Regulatory Risks Faced By Auditors: The Calm Before The Wave?


Much has been written about the scope of auditor liability. Even more ink has been spilled about the increasing prevalence of civil litigation against auditors and accountants, such as the recent court decisions against the auditors of Livent Inc. and Castor Holdings Ltd., the landmark settlement by the auditor of Sino-Forest Corporation, primary and secondary market class actions against auditors of reporting issuers, and lawsuits by third parties as in the ongoing saga of Philip Services Corp. In our view, the plethora of commentary on auditor liability fails to account for the increasing risks that auditors face from securities regulators.

The Old World Order: auditor oversight was typically left to self-regulatory organizations

Prior to 2010, we found no reports of enforcement proceedings between an auditor and a Canadian securities regulator. Auditor oversight was generally left to self-regulatory organizations, such as the Institute of Chartered Accounts of Ontario.

In the wake of the Enron scandal, the Canadian Public Accountability Board (CPAB) was created as Canada's audit regulator with the aim of contributing to public confidence in the integrity of financial reporting of reporting issuers. Securities regulation was enacted to require that all auditors of Canadian reporting issuers be registered and in good standing with the CPAB, which could impose restrictions or sanctions on its members.

In the old world order, an auditor's interaction with a securities regulator typically occurred in the context of being compelled to provide information about the auditor's client, with the scope of production or disclosure being the subject of negotiation and potentially, litigation. This scenario played out fully in Deloitte & Touche LLP v. Ontario (Securities Commission), which went all the way to the Supreme Court of Canada.

As a general proposition, auditors – especially the large established firms – were trusted to function as gatekeepers to ensure appropriate financial disclosure and also trusted to police themselves, as a profession, to ensure that auditors fulfilled that function.

Is the Old World Gate Broken?

In the United States, the Securities and Exchange Commission (SEC) has formally designated its ongoing efforts to identify auditors who fail to carry out their duties consistent with their professional standards as "Operation Broken Gate". In a speech on September 19, 2013, the SEC's Co-Director of the Division of Enforcement...

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