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Auditor Independence

Peter MillsMelissa Langlois

December 11, 2012

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Disclaimer

• The following are solely the views of the Auditor Independence Working Group (Working Group).

• The Working Group continues to engage in stakeholder outreach and consultation in order to consider the Canadian perspective.

• A final paper is anticipated in early 2013.

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Agenda

Further information on the Enhancing Audit Quality initiative can be found at:www.cica.ca/enhancing-audit-quality-canadian-perspective/item64401.aspx

Discussion Item Slide

Background 4-7

Working group members 8

The Canadian Environment 9-11

Enhancing Audit Quality - Objectives 12

Auditor Independence – Project Objectives & Guiding Principles 13-14

A Continuum of AlternativesMandatory Comprehensive Review

15-1718-19

Other Proposals - Non-audit Services, Audit-only Firms, Joint Audits 20-22

Update on the Process 23-24

Questions 25

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Background

• Questions raised about the auditors’ role after the 2008 financial crisis– Resulted in various global initiatives

• Canada weathered the crisis well– No financial system failures in Canada

• Canada already has a commitment to: – regulatory oversight– high-quality accounting and auditing standards– audit committee best practices

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Background

• Reforming the audit process has not been widely debated in Canada– Canada is not immune to what is taking place globally

• Important that Canada’s audit process and audit quality are consistent and comparable internationally since– Many Canadian entities now operating in an international environment – Canada needs to be a good place to invest

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Background

• Canadian Public Accountability Board (CPAB) held an audit symposium – December 2011 – policymakers decided it was important to forge a Canadian perspective

• CPAB and CICA* formed a joint initiative - “Enhancing Audit Quality”– Representatives from

• securities and audit regulators • institutional investors/ financial institutions• audit committee chairs • lawyers• Auditing and Assurance Standards Oversight Council (AASOC)

*Canadian Institute of Chartered Accountants

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Background

• “Enhancing Audit Quality Initiative”– Oversight by a Steering Committee– Released an overarching paper (initiative overview) August 2012– Formed three groups:

Working Group Discussion Paper Deadline for Comment Period

Auditor Reporting Model

August 31, 2012 October 12, 2012

Auditor Independence September 27, 2012 November 16, 2012

Role of the Audit Committee

Not yet released Not yet released

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Working Group Members

• Peter W. Mills, QC, B.Comm, JD, ICD.D, Corporate Director, Toronto (Chair)• William R. Bruschett, FCA, Grant Thornton, LLP, Toronto• Patrick G. Crowley, CA, ICD.D, Executive Vice President & Chief Financial Officer, OMERS, Toronto• Gary B. Hannaford, FCA, Institute of Chartered Accountants of Manitoba, Winnipeg• Jane E. Kinney, FCA, Deloitte, LLP, Toronto• Andrew J. Kriegler, former SVP & Treasurer, The Canadian Imperial Bank of Commerce (CIBC),

Toronto • Paul R. Weiss, FCA, Corporate Director, Toronto

Observer• Kenneth J.A. Vallillee, FCA, Canadian Public Accountability Board (CPAB), Toronto

Project Manager• Melissa E. Langlois, CA, Deloitte, LLP, Toronto

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The Canadian Environment

• Approximately 6,000 reporting issuers in Canada and 1/3 are considered small market capitalization companies (market capitalization and total assets under $10m)

• Large majority of public companies audited by the Big 7 – members of the Forum of Firms (FOF)– FOF members cannot use the exemption in our independence rules for small

cap companies

Features of the Canadian Environment

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Feature Description

Office of the Superintendent of Financial Institutions (OSFI)

Supervises and regulates more than 450 banks and insurers

Provincial Securities Commissions

Each province and territory has its own securities regulator and its own securities legislation

Canadian Securities Administrators (CSA)

A voluntary umbrella organization of the provincial and territorial securities regulators referred to above

Regulatory Oversight All public issuers in Canada have to be audited by firms registered with CPAB and subject to its inspection and discipline. CPAB, was established in 2002, and is a member of the International Forum of Independent Audit Regulators (IFIAR).

Provincial Institute Reviews Audit Partners subject to reviews by the provincial accounting institutes

Features of the Canadian Environment

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Feature Description

Canadian Companies Listed on US Exchanges

Approximately 250 companies are listed on US exchanges - auditors may also be inspected by the US PCAOB in addition to CPAB

Public Oversight of Standard Setting

Establishment of the Auditing and Assurance Standards Oversight Council (AASOC) to oversee the work of the Auditing and Assurance Standards Board (AASB) and the development of Canadian auditor independence standards

Governance – Audit Committees

Regulations that auditors must be independent of companies they audit and audit committee pre-approval of any services

Independence rules Rule 204 in the Code of Conduct of the Chartered Accountant Profession (similar rules for other accounting bodies)

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Enhancing Audit Quality - Objectives

The main objectives are three-fold:

• Provide useful input to Canadian standard setters, regulators and others as they consider potential changes in Canada.

• Support the views of Canadians engaged in dialogue about various global proposals

• Set an appropriate context for further work to enhance audit quality in the future

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Auditor Independence Project - Objectives

The working group was directed to respond to proposals on the appointment and rotation of auditors and the services they should be permitted to provide, including:

• Mandatory audit firm rotation• Mandatory tendering• Non-audit services• Audit-only firms• Joint audit

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Auditor Independence Project - Guiding Principles

• The Working Group used a framework of guiding principles to evaluate the global proposals, including:

a) potential effect on independenceb) potential effect on audit qualityc) work effort and costs for audit committees, the companies and audit firms

• The primary focus by the Working Group was on: – Enhancing audit quality– Reporting issuers

• Reviewed background and potential benefits in each case before arriving at a consensus view

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A Continuum of Alternatives

• Alternatives to attempt to address institutional familiarity threats (long tenure of audit firms) were looked at in a continuum

• Continuum includes:– Mandatory audit firm rotation– Mandatory tendering– Mandatory comprehensive audit firm review by audit committees

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A Continuum of Alternatives

• Considered the effect on the following factors when evaluating the continuum:– Independence– Transparency– Audit quality– Governance impact– Work effort/cost

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A Continuum of Alternatives

• Consensus – Mandatory Comprehensive Review of the Auditor (5 year basis)– Audit committee led– Greatest focus on audit quality and demonstrated exercise of professional

skepticism– Greatest degree of public disclosure about the basis on which the audit

committee evaluates, retains or replaces an auditor– Annual auditor assessments will continue– Audit Committee Working Group to provide details around the process– Considerate of proportionality and scalability for reporting issuers– Provide most of the benefits with fewer of the issues and less cost

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Mandatory Comprehensive Review of the Auditor

• The Working Group’s recommendation included:– Consideration of what should be done in the annual compared to the

comprehensive review– Generating appropriate criteria, tools and guidance to assist the audit

committees in completing the review– Consideration of the scope of reporting issuers subject to the regime, as well

as scalability– Information from Regulatory inspection findings (which is currently not made

public)

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Mandatory Comprehensive Review of the Auditor

• The Audit Committee Working Group is now evaluating the concept and related requirements – Support the mandatory comprehensive review concept– Working on operationalizing, guidance and tools– Preliminary draft completed, with a discussion paper anticipated late

December 2012 or early January 2013

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Non-audit services

• Global proposals address further changes to non-audit services

• Consensus – Continue the Canadian principles-based/prohibition approach to non-audit services– Recommends consideration of additional independence prohibitions for two

of the three differences* between the Canadian and SEC/PCAOB prohibitions – Recommends further study on the third item

* Differences are providing personal tax services for individuals in a financial reporting oversight role, aggressive and confidential tax transactions and providing non-audit services on a contingency fee basis.

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Audit-only Firms

• EC is the only body proposing audit-only firms– Based on percentage of market share by firms in the audit services of larger

public interest entities

• Consensus – Audit-only firms were not supported

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Other Audit Structures - Joint audits

• Consensus – The IWG recommends the rejection of joint audits

• Discussion on this topic is limited in global proposals

• Canada previously had joint audits, and this requirement was removed. Reasons for the change included:– The potential division of responsibility associated with the approach– Concern that some issues would fail to get addressed– The potential to create incentives for management to choose the opinion of

the auditor that yields the most favourable result – Concern that there could be less accountability, less auditor oversight, and

diminished quality of the financial statements

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Status Update – Auditor Independence

• Performed stakeholder outreach – Presentation to some interest groups (e.g., Institute of Corporate Directors

(ICD))

• Comment period closed November 16, 2012

• Continuing to analyze the responses

• Early January the working group will review analysis of the responses

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Status Update – Auditor Independence CPAB Symposium held November 30, 2012• Representation from – Canadian banking, investors, securities and audit regulators, audit committees, and

audit firms– Steven Maijoor, Chair of the European Securities and Markets Authority – Stephen Hadrill, CEO of the UK Financial Reporting Council) – Steven Harris, Board Member of US Public Company Accounting Oversight Board– Nathalie Berger, Head of Unit Audit and Credit Rating Agencies, DG Internal Market,

European Commissions

• At least in Canada there was wide support for mandatory comprehensive review and the positions recommended on non-audit services, audit-only, joint audits

• Audit Committee working group continues to work through operationalizing mandatory comprehensive review

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Questions?