At its meeting on June 13-14, 2019, AASOC received presentations on, and discussed the following:
- Chair’s Opening Remarks
- Alternative Performance Measures – CFA Societies of Canada
- Approval of AASOC Minutes
- AASB Due Process
- Other Matters
- Other Canadian Updates
- International Updates
- U.K. Update
- Update on the Independence Standing Committee
- Monitoring Group Update
Chair’s Opening Remarks
AASOC Chair, Kevin Nye welcomed everyone, including new Council members Ellen Desmond and Gary Hannaford.
Mr. Nye thanked Carol Paradine for hosting AASOC at the Canadian Public Accountability Board’s (CPAB) Toronto office.
He announced that John Gordon, Cameron McInnis, and Michael Tambosso were unable to attend today’s meeting. However, Mr. Tambosso provided the Chair with his comments in advance to share with the Council.
Mr. Nye informed the Council that today’s agenda encompasses several topics that the Council ought to consider for the future of standard setting in Canada. The agenda includes:
- a presentation by the CFA Societies of Canada on Alternative Performance Measures;
- an update on the current developments in the U.K.; and
- an update on the activities of the Monitoring Group.
Alternative Performance Measures – CFA Societies of Canada
Mr. Nye introduced Richard Talbot who is currently a Senior Advisor to the CFA Societies of Canada and was most recently the Chief Operating Officer of RBC Capital Markets. The Chair noted that Mr. Talbot and Tom Trainor, Managing Director, Hanover Private Client Corporation, have been leading an initiative on Alternative Performance Measures, which Mr. Talbot will present to the Council today. After this presentation, the Council will discuss the CFA Initiative and determine its next steps.
Mr. Talbot informed the Council of concerns that audited financial statements are losing their relevance. Investors are increasingly allocating capital using unaudited information, or APMs, that is not covered by GAAP. In speaking to a group of senior investors, Mr. Talbot reported that they stated that 15 to 20 per cent of the information investors use to make their investing decisions are obtained from the audited financial statements.
Although investors rely on APMs, there are currently no standards governing their preparation. This has led to concerns about the inconsistency, incomparability, and lack of disclosures for this data. Mr. Talbot further noted that stakeholders regard audits as highly relevant. However, there is an audit expectation gap, the difference between what users expect from the auditor and the financial statement audit and the reality of what an audit is and what auditors believe their responsibilities are. He stressed that the AASB has a role to play in clarifying this.
In its survey, the CFA Societies of Canada found that stakeholders support the expansion of the use of APMs, However, they voiced concern that APMs are not governed by standards. Most respondents said that APMs should be regulated by official standard setters and these standards should be made mandatory.
Mr. Talbot noted that APMs are different from GAAP information because they are typically sector-specific and, therefore, requiring the standard setters to know the subject industry in detail. He informed AASOC that the Alternative Performance Measures Working Group was created in May 2018 at the suggestion of the Governor of the Bank of Canada. The Group’s goal is to develop a set of industry-specific standards that can be implemented and ultimately improve corporate disclosures. The Group will form industry-specific teams that will utilize a collaborative approach with an agile cycle time. Mr. Talbot invited the AASB to support this initiative by being represented on the Group.
After a question-and-answer period, Mr. Nye thanked Mr. Talbot for presenting the CFA Alternative Performance Measures Initiative to the Council.
Council’s Thoughts on the CFA Alternative Performance Measures Initiative
In reflecting on Mr. Talbot’s presentation, one Council member expressed that AASOC must act in the public interest by supporting this project and allocate resources in its favour. Furthermore, the Council should also assess what value it could add to this initiative.
Other members expressed their support and noted that this is a great opportunity for Canada to be a leader in this field.
Mr. Nye reiterated the Council’s support of the AASB’s involvement in the Alternative Performance Measures Working Group to support this up-and-coming initiative.
Approval of AASOC Minutes
AASOC approved the minutes of the meeting held on March 25, 2019.
AASB Due Process
CSAE 3416, Reporting on Controls at a Service Organization
Eric Turner, Director, Auditing and Assurance Standards, turned AASOC’s attention to the meeting materials on CSAE 3416, Reporting on Controls at a Service Organization. He explained that the Board usually adopts international standards or develops its own. However, this is an exception because this standard deals with organizations that operate between Canada and the United States. Canadian stakeholders have indicated that the marketplace for these engagements is highly integrated between Canada and the United States. Therefore, aligning the Canadian and U.S. standards is important.
AASB Chair, Ken Charbonneau noted that the Board is serving the public interest by developing a high-quality standard that will meet the needs of users and practitioners and will ensure consistency between CSAE 3416 and the American standard equivalent.
In response to questions, Mr. Turner said that this project also addresses the requirements of entities that need auditors to report in accordance with both Canadian and U.S. standards.
AASOC concluded that the AASB followed due process with proper regard for the public interest in developing and approving CSAE 3416.
AASB 2018-2019 Performance Report and Annual Report
AASB Director, Eric Turner, provided background to the Board’s Performance Report for 2018-2019, including the due process steps performed to date. These steps included discussions with the AASOC Performance Review Committee and with the Council during the year. Mr. Turner noted that the Board met most targets established in the 2018-2019 Annual Plan. He explained the background, the reasons, and actions the Board took to address activities that were delayed.
Bruce West, Chair of the Performance Review Committee, informed AASOC that the Committee met twice to review the AASB’s performance for the year ended March 31, 2019. Committee members agreed that the Board achieved its 2018-2019 work-plan objectives and is on track to meet its 2016-2021 Strategic Plan objectives.
One member asked that the AASB provide AASOC with a biannual summary of the status of its projects to keep the Council updated.
AASOC endorsed the Committee’s conclusion and decided that the AASB’s 2018-2019 Performance Report provided a basis for the Council to assess the Board’s performance for the year ending March 31, 2019. The Council approved the AASB 2018-2019 Performance Report.
In response to a Council member’s question, Mr. Charbonneau said that the Annual Report included no discussion of the targets that were not achieved. Although those targets were insignificant, they will be achieved during the year ending March 31, 2020.
Mr. Nye thanked the Committee for its efforts.
Mr. Charbonneau updated AASOC on the following auditor reporting projects:
- Communication of Key Audit Matters (KAM) in the Auditor’s Report;
- Combined Report; and
- Engagement Partner Name.
Communication of Key Audit Matters (KAM) in the Auditor’s Report
Mr. Charbonneau advised the Council that the Board published the Exposure Draft, “Communication of Key Audit Matters (KAM) in the Auditor’s Report,” in January 2019, with comments due by May 15, 2019. The Exposure Draft mainly addressed two matters: the scope of the requirements to communicate KAM in the auditor’s report and the effective date. Mr. Charbonneau highlighted that staff has received 20 comment letters and consulted with 75 individuals.
One of the proposals set out in the Exposure Draft relates to communicating KAM for entities listed on exchanges other than the Toronto Stock Exchange (TSX). He commented that six letters were in support of extending KAM to entities listed on exchanges other than the TSX, three letters did not support this idea and the remaining letters did not comment on this proposal.
On the issue of entities that are required to comply with National Instrument (NI) 81-106, Investment Fund Continuous Disclosure, the AASB proposed to expand KAM to apply to entities that are required to comply with NI 81-106, which applies to both listed and unlisted investment funds. The Board received two letters supporting the proposal, 10 letters not supporting, and the remaining letters not commenting on it. Mr. Charbonneau noted that CPAB supported the proposal while the Chief Accountants Committee of the Canadian Securities Administrators did not support it.
The AASB received mixed feedback on the new standard’s effective date. The Board will provide further information on its findings at the Council’s meeting on July 8, 2019. The Board intends to approve Handbook changes in September 2019 and issue the new standard in December 2019.
Combined Report Update
Mr. Charbonneau reminded the Council that the Combined Report Update project aims to address the challenges faced by dual-listed entities that are required to have their financial statements audited in accordance with both Canadian and U.S. audit standards. The differences between these auditor reporting standards do not allow auditors to issue a single audit report that complies with each country’s standards. The AASB took on this project to address the public interest considerations of having two separate reports on one set of financial statements, which could confuse readers. The Board will provide further information on the project’s developments at the Council’s meeting on July 8, 2019.
Engagement Partner Name
Mr. Charbonneau reminded AASOC that the Engagement Partner Name project arose out of concerns stakeholders raised to the AASB regarding the personal liability of engagement partners when a Canadian audit report is filed in the United States and the engagement partner’s name is disclosed in the report.
He informed the AASOC that the one-year deferral the AASB approved in January 2019 will not be required after the stated December 15, 2019, end date. The International Practices Task Force’s (IPTF), a task force of the SEC Regulations Committee, minutes were issued as expected and confirm the Securities and Exchange Commission’s (SEC) view that for certain Canadian entities that report to the SEC, a Canadian Auditing Standards report is not “filed” in the U.S.; it is “furnished.” A furnished audit report does not attract the same liability concerns as a filed report. Therefore, personal liability should not be a concern. Mr. Charbonneau also indicated the Board is not currently working on any project related to the engagement partner name. However, the Board knows the large firms are working through their legal counsel to resolve related issues.
One member asked if Canada requires the engagement partner name to be included on all Canadian audit reports. Mr. Charbonneau responded that Canada requires the engagement partner name in the audit report of listed entities but does not require this for other audits.
Mr. Charbonneau introduced Svetlana Berger, Principal, Auditing and Assurance Standards, to AASOC. Ms. Berger has led the AASB’s Compilation Engagements project for some time. She updated the Council on this project, including a discussion of the key issues respondents raised to the Exposure Draft, “Compilation Engagements” and the Board’s preliminary conclusions.
Ms. Berger informed AASOC that many practitioners conduct compilation engagements. The AASB has been working on the project for a new compilations engagement standard to better assist practitioners in performing compilation engagements in the current environment and to more clearly communicate to users the responsibilities of management and the practitioner, and the nature and scope of a compilation engagement.
She highlighted that unlike other services associated with financial information, compilation engagements provide no assurance to stakeholders. Rather, management asks the practitioner to compile the financial information using information management provides. Ms. Berger noted that among other things, compilation engagements are performed to
- facilitate the preparation of corporate tax returns;
- obtain the practitioner’s advice on tax and business planning; and
- meet the lenders’ information needs.
Ms. Berger informed AASOC that the AASB’s Exposure Draft was issued in September 2018, with a 120-day comment period. She outlined the breadth of the feedback the Board received on this project and the Board’s activities to date in considering stakeholder feedback. This included using a task force to discuss and analyze feedback.
In discussing concerns raised by the Public Business Accountants (PBAs), Mr. Charbonneau informed AASOC that he met with the CEO of the Chartered Professional Accountants of British Columbia to discuss the PBAs concerns that they will not be able to perform compilation engagements or issue a compilation engagement report under the proposed CSRS 4200, Compilation Engagements, because:
- the term “professional” (used in definitions of “practitioner” and “relevant ethical requirements”); or
- the reference to a CPA Canada Handbook standard in the report is reserved for CPAs by the CPA Act in some of provinces.
One Council member with legal background added that this is a regulatory issue in B.C. and further noted that she believed that it is in the public interest to require a certain level of expertise that professional accountants possess.
Another Council member asked if the AASB considered rewording the proposed new standard to accommodate the PBA group. Mr. Charbonneau indicated that the Board was not planning to revise the new standard for the following reasons:
- addressing who can perform a compilation engagement is a provincial regulatory matter and not within the Board’s mandate;
- the definitions are consistent with the same definitions in the review engagements standard; and
- the reference to CSRS 4200 in the report is consistent with the other Assurance Handbook report requirements.
A Council member questioned whether it is in the public interest that CSRS 4200 retain language that may restrict non-CPAs from providing compilation engagements. To get a better sense of the magnitude of the issue, the Council member asked: “How many entities using the services of PBAs could be impacted by the new CSRS 4200?” A response to this question will be provided by the Board at a future Council meeting.
Ms. Berger informed AASOC that the AASB’s next steps include approving the final standard in September 2019, obtaining Council’s assessment of due process and consideration of the public interest in October 2019, and issuing the new standard in the Handbook by the first quarter of 2020. The Board will discuss the new standard’s effective date at its September 2019 meeting.
In discussing the International Auditing and Assurance Standards Board’s (IAASB) Strategy and Work Plan, Mr. Charbonneau noted that at its May 2019 meeting the AASB discussed key comments to include in its response letter to the IAASB’s Consultation Paper “Proposed Strategy for 2020-2023 and Work Program for 2020-2021.” A draft response letter was circulated to the Board for review, and a final letter was submitted to the IAASB. He highlighted the key comments provided in the response letter.
In response to questions, Mr. Charbonneau said that like the IAASB, AASB recognizes the urgency of addressing the challenges and issues relating to an audit of less complex entities. The Board is currently looking to form a working group to assist the Board to better understand the challenges and issues of audits of less complex entities in Canada.
Other Canadian Updates
Accounting Standards Oversight Council (AcSOC)
Stephenie Fox, Vice-President, Standards, FRAS Canada, provided AASOC with the following updates:
- AcSOC met on June 6-7, 2019, in Edmonton, Alberta, where the it held an extensive orientation session for new Council members.
- AcSOC discussed its approach to oversight in the future and the its role in providing strategic input to the Accounting Standards Board and the Public Sector Accounting Board.
Canadian Public Accountability Board (CPAB)
CPAB CEO Carol Paradine provided an overview of CPAB’s activities since the last AASOC meeting:
- CPAB is currently performing thematic reviews on going concern, fraud, and IFRS 9 Financial Instruments in addition to regular inspections. She highlighted that CPAB has found higher than normal inspection findings in the cannabis and cryptocurrency sectors.
- CPAB is engaging with stakeholders to discuss international developments to determine what could be done in Canada to strengthen the audit environment.
- CPAB will be partnering with the Office of the Superintendent of Financial Institutions (OSFI) for an audit quality roundtable in October 2019.
- CPAB has two new Board members: Sheila Fraser and Kevin Kelly.
Canadian Securities Administrators (CSA)
Mark Pinch, Associate Chief Accountant of the Ontario Securities Commission (OSC), provided the following updates:
- One of the CSA’s main projects now relates to finding ways to reduce regulatory burden. For example, the OSC published a Staff Notice on January 14, 2019, seeking suggestions on ways to further reduce unnecessary regulatory burden. The OSC also held several roundtables to obtain feedback on this topic, one of which an AASOC member attended.
- The CSA hopes to publish a document on the proposed amendments to the Auditor Oversight Rule by early Fall 2019.
Office of the Superintendent of Financial Institutions (OSFI)
Karen Stothers, Senior Director of the Accounting Policy Division at OSFI, provided AASOC with the following updates:
- OSFI hosted the Financial Stability Board’s latest series of roundtables on external audit on June 6-7, 2019. The roundtable’s objective was to engage in constructive dialogue regarding ways to promote international financial stability by enhancing public confidence in auditors and the quality of auditors, especially for financial institutions. Roundtable participants consisted of market regulators, audit regulators, IAASB, and others.
- OSFI will be partnering with CPAB to discuss audit quality in October 2019.
International Auditing and Assurance Standards Board (IAASB)
Eric Turner, Director, Auditing and Assurance Standards and IAASB Member, provided AASOC with the following comments:
- The IAASB met in Toronto on March 11-15, 2019, and held a conference call on April 10, 2019.
- The IAASB has appointed a new Chair, Tom Seidenstein, on July 1, 2019. Mr. Seidenstein held senior strategic leadership positions at the Federal National Mortgage Association and the IFRS Foundation.
- The IAASB also appointed a new Technical Director, Willie Botha, in March 2019.
- The IAASB’s March meeting focused on group audit engagements, ISA 315, Identifying and Assessing the Risks of Material Misstatement, and ISA 500, Audit Evidence.
- The IAASB’s April meeting focused on audits of Less Complex Entities.
International Federation of Accountants (IFAC)
Nothing to report.
Public Interest Oversight Board (PIOB)
Karen Stothers, Senior Director of the Accounting Policy Division at OSFI and OSFI Member, provided AASOC with the following updates:
- The PIOB met on March 28-29, 2019, in Madrid, Spain, where the group analyzed the outcome of its annual self-assessment exercise, discussed future action, and provided input on the latest Monitoring Group consultation paper.
- The PIOB will release its 2019 Annual Report in the coming few weeks. It will highlight the Board’s work over the past fiscal year.
- The PIOB’s next meeting will be on June 27-28, 2019, in Madrid, Spain.
Jeremy Justin, Chief Risk Officer and Vice-President Strategy at CPAB, said that he will provide AASOC with information on the current global developments related to audit.
He stated that the British government launched several reviews in response to the many high-profile company failures in the United Kingdom in the past two years. The most notable ones were HBOS, Carillion, and Patisserie Valerie. These incidents raised questions about the work of the auditor and audit regulator, a number of reviews were launched by the UK government.
By early 2019, several reports have been published recommending changes to the audit market and audit regulator in the United Kingdom. They include:
- a report on the independent review of the Financial Reporting Council (U.K. audit regulator);
- the U.K. Competition and Markets Authority’s report on the audit market; and
- British government’s Business, Energy, and Industrial Strategy Committee’s report on the audit market.
The British government has also commissioned Sir Donald Brydon to review the future of the audit.
Mr. Justin noted that recent developments in the United Kingdom related to Brexit may delay implementation of any changes. He stressed the importance that AASOC study the implications of these developments in Canada and consider any changes in the Canadian audit environment that should be pursued to better serve public interest.
Following a discussion on these recent developments, Mr. Nye thanked Mr. Justin and asked that AASOC continue to perform a global scan at each of its meetings to familiarize itself with potential impacts to the Canadian audit environment.
Update on the Independence Standing Committee
Mr. Nye reminded AASOC that at its February 2019 meeting the Council discussed its role in the newly formed Independence Standing Committee. Bruce Winter, the previous Council Chair, convened an informal committee to assist with delineating what oversight of the ISC might look like. He informed the Council that Mr. Winter will update the group on the recent developments as they relate to the ISC.
Mr. Winter reminded AASOC that the Committee began by considering how Council’s Terms of Reference might be adapted to clarify the Committee’s oversight role. A draft of the Council’s proposed role for the Committee was sent to Genevieve Mottard, Chair of the Public Trust Committee. She suggested that the Council and the Committee should agree on what oversight should look like for the Committee.
Mr. Winter noted that the Committee met with Ms. Mottard and Michele Wood-Tweel, Vice-President of Regulatory Affairs at CPA Canada, in May 2019 to discuss the matter further.
After some discussion, the AASOC agreed on some updates to its role for the Committee. Mr. Winter said he will gather Ms. Mottard’s input on the revisions and update the Council on this matter at its next meeting in July 2019.
Monitoring Group Update
Ms. Fox provided AASOC with a brief overview of the Monitoring Group’s history and the its main responsibilities, which include overseeing, consulting, and advising the PIOB, appointing the members of the PIOB, and approving the PIOB budget.
She said that on November 9, 2017, the Group published a Consultation Paper that discussed a multi-stakeholder approach in standard-setting to better serve the public interest. This Consultation Paper interjected a high sense of uncertainty in the standard-setting environment. The Group received 180 response letters from around the world on its Consultation Paper and initially expected to issue its second consultation paper in the fall of 2018. To date, the Group has not issued its second paper. In speaking to members of the PIOB and IFAC, Ms. Fox does not anticipate that a second paper will be issued in 2019. She informed members that the Group will meet next in October 2019./p>
After some discussion, Ms. Fox advised AASCOC that she will continue to update it on any developments related to the Monitoring Group.
The Auditing and Assurance Standards Oversight Council (AASOC) is an independent, volunteer body established by the Canadian Institute of Chartered Accountants (now Chartered Professional Accountants of Canada) in 2000. It serves the public interest by overseeing and providing input on the activities of the Auditing and Assurance Standards Board (AASB), which sets standards for assurance and related service engagements. Reporting to the public and consisting of prominent leaders from business and regulators, AASOC’s responsibilities include appointing AASB members, providing input on strategic priorities and evaluating the performance of the AASB.