1. Auditor Independence Peter Mills Melissa Langlois December 11, 2012

2. 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.

3. Agenda
Further information on the Enhancing Audit Quality initiative can be found at:
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 Alternatives
Mandatory Comprehensive Review
15-17
18-19
Other Proposals - Non-audit Services, Audit-only Firms, Joint Audits
20-22
Update on the Process
23-24
Questions 25

4. 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

5. 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

6. 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

7. 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

8. Working Group Members Observer Project Manager
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

9. 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

10. Features of the Canadian Environment
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

11. Features of the Canadian Environment
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)

12. 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

13. 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

14. Auditor Independence Project - Guiding Principles
The Working Group used a framework of guiding principles to evaluate the global proposals, including:
a) potential effect on independence
b) potential effect on audit quality
c) 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

15. 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

16. A Continuum of Alternatives
Considered the effect on the following factors when evaluating the continuum:
Independence
Transparency
Audit quality
Governance impact
Work effort/cost

17. 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

18. 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)

19. 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

20. 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.

21. 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

22. 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

23. 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

24. 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

25. Questions?