On March 10, 2006, the Canadian Securities Administrators (the "CSA") announced, after extensive review and consultation, and in view of the debate ongoing in the United States in respect of the rules implementing section 404 of the Sarbanes-Oxley Act of 2002 (the "Sox 404 Rules"), that they have determined not to proceed with proposed Multilateral Instrument 52-111 - Reporting on Internal Control Over Financial Reporting ("Proposed MI 52-111"). Proposed MI 52-111, originally published for comment in February 2005, was substantially similar to the Sox 404 Rules and would have required, among other things, management of an issuer to evaluate the effectiveness of the issuer’s internal control over financial reporting, as at the end of the issuer’s financial year, against a suitable control framework, and the filing by the issuer of: (i) a report of management on its assessment of the effectiveness of the issuer’s internal control over financial reporting, including a statement whether the issuer’s internal control over financial reporting is effective; and (ii) a report of the issuer’s auditor prepared in accordance with applicable auditing standards for internal control audit engagements.

Instead, the CSA proposes to amend Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings ("MI 52-109") to include additional provisions in respect of internal control over financial reporting. In particular, the CSA proposes to amend MI 52-109 to include requirements that:

  • the CEO and CFO of a reporting issuer, or persons performing similar functions, certify in their annual certificates that (i) they have evaluated the effectiveness of the issuer’s internal control over financial reporting as of the end of the financial year, and (ii) based on their evaluation, they have caused the issuer to disclose in its annual MD&A their conclusions about the effectiveness of internal control over financial reporting as of the end of the financial year; and
  • the issuer’s annual MD&A include disclosure regarding its internal control over financial reporting, including a description of the process for evaluating the effectiveness of the issuer’s internal control over financial reporting and the conclusions about the effectiveness of such internal control over financial reporting.

Under the proposed amendments to MI 52-109, the issuer will not be required to obtain from its auditor an internal control audit opinion concerning management’s assessment of the effectiveness of internal control over financial reporting. While the board of directors and the audit committee of an issuer, in consultation with management, may choose to consider engaging the issuer’s auditor to assist in discharging their respective responsibilities in respect of the issuer’s internal control systems and the review and approval of the issuer’s annual MD&A, the engagement of the auditor will not be required under the proposed amendments to MI 52-109.

The internal control reporting requirements proposed to be included in MI 52-109 will apply to all reporting issuers, other than investment funds, which is consistent with the current scope of application of MI 52-109. The CSA does not intend to distinguish the application of these requirements between venture issuers and non-venture issuers (as previously contemplated in Proposed MI 52-111).

The CSA indicated that the earliest that these proposed requirements would apply is in respect of financial years ending on or after December 31, 2007. In addition, the CSA proposes a single implementation date for all issuers subject to the proposed requirements (as opposed to the staggered implementation schedule previously contemplated in Proposed MI 52-111).

The CSA reiterated that the proposed addition of internal control reporting requirements to MI 52-109 will not cause any change to the existing requirement in MI 52-109 for CEOs and CFOs, beginning with financial years ending on or after June 30, 2006, to certify that they have designed internal controls over financial reporting, and caused certain changes in internal control over financial reporting to be disclosed in the issuer’s MD&A.

The CSA noted that the objectives of the proposed internal control reporting requirements are to improve the quality, reliability and transparency of financial reporting. The CSA is of the view that the proposed additional internal control reporting requirements will increase management's focus on, and accountability for, the quality of internal control over financial reporting. The CSA believes this will contribute towards achieving its objectives while balancing the costs and benefits associated with the internal control reporting requirements.

The CSA reiterated that its announcement does not diminish the existing obligations of an issuer's auditor under generally accepted auditing standards to (i) understand the issuer's internal controls relevant to the audit of the issuer's financial statements and (ii) read materials with which the auditor is deemed to be associated, such as the issuer's MD&A, assess whether they are inconsistent with the auditor’s knowledge and take appropriate action if the auditor is aware of any material misstatements of fact or, if applicable, misrepresentations.

The CSA plans to seek public comment on the proposed requirements in connection with the publication of an amended and restated MI 52-109 later in 2006.

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