The Canadian Public Accountability Board (CPAB) fills a similar role to the PCAOB in the United States. It just issued a report blasting auditors for the quality of audits done on Chinese companies listed on the Toronto Stock Exchange. Sino-Forest is the highest profile case of Canadian listed Chinese companies, but the report indicates that there are many more potential problems. The report is a must read for anyone auditing Chinese companies, listed in Canada or not.
The reports indicates that CPAB identified 24 higher-risk reporting issuer audits based in China; 12 of those were audited by national firms and 12 by regional or local firms. Unfortunately neither the firms nor the auditors are named.
CPAB says it is disappointed in the results of its review of these audits. The findings include misapplied fundamental audit procedures, notably around cash confirmations as well as a failure of the auditors to have a sufficient understanding of the entity and its environment. CBAP found a lack of professional skepticism when auditors are confronted with evidence that should have raised red flags regarding potential fraud risk. CBAP says the findings should be a wake-up call for Canada's accounting profession.
One unnamed firm has been restricted from performing audits of issuers with operations in China. Numerous other situations required remedial action and one case required restatement.
A major obstacle to CPAB was access to the audit files, a problem it shares with the PCAOB. China does not permit foreign regulators to inspect audit work papers in China, and it is a violation of China's accounting laws to remove audit work papers from China. Without access to complete audit files, the CPAB, and the PCAOB, cannot do their jobs. I am hopeful that the PCAOB and Chinese regulators will reach an agreement soon on cooperative examinations. The Canadians should be part of that agreement.