Back in the spring, Dalton McGuinty's Liberal government in Ontario promised to provide better oversight of auditing firms:

The government is working with other jurisdictions and the Canadian Public Accountability Board (CPAB) to maintain an effective and well-functioning oversight system for audit firms, which supports public confidence in the integrity of financial reporting by public companies.

That promise has been fulfilled, in a way, but the implications go far beyond oversight of audit firms. From Bill 151, An Act to enact various 2006 Budget measures and to enact, amend or repeal various Acts, tabled this week at Queen's Park:

SCHEDULE D

CANADIAN PUBLIC ACCOUNTABILITY BOARD ACT (ONTARIO), 2006

The purpose of the Canadian Public Accountability Board Act (Ontario), 2006 is to promote the integrity of financial reportingin Ontario's capital markets. This is accomplished through the oversight of the auditing of the financial statements of companies (reporting issuers) whose securities are publicly traded.

The Act gives the Canadian Public Accountability Board a statutory mandate to maintain a register of public accounting firms that audit reporting issuers and to provide oversight of their audits. The Board is federally incorporated for this purpose and is supported by securities regulators across Canada. It currently carries out its functions under National Instrument 52-108 of the Canadian Securities Administrators which was adopted as a rule of the Ontario Securities Commission in March, 2004. Public accounting firms subject to the Board's oversight program must allow the Board to review their audits as provided in the Board's by-laws and rules. Parties to a hearing before appeal panels of the Board will have a right of appeal to the Divisional Court or they may refer matters to final and binding arbitration.

The Act provides for the powers and duties of the Board in Ontario. The Board is accountable to the Province through three mechanisms. Firstly, the Board must submit an annual report to the Commission which must in turn review the report and report on it to the Minister. The Board's report, together with the Commission's report, must be tabled in the Assembly. Secondly, the Minister may make regulations prescribing rules that are deemed to be rules of the Board. Thirdly, the Act may be repealed by proclamation of the Lieutenant Governor on there commendation of the Minister of Finance if the Board changes its letters patent or its by-laws in a manner that has a negative effect on the operation of the Act.

The Board has wide access to confidential and privileged information; but, audit firms and reporting issuers are protected in respect of the disclosure of information. Subject to the disclosure rules in the Act, the Board may notify the Ontario Securities Commission and other appropriate regulatory authorities, law enforcement agencies or professional regulatory authorities of a breach of the law by any person or company. It may also assist foreign public company audit oversight bodies.

Members of the Board's Council of Governors, its industry members, as defined in its by-laws, the members of its board of directors and its officers, employees and agents are given protection from civil liability.

Now National Instrument 52-108, created by the OSC, is rather limited in its effect. With this instrument, the OSC established the CPAB as the quality control oversight board for auditors. Essentially, the OSC only accepts audits from accountants who pass muster with the CPAB. Of course, an accounting firm doesn't have to accept oversight by the CPAB, but since the OSC has made it a condition for accepting audits, it's not likely any major firm doesn't belong.

But besides the inspection regime, the CPAB powers as defined by 52-108 aren't all that intrusive. The OSC can use the CPAB to keep accountants in line, but it is a very blunt instrument. All the OSC can do is punish the accountant, but not the client.

With Bill 151, the CPAB changes dramatically in nature. It is now an investigatory body, instead of merely an enforcer of standards. And what an investigatory body it is!

The Act gives the Canadian Public Accountability Board a statutory mandate to maintain a register of public accounting firms that audit reporting issuers and to provide oversight of their audits.

Oversight of the audits -- that means the process of auditing. That means the CPAB can be in the room, watching and reading as the bills and receipts and paystubs and ledgers are poured over as part of the audit.

This is not just about the final audit sheet. This is about using the audit process as a way to open up all the books of a firm to inspection by a government body.

Before the CPAB was limited to oversight of auditors:

Conduct inspections of public accounting firms that audit reporting issuers to ensure compliance with professional standards and participation requirements.

What a difference one little syllable makes. I don't mind that my accountant has to maintain good standing with a regulatory body. It's probably a good idea that my accountant has to have a quality program in place, such as inspection of audits by other members of the same firm, and that the result of the inspections are examined by another body.

But it's entirely a different story to watch the auditing itself. That's my financial information!

Notice there are no conditions to the power of the CPAB to inspect an audit:

Public accounting firms subject to the Board's oversight program must allow the Board to review their audits as provided in the Board's by-laws and rules. Parties to a hearing before appeal panels of the Board will have a right of appeal to the Divisional Court or they may refer matters to final and binding arbitration.

I can complain to the courts after they've started rifling through my private financial data, but they don't have to establish with the courts any justification for looking at the data in the first place.

And here's another thing I find strange. Any audit prepared by a firm subject to the oversight program is subject to inspection. But it doesn't say that it is only audits being executed as part of my obligation as a firm raising capital on the stock market are the ones subject to oversight. By my reading, if I ask for an audit just for my own peace of mind to see how my privately-owned firm is performing, and the accountant I'm using is registered with the CPAB, the CPAB, and so the OSC, gets a look-see at my books.

That can't be right. That can't be what they meant, could it?

So the CPAB gets to watch my audit and so sees all the supporting documentation. They see something they don't like. The OSC is informed. They make a move, and the bad publicity ruins my ability to raise funds. I fight it and I win. What actions can I pursue? Precious little. The Bill grants blanket protection from any civil action that might be lodged in response to their activities. The CPAB and the OSC can act with malice and brag about it, and the Bill says there's nothing that can be done.

And what can they do with the information they see? They can hand the information over to the OSC or to the police without the benefit of a warrant. If the police wanted to crack open my books, they'd have to go to court and convince a judge that they reasonable grounds to be suspicious that there was something wrong. No fishing expeditions allowed. But now the police have the CPAB. The CPAB can kick in the door whenever an audit is occuring, look at anything and everything on the table, and tell the police what they've found, all on the justification that they are making sure that the audits are being done correctly.

Better than that, they can tell a foreign regulatory body what they've found.

All this without requiring the CPAB to go to the courts to justify their interest, or to get permission to pursue any subsequent actions. The police have nothing that approaches this kind of power.

Why don't the police enjoy that sort of discretionary power? Because we're innocent until proven guilty. Unless you're a business having an audit. In that case, you are as guilty as sin. The investigation is just a formality, and clearly justified. Or so say the people who designed this portion of the Bill.

What happened to Section 8 of the Charter of Rights and Freedoms?

8. Everyone has the right to be secure against unreasonable search or seizure.

This seems like a pretty unreasonable search to me.

I can't believe this part of the Bill has made it to First Reading. Where was the Attorney General's office during the crafting of this portion of the bill? Part of Michael Bryant's job is to advise other ministries on the drafting of legislation to make sure there are no Charter issues:

The Attorney General has broad responsibilities associated with Government legislation. These responsibilities have been described as twofold. One is to oversee that all legislative enactments are in accordance with principles of natural justice and civil rights (see also s. 5(b) above). This is obviously an important and broad area of responsibility. The second aspect of this responsibility is to advise on the constitutionality and legality of legislation.

The Attorney General's legislative responsibilities are played out in a variety roles. The Office of Legislative Counsel reports to the Attorney General. Legislative Counsel plays a key role in ensuring the legal integrity of Government legislation. Although the Legislative Counsel's reporting relationship to the Attorney General does allow the Attorney General to provide guidance and set standards, individual pieces of legislation are drafted on instructions from client ministries and are not within the sole control of Legislative Counsel or the Attorney General. It should also be noted that Legislative Counsel also has a direct responsibility to the Legislature as the Office also drafts all private member's bills.

The Attorney General has a further role to play as part of whatever Cabinet Committee is formed to review legislation and regulations. Here the Minister has an opportunity to comment on the technical issues related to legislation and regulations prior to Cabinet consideration.

Fortunately, this bill is at First Reading. There is still time to fix it. But I think this goes deeper than fixing a badly constructed bill. Who thought this was a good idea in the first place? Who suggested Schedule D? The bureaucrats in the Ministry of Finance? The CPAB? The OSC? Some other body? And why? What problem is being solved by this dramatic increase in power coupled with a serious undermining of Charter protections? Is there a reason to believe that most audits are flawed, or that most firms are concealing evidence of potentially criminal activities with the complicity of their corrupt accountants?

And why is the Attorney General silent on this?

For that matter, why hasn't the media started asking some questions? Hopefully they will.

Update: Expect the legal profession to weigh in and soon:

Disclosure despite privilege

(4) A participating audit firm that is required undersubsection (1) to provide information or to produce documents shall comply with the requirement even if the information or documents are privileged or confidential.

So what exactly is the point of privilege if a government agency is allowed to look at the files? In section 13, there are restrictions to how the privileged information can be used, but that's hardly the point. As soon as a third party knows the information, it isn't privileged. To compel accountants to provide privileged information is a huge erosion of the basic right of a person to seek counsel. People will begin to edit the information they give to their accountants knowing that it is no longer truly privileged, undermining the ability of the accountants to do their work, and undermining the quality of the resulting audits.

Which is ironic, because the whole point of this exercise is to improve audits, or so is claimed.

I suspect the true reason is to give the OSC a direct view into the financial details of firms, and accountants are being turned into state agents via the CPAB in order to provide that function, with audits merely being the convenient moment to take a look. It would be a lot easier than conducting an independent investigation, as the difficulties the OSC is having in the Frank Dunn case shows.

So will the Ontario Bar Association have a go at this bill? I hope so. They stand to be dramatically affected if the concept of privilege is weakened.