Canadian audit overseer reports problems and solutions

The Canadian audit oversight body, the Canadian Public Accountability Board, announced Friday that last year they deregistered a small firm in Vancouver (which has since gone out of business) and prevented three other small firms from accepting new client due to deficiencies in their audits discovered upon inspection.

My initial thought was, these small firms have public company clients? The CPAB is charged with overseeing only firms that audit public companies, therefore I guess they must. Good on them. Generally public companies choose auditors with more expertise on board that a partner or two and a handful of staff. This is because of their often complex accounting needs and the greater security that comes with a firm that can take on higher liability.

CPAB said yesterday it reviewed 121 audits performed by Canada’s six largest accounting firms last year, and found five cases where the work was so deficient that the companies involved had to correct or restate their reported financial results.

Another nine of the files “had serious deficiencies” in the work done, but did not require restatements. In each case, the audit firm was required to do more work on the file or improve its documentation.

Overall the oversight board believes documentation is the biggest area of improvement for audit firms. We just don’t document our thought processes in enough detail to satisfy them, in particular when we consult internally on complicated matters or judgment calls. I know my firm has recently rolled out what they’re calling the new “documentation standards”, which address this concerns.

I’d like to have a file that I worked on examined by the CPAB just to see whether my work is up to snuff. Something tells me it’ll happen sooner or later!


Nortel completes latest restatement

Nortel released their 2005 financials Friday and completed more restatements of prior years’ results. The restatements related to revenue recognition and decreased revenues and net income because the revenue should’ve been booked in different periods.

Maybe this will mark a turning point for the Canadian communications equipment company and they can retain (or regain) their position as a market leader. The fact they released these disappointing results on a Friday afternoon is of course a little trick to reduce their media exposure. Not everyone is fooled!


Revenue recognition and Nortel

Nortel BramptonNortel Networks Corp. once again will have to restate its financial results to fix accounting mistakes, the company said on Friday as it posted a fourth-quarter loss of $2.2 billion.

Their chief executive maintains that the revenue was just recognized in incorrect periods, from 2002 through 2005.

Revenue recognition is definitely a touchy subject these days, I know we certainly spend more time nowadays on it than we used to. We have checklists to ensure we’ve considered every different aspect of sales arrangements and there is a note to the financial statements concerning how and when revenues are recognized.

Since Nortel is large (complicated) and public (risky), the audit could take quite long and I wouldn’t be surprised if there are a handful of public accountants who are there each year more often than they are at their own office.