Investors weigh in on upcoming significant changes to auditing and accounting

Learn what investors think about state of auditing and accounting in Canada as well as how CPA Canada, CPAB and Veritas Investment Research are engaging investors.

On October 8, 2015, Chartered Professional Accountants of Canada (CPA Canada) teamed up with the Canadian Public Accountability Board (CPAB) and Veritas Investment Research to host Knowing the Numbers, an accounting and auditing lunch and learn for institutional investors.

The event, attended by over 30 investors (primarily portfolio managers and buy side financial analysts), was hosted to discuss key accounting and auditing matters of concern and share information and resources that can benefit their businesses in keeping with the evolving regulatory and standards landscape.

Investors speak

A brief survey was undertaken at the event to understand the Canadian investor’s current state on accounting and auditing standards. Results show that:

  • more than 60 per cent believe that the quality of financial reporting of public companies in Canada is very high
  • more than 60 per cent noted that the overall quality of public company auditing in Canada is good or very good
  • more than 80 per cent stated that they rely on publicly issued financial statements when making investment decisions
  • more than 80 per cent support aligned auditing standards between the U.S. and Canada
  • more than 85 per cent currently support the disclosure of key audit matters within the auditor’s report
  • more than 85 per cent indicated that financial reporting would be improved if the auditor expressed an opinion on non-GAAP measures and other key performance indicators

Experts from Chartered Professional Accountants of Canada (CPA Canada), Canadian Public Accountability Board (CPAB) and Veritas Investment Research delivered presentations on the latest developments in the world of accounting and auditing standards, the investor’s role in driving audit quality and what they can do to ensure better business decisions.

Highlights of each presentation are noted below.

Living in an IFRS world

Alex Fisher, CPA, CA and principal at CPA Canada discussed the complexities of living in an IFRS world. His presentation included the following topics:

  • International Financial Reporting Standards (IFRS) have become the de facto global standard for financial reporting, validated by almost a decade of use by markets in both advanced and developing economies.
  • More than 100 countries require the use of IFRS by public companies today, while most other jurisdictions permit the use of IFRS in at least some circumstances. However, at the current time there is little support for the Securities and Exchange Commission (SEC) to mandate IFRS for all U.S. public companies.
  • Over the next few years, major changes will occur to the accounting for revenue and leases. The new revenue standard, IFRS 15 Revenue from Contracts with Customers, will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally.
  • To address investors’ concerns about off-balance sheet assets and liabilities that result from the application of today’s lease accounting rules, major changes are upcoming on how lessees account for leases. Practical insights and examples to highlight some of these changes were shared.

Access more investor-focused IFRS information and resources from the International Accounting Standards Board.

The new auditor's report

Given the intended adoption of new international auditor reporting standards by the Auditing and Assurance Standards Board (AASB), Eric Turner, CPA, CA and director, auditing and assurance standards at CPA Canada outlined key considerations and benefits for the Canadian investor and analyst community, around the new auditor’s report.

Eric noted the following points among the key changes in format and content:

  • The new report is tailored to the specific circumstances of the entity, moving away from a standardized one-page pass/fail report.
  • A Key Audit Matters section, specifically designed so that auditors of listed entities can provide information to investors about the matters requiring significant attention during the audit and how the auditor responded to issues identified.

The AASB’s mandate is to adopt international auditing standards with minimal amendment. It issued an Invitation to Comment earlier this year indicating that it intends to adopt the auditor reporting standards on a deferred basis which will likely incorporate a staged implementation for listed entities. Investors were encouraged to provide comment to the AASB and were left with information on key considerations as Canada moves towards implementation.

A number of jurisdictions have already made changes to the new auditor’s report or are in the process of adopting the international reporting standards. The U.S. is expected to issue auditor reporting proposals in 2016.

Follow the Audit Quality Blog to keep up with the latest developments on the new reporting standard.

The state of auditing in Canada

Brian Gabel, CPA, CA and vice-president, stakeholder engagement at CPAB discussed the state of auditing in Canada.

Each year, CPAB publicly releases the results of its inspection activities. Although inspection results have indicated an improvement in audit quality over time, the performance of audit firms varies and therefore continued improvement efforts by audit firms and oversight by audit committees has been suggested by CPAB. Key deficiencies in audit work were most often found in:

  • auditing complex estimates
  • auditing operations in foreign jurisdictions
  • audit approach used based on poor understanding of internal controls
  • demonstration of business knowledge and judgment
  • reliance on management’s representations

Investors can help improve audit quality by asking questions of management relating to key audit issues.

Visit the CPAB website for more information.

Better research leads to better investment outcomes

Anthony Scilipoti, CPA, CA and president and CEO of Veritas Investment Research concluded the session by:

  • providing an overview of possible triggers that may influence “creative accounting”
  • outlining some emerging marketplace risks
  • suggesting questions investors may want to ask management to better understand their business and accounting

In closing the discussion, it was noted that more than 50 per cent of participants believe that investors are not prepared for the changes and issues discussed at the luncheon, enhancing the need for future dialogue with investors on these important topics.