Enhancing audit quality (EAQ) initiative: FAQs

Learn more about the EAQ initiative, which was a transparent consultation process to gain Canadian stakeholder input on emerging issues with respect to enhancing audit quality globally, and the impact on Canada.

Who was involved in the consultation process?

Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board (CPAB) collaborated on the EAQ initiative. A steering group and working groups were established to develop discussion papers for public comment on key audit quality issues. The EAQ Steering Group, chaired by David Brown, a leading securities lawyer and former chair of the Ontario Securities Commission, was responsible for providing direction and oversight to the work program to ensure a transparent consultation process that best served the public interest.

Three working groups focused on the role of audit committees, the auditor reporting model and auditor independence. Working group participants included leading experts from:

  • audit committees
  • audit and assurance standards setters
  • auditors
  • institutional investors
  • prudential and securities regulators
  • financial statement preparers
  • CPAB
  • CPA Canada

Why did CPA Canada and CPAB set up a consultation process?

In response to the global financial crisis in 2008-09, various international policymakers, regulators, standards setters and others evaluated the need for changes to the financial system to promote greater financial stability and reduce systemic risk.

Although auditors were not seen as causing company failures during the crisis, it was recognized that they could play a key role to address weaknesses in the financial reporting system. Several global initiatives were launched both internationally and in North America to assess changes to the audit process and impact on audit quality.

Canada weathered the financial crisis well, relative to many other countries, and did not experience the bank and other system failures that raised questions about audit process and quality in other jurisdictions.

Factors contributing to Canada’s strong position during the financial crisis:

  • sound banking, securities and financial regulatory systems
  • well-respected corporate governance policies
  • adoption of high-quality international accounting and auditing standards
  • strong regulatory mechanisms for auditors, including:
  • audit inspection regimes
  • professional qualification and continuing education requirements
  • ethical standards
  • auditors generally performing audits of sound quality

However, Canada could still be affected by proposals affecting the future of auditing from other jurisdictions.

In December 2011, CPAB held its first annual symposium on audit quality. The symposium brought together thought leaders and policymakers from around the world to discuss issues relating to audit quality, as well as current proposals to address them. The CPAB symposium was a catalyst for various stakeholders to develop a process to identify Canadian perspectives on international developments relating to audit quality.

It was important for Canadian stakeholders to consider the issues and add their voice to the discussions on enhancing audit quality that took place in the United States, the European Union and elsewhere.

What issues were considered and what was the output from the consultation process?

There were three primary objectives of the consultation process:

  1. to provide useful input to Canadian standard setters, regulators and others as they considered potential changes in Canada in the wake of developments taking place globally
  2. to enable Canadians engaged in global discussions about enhancing audit quality to present a strong and credible Canadian voice
  3. to set an appropriate context for further research, debate and guidance to support the enhancement of audit quality in Canada in the future

Three working groups considered and reported on the following areas:           

The Role of the Audit Committee Working Group

  • reporting relationships among audit committees, management, auditors, audit inspectors, regulators and shareholders
  • enhancing and promoting the application of professional skepticism by the audit committee and the auditor

The Auditor Reporting Working Group

  • enhancing the information value of the auditor’s report
  • expanded assurance by auditors on parts or all of Management’s Discussion & Analysis (MD&A), quarterly financial statements and other information

The Auditor Independence Working Group

  • options relating to the appointment and rotation of, and services provided by, auditors to improve independence, objectivity, professional skepticism and audit quality at firms

What would have been the risk to Canada of not identifying and communicating a Canadian perspective on these audit quality issues?

Canada would not be immune to auditing changes that might have emerged in other jurisdictions. It was important that Canadian stakeholders considered the issues and added their voices to the discussions on enhancing audit quality that were taking place in the U.S., the European Union and elsewhere. Failure to do so may have resulted in international solutions that would be problematic for Canada.

For example, if International Standards on Auditing and U.S. Public Company Accounting Oversight Board (PCAOB) standards conflict, this could add complexities for Canadian auditors of Canadian Securities and Exchange Commission (SEC) registrants who wish to report in compliance with both sets of reporting standards.

Q: What was the timing of the consultation process?

A: The timing of the consultation process for the three working groups was as follows:

  • Role of the Audit Committee
  • Consultation paper: Fall 2012
  • Reports reflecting results of the consultation process: Winter 2013
  • Auditor Reporting
  • Consultation paper: Late Spring/Summer 2012
  • Reports reflecting results of the consultation process: Fall 2012
  • Auditor Independence
  • Consultation paper: Late Spring/Summer 2012
  • Reports reflecting results of the consultation process: Fall 2012