On January 13, 2022, the Canadian Securities Administrators (the CSA) published CSA Notice of Publication – Amendments to National Instrument 52-108 Auditor Oversight (the Notice), containing the final amendments introducing new rules intended to regulate the conduct of certain audit firms performing audits of Canadian public issuers (the Amendments).

The Amendments are intended to address challenges that the Canadian Public Accountability Board (CPAB) faces in accessing audit work performed by audit firms that are not directly subject to Canadian regulatory oversight. Such challenges could arise, for example, in circumstances where the main audit firm (the audit firm that issues the audit report, or the “participating audit firm” or “PAF”) retains the services of a foreign audit firm to complete a portion of the audit. Under the current regime, CPAB experiences difficulty accessing the audit materials and records of such foreign auditors.

The Amendments introduce a new definition of a “component auditor”, having the same meaning as it does in Canadian GAAS, which essentially refers to an auditor that performs an audit over a “component” (e.g. a foreign subsidiary of the public issuer). A “significant component auditor” is a component auditor where:

  1. the component auditor performs audit work involving financial information related to a component of the reporting issuer;
  2. the reporting issuer being audited has the power to direct the component on its own or jointly with another person; and
  3. the component auditor meets one of the quantitative metrics relating to hours of work, fees paid, or relative size of the component’s assets or revenue set out in the Amendments.

The Amendments then require a reporting issuer to give written notice to a significant component auditor permitting it to provide access to records relating to its audit work to CPAB, and to enter into a “CPAB access agreement” with CPAB if CPAB issues a notice that it was unable to access the significant component auditor’s records.

If the significant component auditor fails to enter into such an agreement, the PAF will be prohibited from using the significant component auditor in future.

In coordination with the publication of the Notice, CPAB released its own publication, entitled Guidance regarding CPAB’s process for requirements in NI 52-108 related to access to working papers of significant component auditors in foreign jurisdictions (the Guidance).

In the Guidance, CPAB states that, when deciding whether to request access to a significant component auditor’s records, it will consider factors including:

  • the number of component auditors and the relative significance of their audit work to the inspection focus areas;
  • the nature and extent of the audit work;
  • the oversight by the PAF; and
  • the evidence retained in the group audit file.

Furthermore, CPAB clarifies that it will only request access to a significant component auditor’s working papers that directly relate to its review of the PAF audit file, and not seek access to inspect the component auditor’s system of quality controls.

If there is a memorandum of understanding or similar agreement in effect with the local audit regulator of the significant component auditor’s jurisdiction, CPAB will first utilize such mechanism before resorting to the process set out in the Amendments.

These mechanisms ultimately leverage the relationships that the public issuer has with the PAF and the significant component auditor to achieve the objectives of access to relevant records.

If you have any questions about the Amendments, the Guidance or about how the new rules may affect you, please do not hesitate to contact any member of our team.

January 31, 2022