Canada: Canadian Rules Will Demand More From CEOs, CFOs And Audit Committees

U.S. rules are tracked closely
Last Updated: July 22 2003

Canada’s securities regulators believe it is essential that public issuers in Canada be subject to corporate governance rules that are as robust as those in the United States but tailored to the Canadian markets. On June 27, they released three draft rules, accompanied by cost-benefit analyses and detailed questions to solicit public comments. If the rules are adopted, most public issuers in Canada will have to provide CEO and CFO certifications and comply with audit committee rules that are substantially similar to comparable provisions of the U.S. Sarbanes-Oxley Act of 2002 (S-Ox), and SEC and U.S. stock market requirements. In addition, public issuers will only be permitted to appoint auditors who are in good standing with the Canadian Public Accountability Board.

The recently released Report of the Standing Senate Committee on Banking, Trade and Commerce makes several recommendations to the federal government, including CEO/CFO certification, and audit committee independence, financial literacy and expertise. The Report also calls for additional corporate governance requirements, many of which track the U.S. rules closely. Therefore, the three draft rules discussed below are likely to be the first of several investor confidence initiatives to be undertaken in Canada.

Personal Certification by CEOs and CFOs of Annual and Interim Filings

This certification rule will apply to all reporting issuers, other than investment funds. There will be exemptions from this rule for (a) Canadian cross-border issuers that provide certifications under section 302 of S-Ox (but only if the financial statements filed in Canada are covered by the S-Ox certifications); (b) certain non-Canadian issuers; and (c) certain issuers of exchangeable or guaranteed securities.

Misrepresentations and Fair Presentation

Four times a year, the CEO and CFO will have to personally certify that, to their knowledge, their company’s annual or interim filings (the AIF, annual or interim financial statements, and annual or interim MD&A, together with documents incorporated by reference) (i) do not contain a misrepresentation; and (ii) fairly present in all material respects the company’s financial con dition, results of operations and cash flows as of and for the periods presented in the filing. CEOs and CFOs will not be permitted to qualify their fair presentation certification by the phrase “in accordance with generally accepted accounting principles.” These certifications will be required for filings made after December 31, 2003.

According to the regulators, fair presentation includes

• the selection and proper application of appropriate accounting policies;

• disclosure of financial information that is informative and reasonably reflects the underlying transactions; and

• disclosure that is necessary to provide investors with a materially accurate and complete picture of the company’s financial condition, results of operations and cash flows.

Disclosure Controls and Internal Controls

Public issuers will have to design and implement disclosure controls and procedures that provide reasonable assurances that material information required to be disclosed by the company is made known to the CEO and CFO and is disclosed within the time periods required by Canadian securities laws. Like the recently amended SEC rule, issuers will also have to design internal controls that provide reasonable assurances that their financial statements are fairly presented in accordance with GAAP. CEOs and CFOs will be required to certify this four times a year. Annually, the CEO and CFO will be required to evaluate the effectiveness of the disclosure controls and the internal controls, and present their conclusions in the annual MD&A. The requirement to certify in respect of disclosure controls and internal controls will begin with annual and interim certificates required to be filed after December 31, 2004. Canadian securities regulators are studying, but did not include in the draft rule, the SEC’s requirement for auditor attestation of and reporting on management’s assessment of internal controls.

The Role and Composition of Audit Committees

It is a fundamental premise of good governance that the external auditors report to a body that is independent of management. Auditors are, in theory, responsible to the board and audit committee, acting in the best interests of the shareholders. The threat that the auditors will be beholden to management is addressed in this draft rule—by requiring independence, financial literacy and a direct reporting relationship between the audit committee and the external auditors.

This rule will apply to all reporting issuers other than investment funds, issuers of asset-backed securities, certain non-Canadian issuers and certain subsidiaries of reporting issuers. In addition, U.S.-listed issuers will be exempt if they include in their AIF disclosure of instances where the board did not adopt a recommendation of the audit committee to nominate or compensate an external auditor.

The rule distinguishes between large issuers and venture issuers. “Large issuers” are reporting issuers listed or quoted on the TSX, the NYSE, the AMEX, the Nasdaq National Market, the Nasdaq SmallCap Market, the Pacific Exchange or a market outside of Canada and the United States. All other reporting issuers, including those listed on the TSX Venture Exchange, are “venture issuers”.

Number and Independence of Audit Committee Members

Large issuers will be required to have at least three directors on their audit committee, all of whom will have to be independent. Venture issuers will not be subject to this requirement, although corporate law may require them to have an audit committee comprised of a majority of non-management directors. Venture issuers will be required to disclose in their AIFs the name of each audit committee member and whether or not the member is independent.

Meaning of Independent

To be considered independent for audit committee purposes, the draft rule requires that a person have no direct or indirect material relationship with the issuer. A “material relationship” is one that could, “in the view of the issuer’s board of directors, reasonably interfere with the exercise of a member’s independent judgment.” Individuals will lack independence if, in the past three years, they (or in most cases, immediate family members) were (a) officers or employees of the issuer (or its parent, subsidiaries or affiliates); (b) affiliated with the company’s auditor; or (c) an executive officer of another company that had an executive officer of the issuer on its compensation committee. In addition, anyone who accepts, directly or indirectly, any consulting, advisory or other fee from the company (other than directors’ fees and committee fees), or is “affiliated” with the issuer, will lack independence. Officers and executive directors of affiliated companies are considered “affiliates” for this purpose. The threeyear “look-back” period is being phased in, so relationships before January 1, 2004 will not taint independence.

Like the SEC, Canadian securities regulators will not impose independence requirements on boards as a whole. Therefore, TSX-listed issuers must continue to consider the TSX guidelines on independence of the board and other corporate governance matters. The TSX has indicated that it will abandon proposed listing requirements and guidelines relating to audit committee independence and harmonize the definition of “unrelated director” with the definition of independence in the audit committee rule, although the extent of the harmonization remains to be seen. Other changes to the TSX guidelines are also expected.

Like the recently amended SEC rule, there is an important provision that will permit a representative of a parent company to be a member of the audit committee of a controlled, public company subsidiary. The representative will, however, have to be independent of both the parent company and the controlled subsidiary.

Financial Literacy and Financial Expert

All members of the audit committee of a large issuer will have to be financially literate (that is, able to read and understand a set of financial statements of breadth and complexity similar to the breadth and complexity of the issues expected to be raised by the issuer’s financial statements).

Like the SEC rules (but unlike the NYSE rules), there is no requirement to have a financial expert on the committee, although issuers will be required to disclose whether or not they have an audit committee financial expert serving on the committee. An “audit committee financial expert” is someone with a more in-depth understanding of GAAP and financial statements, internal controls and procedures for financial reporting and audit committee functions, than someone who is merely financially literate. If the audit committee financial expert has gained their expertise other than through (a) education and experience as a principal financial officer or auditor; (b) actively supervising a principal financial officer or auditor; or (c) experience overseeing or assessing the performance of companies or auditors, the issuer must provide a brief description of the person’s relevant experience.

Venture issuers will not be required to have financially literate audit committee members. They will be required to disclose in their AIF the name of each audit committee member and whether or not the member is financially literate.

Responsibilities of the Audit Committee

The draft rule focuses on the relationship between the company and its external auditors by requiring the external auditor to report directly to the audit committee. The audit committee also must have a written charter that sets out its mandates and responsibilities.

The draft rule requires the audit committee to, at a minimum (a) recommend to the board the external auditors to be nominated for appointment by the shareholders; (b) recommend the compensation of the external auditors; (c) be directly responsible for overseeing the work of the external auditors, including the resolution of disagreements between management and the auditors; (d) pre-approve nonaudit services to be provided to the issuer by the external auditors; (e) review the financial statements, MD&A and earnings press releases before the information is publicly disclosed; (f) be satisfied with and periodically assess the adequacy of procedures for the review of other corporate disclosure that is derived or extracted from the financial statements; (g) establish procedures for the receipt, retention and treatment of complaints about accounting, internal controls or auditing matters and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and (h) review and approve the issuer’s hiring policies regarding employees and former employees of the present or former external auditors.

Audit committees will have to be given the authority to communicate directly with the internal and external auditors, engage independent counsel and other advisors, and set the compensation for any advisors retained.

New Disclosures

Large issuers will have to disclose in their AIF (a) the audit committee charter; (b) the name of each member of the audit committee, and if they are not independent, the reason; (c) the identity of any audit committee financial expert(s) and if there is no such expert, that fact and the reason must be stated; (d) in some cases, the qualifications of the audit committee financial expert(s); and (e) whether the issuer has relied on an exemption from the rule and how that exemption materially affects the audit committee’s ability to act independently and satisfy the other requirements of the rule. The management proxy circular must include a cross reference to the section of the AIF where these disclosures are made. Venture issuers are subject to less robust disclosure requirements.

Other disclosures in the AIF will include (a) instances where the board did not adopt a recommendation of the audit committee to nominate or compensate an external auditor; (b) a description of specific policies and procedures, if any, for pre-approving non-audit services; and (c) detailed disclosures of various fees billed to the issuer by the external auditor, broken down by category.

The Canadian Public Accountability Board

The Chair of the Ontario Securities Commission described the third draft rule as one that “puts some teeth into the Canadian Public Accountability Board.” It requires that financial statements of public issuers be audited by a firm that is in good standing with the CPAB. Auditors that have restrictions placed on them by the CPAB or that are sanctioned by the CPAB must provide notice to the securities regulators and, in some cases, also to the public issuers they audit.

What You Should Do

Public issuers in Canada that presently comply with the U.S. corporate governance requirements will be largely unaffected by the new Canadian rules. For other public issuers in Canada, there may be a lot to do. At a minimum, public issuers must adopt appropriate disclosure controls and internal controls to put the CEO and CFO in a position to give the required certifications; procedures will be needed to assist the CEO and CFO to evaluate and publicly disclose their conclusions on the effectiveness of these controls; an appropriate audit committee charter will have to be developed or reviewed to ensure that the mandate of the audit committee is clearly stated and that the committee is imbued with the required authority; and the audit committee will likely have to be reconstituted to ensure that, for large issuers, the members are independent and financially literate.

Comments on the draft rules must be submitted to Canadian securities regulators by September 25, 2003.

This client memo is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss with you the issues raised by this client memo in the context of your particular circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions