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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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