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Auditors play an important role as gatekeepers to
public capital markets. By attesting to the accuracy of a
company's financial statements, the auditor lends its credibility
to that company and its financial health.
Both market and legal mechanisms play a role in ensuring that
auditors perform high quality audits. Reputation is critical in
the market for auditors. In addition, potential legal liability
to issuers and investors arising from contract, tort, and
statutory securities laws creates incentives for auditors to
conduct high quality audits. Potential discipline by professional
self-regulatory bodies also plays a part. Striking the
appropriate balance among market-based, legal, and
self-regulatory mechanisms is a delicate task.
Canada and the US have both established oversight bodies for the
auditors of public companies in an effort to enhance the quality
of audits for those companies: the Canadian Public Accountability
Board (CPAB) and the Public Company Accounting Oversight Board
(PCAOB) in the United States. The two countries deviate, however,
in their allocation of regulatory responsibility in relation to
the accounting profession, with Canada continuing to rely on a
largely self-regulatory model and the US relying almost
exclusively on government regulation.
This study compares these two approaches to the regulation of
public auditors in Canada and the US and offers concrete
suggestions for improvement. In particular, this study analyzes
and compares the CPAB and the PCAOB, looking at the structure,
operation, and governance of the two boards, and analyzing their
effectiveness and making recommendations for how they might be
improved.
Our central theme is that carefully circumscribed statutory
authorization for the CPAB could enhance its efficiency and
effectiveness, without sacrificing the advantages of
self-regulation. In our view, statutory authority for the CPAB
would enhance its legitimacy. Properly circumscribed statutory
authorization would also provide the CPAB with powers that are
normally granted to governmental regulators, such as immunity and
subpoena powers, without undermining the virtues of
self-regulation: adaptability and responsiveness to current
conditions.
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