Auditor Independence Peter Mills Melissa Langlois December 11, 2012

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: www.cica.ca/enhancing-audit-quality-canadian-perspective/item64401.aspx

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:

8. Working Group Members • 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

11. Features of the Canadian Environment

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 favourableresult • 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?