

in their interaction with the audit committee.

So, Don, I think that the audit committee has to look at those levels of things because

you do not want the audit committee trying to dive down and that is not their job and

that would be a waste of time, that is Brian’s role to deal with that, but that would be

my quick assessment.

Patricia.

I would say you know I would tend to agree with quint Jim just said I guess the other

thing is from one year to other are we touching these on the same issues.

Are we taking notice of what is happening in the outside world bringing this back to

in context with what is touching the company and are the auditors really in tune with that

or they just have the cookie cutter program touching again on the same aspect, they are

comfortable with that, management is comfortable with that, but then you have an issue of trying

to break out of that mold and trying to push them to ask themselves other types of questions

that could impact the company.

Yeah, I think that is a critical part, is understanding.

Do they really understand the industry, the outside world bringing that perspective, do

they understand the commercial challenges, the incentives, those sort of things, and

that would come out through discussion at audit committees.