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04 April 2006
The Canadian Securities Administrators (CSA) has issued a notice updating market participants on the status of its earlier proposals with respect to internal control reporting requirements. The most important change is that the CSA no longer proposes to require internal control audit opinions from external auditors concerning management's assessment of the effectiveness of internal control over financial reporting.
After an extensive review and consultation, and in light of the delays in the United States with respect to the rules implementing Section 404 of the Sarbanes-Oxley Act 2002 with respect to internal controls, the CSA has determined not to proceed with the proposed Multilateral Instrument (MI) 52-111, which was published for comment in February 2005.
Proposed MI 52-111 contained requirements that were substantially similar to the requirements in the United States. MI 52-111 would have required issuers to file the following with securities regulatory authorities: (i) a report by management on its assessment of the effectiveness of the issuer's internal control over financial reporting, including a statement as to whether the issuer's internal control over financial reporting is effective; and (ii) a report by the issuer's auditor prepared in accordance with the Canadian Institute of Chartered Accountants' auditing standard for internal control audit engagements.
The CSA proposes to expand existing MI 52-109, which provides for chief executive officer and chief financial officer certification of disclosure in annual and interim filings to include the following internal control reporting requirements.
First, the chief executive officer and chief financial officer of a reporting issuer, or persons performing similar functions, will be required to certify in their annual certificates that they have evaluated the effectiveness of the issuer's internal control over financial reporting as at the end of the financial year. They will also be required to certify that, based on their evaluation, they have caused the issuer to disclose in its annual management discussion and analysis their conclusions about the effectiveness of internal control over financial reporting as of the end of the financial year.
Second, the issuer's management discussion and analysis will include disclosure regarding its internal control over financial reporting. This disclosure will include a description of the process for evaluating the effectiveness of the issuer's internal control over financial reporting and the conclusions drawn at the end of the financial year.
An 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. There is no doubt that these audit opinions would have been costly to obtain. However, the CSA notes that a board of directors and its audit committee may, in consultation with management, choose to engage the issuer's auditor to assist in discharging their respective responsibilities with respect to the issuer's internal control systems and management discussion and analysis review.
The CSA is of the view that the proposed internal control reporting requirements should apply to all reporting issuers (venture or non-venture) other than investment funds.
Cognizant of the fact that the process of evaluating the effectiveness of internal control over financial reporting may be a significant undertaking for many issuers, the CSA proposes that the earliest any of the proposed requirements will apply will be in respect of financial years ending on or after December 31 2007. The implementation date will be consistent for all issuers.
The CSA notice states that the proposed additional internal control reporting requirements will not change the present requirement under MI 52-109 that, beginning with financial years ending on or after June 30 2006, chief executive officers and chief financial officers certify that they have designed internal control over financial reporting and caused certain changes in internal control over financial reporting to be disclosed in the issuer's management discussion and analysis. The implementation of these requirements will not be deferred even though the CSA proposes to implement the requirement to certify the evaluation of the effectiveness of internal control over financial reporting at a later date.
The CSA notice provides a high-level summary of the CSA's proposed internal control reporting requirements. An amended and restated MI 52-109 with the details of the proposal is to be published for comment later this year.
For further information on this topic please contact Eric Robb at the Toronto office of Goodman LLP by telephone (+1 416 979 2211) or by fax (+1 416 979 1234) or by email (firstname.lastname@example.org). Alternatively, please contact Paul Goldman or David Redford at the Vancouver office of Goodmans LLP by telephone (+1 604 682 7737) or by fax (+1 604 682 7131) or by email (email@example.com or firstname.lastname@example.org).
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Paul L Goldman