The Canadian securities administrators (CSA) announced on March 10, 2006 that they will not defer implementation of CEO/CFO certifications regarding internal control over financial reporting (ICOFR), contrary to previous expectations. The CSA also announced that they will not be proceeding with a proposed multilateral instrument on reports on internal control over financial reporting, although they expect to introduce amendments to annual certification requirements to require certifying officers to confirm that they have evaluated ICOFR and disclosed their conclusions in the issuer’s annual MD&A.
Annual CEO/CFO certificates filed in respect of financial years ending on or after June 30, 2006 and interim certificates filed after such annual certificates are required to include statements confirming that:
- the certifying officers are responsible for establishing and maintaining ICOFR for the issuer;
- the certifying officers have designed such ICOFR, or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP; and
- the certifying officer has caused the issuer to disclose in the annual MD&A any change in the issuer’s ICOFR that occurred during the issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the issuer’s ICOFR.
Issuers that are foreign private issuers and accelerated filers under U.S. securities laws are required to include substantially similar statements in their CEO/CFO certificates filed under U.S. securities laws for financial years ending on or after July 15, 2006.
In light of the feedback received and the continuing debate in the U.S. over the implementation of management’s report on ICOFR and the auditors’ attestation of such report, the CSA will not be proceeding with proposed Multilateral Instrument 52-111 Reporting on Internal Control Over Financial Reporting, and does not propose to require issuers to obtain an audit opinion concerning management’s assessment of the effectiveness of the issuer’s ICOFR.
However, the CSA intends to publish for comment later this year proposed amendments to Multilateral Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings requiring certification in respect of the effectiveness of the issuer’s ICOFR, although the earliest that these new requirements will apply is in respect of financial years ending on or after December 31, 2007. The new requirements will apply in all Canadian jurisdictions to all reporting issuers, other than investment funds, and without distinguishing between non-venture and venture issuers. The new requirements will be that:
- the CEO and CFO confirm in their annual certificates that they have evaluated the effectiveness of the issuer’s ICOFR as of the end of the financial year and have caused the issuer to disclose in its annual MD&A their conclusions about the effectiveness of ICOFR as of the end of the financial year based on such evaluation; and
- the issuer’s annual MD&A include disclosure regarding its ICOFR, including the issuer’s process for evaluating the effectiveness of the issuer’s ICOFR and the conclusions about the effectiveness of ICOFR as of the end of the financial year.
The Canadian securities administrators have indicated that they will monitor this proposed approach to the objective of improving the quality, reliability and transparency of financial reporting. Based on the results of this monitoring and in light of experience in Canada and internationally, the Canadian securities regulators will consider in the future whether a requirement for auditor involvement with the evaluation of the effectiveness of an issuer’s ICOFR would contribute in a cost-effective manner to further improving the quality and consistency of disclosure to investors.
Andrew MacDougall is a partner in Osler’s Business Law Department and an advisor to boards and in-house counsel on a wide variety of general corporate and commercial legal issues. Doug Marshall is a partner in the Osler's Business Law Department and a member of the firm's Executive Committee. Julie Walsh’s practice in the Business Law Department focuses on mergers and acquisitions, general corporate law and corporate finance.
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