Effects of regulation on audits: A Canadian example

• DOI: http://doi.org/10.1002/jcaf.22383
• Published date: 01 April 2019
• Date: 01 April 2019

BLIND PEER REVIEW

Effects of regulation on audits: A Canadian example

Anne-Marie T. Lelkes

Department of Accounting and Finance,

Texas A&M University, Kingsville, Texas

Correspondence

Anne-Marie T. Lelkes, Department of

Accounting and Finance, Texas A&M

University, 700 University Boulevard, MSC

184, Kingsville, TX 78363-8202.

Email: anne-marie.lelkes@tamuk.edu

Abstract

The increase in regulation has caused the number of publicly traded Canadian pub-

lic companies to decline. This study analyzes audit fee data from Audit Analytics

from 2002 through 2015 for Canadian companies to determine if they have moved

away from using Big 4 auditors. Charts and regression are used to analyze the data.

Results show that there is a decline in the number of public audits from 2002 to

2015 that seems to correspond to the decline of Canadian public companies due to

increased regulation. In spite of the decline in the number of publicly traded com-

panies, the results of this study show that, of the total audits, the proportion done

by Big 4 auditors is increasing, possibly due to the need for higher audit quality

and more experienced auditors for the companies to be listed on stock exchanges.

This leads to higher audit fees. As a result, many executives have decided to fund

their companies with private equity. This decline in the number of publicly traded

companies is not healthy for the Canadian market. Perhaps more incentives can be

given to attract more public issuers, which will give investors more opportunities

to invest, and thus, further strengthen the economy.

KEYWORDS

audit fees, Big 4, Canadian, private, publicly traded

1|INTRODUCTION

In 2002, the U.S. Congress enacted the Sarbanes–Oxley

(SOX) Act in response to various scandals involving major

corporations (e.g., Enron) along with a major auditing firm

(e.g., Arthur Andersen) (Gray, 2005). The initial Canadian

response to SOX was mixed. Two major camps of reform

were the rules-based proponents and the principles-based

proponents (Sibold, 2009). Since Canadian rules are more

principles based whereas U.S. rules are more rules based,

the principles-based proponents felt that the rules-based sys-

tem could promote an approach where firms search for loop-

holes, and thus, result in noncompliance with the laws

(Gray, 2005). Some felt that some of the SOX rules were

controversial. One controversial SOX rule requires CEOs

and CFOs to certify that the financial statements are free

of material misstatement and face criminal penalties if

falsely certify (Gray, 2005). Another controversial SOX rule

requires CEOs and CFOs to forfeit bonuses or profit from

selling stock if there is a restatement (Gray, 2005). Some felt

that these SOX rules would discourage risk taking and entre-

preneurial behavior (Gray, 2005).

Canada is different from the United States regarding

national corporate laws. For instance, Canada does not have

a national securities commission similar to the U.S. Securi-

ties and Exchange Commission. Instead, Canada has the

Canadian Securities Administrators (CSA) and the Ontario

Securities Commission (OSC) (Gray, 2005). In 2003, the

CSA and OSC began to align themselves to a more rules-

based system and created draft instruments that cover the

major provisions of SOX. The CSA created MI 52-109, MI

52-110, MI 52-111 (Gray, 2005). MI 52-109 requires CEOs

and CFOs to certify quarterly and annual financial state-

ments. MI 52-110 requires Canadian companies to adopt

disclosure controls. MI 52-111 requires that (a) major

Canadian public companies to have a “fully independent and

Received: 18 February 2019 Accepted: 21 March 2019

DOI: 10.1002/jcaf.22383

J Corp Acct Fin. 2019;30:23–28. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 23