As you likely know by now, amendments to the Ontario Securities Act providing for civil liability for secondary market disclosure came into force on December 31, 2005. In general terms, these amendments provide statutory civil liability on reporting issuers, directors, officers and others for misrepresentations in continuous disclosure documents. Experts, such as auditors, may be liable if a misrepresentation is contained in their report or a summary or quotation therefrom if the expert has consented in writing to the use of the report. The issuer and other persons who might be liable for a misrepresentation in a continuous disclosure document generally have a defence with respect to the inclusion of or summary or quotation from an expert's report if the issuer obtained the written consent of the expert to the use of the report.
We suspect that most reporting issuers assumed that the auditor would give written consent to the use of the financial statements, which would enable the issuer, its directors and officers and others to establish the reliance on an expert defence unless and until the auditors have withdrawn their consent. In other words, the issuer would obtain one consent at the time of the audit report and this would be sufficient to protect the issuer and its officers and directors in connection with all future use of those statements (e.g. subsequent mailing of the audited financial statements in the annual report, subsequent statements based upon the audited financial statements, such as in the MD&A, or AIF or even in analysts' calls or discussions at shareholder meetings).
However, it seems that auditors are limiting their consent to the actual filing of the audited financial statements and are specifically providing that the consent does not apply for any other purpose. That raises the question of whether, for example, the subsequent mailing of the audited financial statements as part of an annual report, which sometimes occurs several weeks later, constitutes a new release of a document for which the issuer and others could be liable if the original audited financial statements contained a misrepresentation. That is, by restricting the consent, have the auditors taken away the reliance on an expert defence? One way of dealing with this is to have the auditors give a fresh consent at the time of the mailing of the financial statements. However, the CICA has issued Assurance and Related Services Guideline AuG-44 which specifies that if a subsequent written consent is requested, a subsequent events review must be undertaken by the auditors. This, of course, imposes additional costs on the issuer. Furthermore, if a subsequent event is identified, the later published financial statements would have to include a subsequent event note and the audit report would be double-dated and would differ from the earlier-filed statements. This situation might also occur if the audited financial statements are subsequently translated into the other of our official languages.
Some issuers may wish to take the common sense position that if the auditors have consented to the filing, the issuer and its directors and officers may rely on the expert defence even though the consent was limited. However, at least one of the Big Four accounting firms seems to be taking the position that the issuer is not entitled to mail its financial statements as part of its annual report, unless it obtains the auditor's consent in writing to do so, which entails the auditors undertaking the subsequent event review.
With respect, we suggest that the accounting profession's approach is detrimental to the interests of their clients because it could deny them the reliance on an expert defence. It could also subject the auditors to greater liability because they are exposing themselves to liability each time they purport to update their report.
It seems to us that auditors should provide the consent for the issuer to use the financial statements and this consent should accompany, or perhaps be included in, the auditor's report. The consent would clarify that the report is as of its stated date and the auditors have no obligation to investigate subsequent events that may have an effect on the financial statements, except in accordance with their professional standards. We would suggest that, in this way, auditors can be comfortable that they will not be exposing themselves to liability if subsequent events would cause the financial statements to become incorrect, while enabling their clients, directors and officers and others to rely on the auditor's report to establish the reliance on an expert defence.
The CICA advises us that they will be reconsidering AuG-44 in May. We would suggest that those who are concerned about the current CICA approach make those concerns known to the CICA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.