Canada: Canadian Regulators Will Not Require an Audit of Internal Controls

The Canadian Securities Administrators have announced that they will not mandate auditor attestation of the effectiveness of internal control over financial reporting. This significant divergence from the U.S. approach under section 404 of the Sarbanes-Oxley Act of 2002 is premised on the Canadian securities regulators’ belief that the quality, reliability and transparency of financial reporting can be improved on a cost-effective basis by strengthening the CEO and CFO certification requirements. It is proposed that:

• the CEO and CFO of all reporting issuers, other than investment funds, be required to certify that they have evaluated the effectiveness of the issuer’s internal control over financial reporting as of the end of the financial year; and

• the annual MD&A contain a description of the process followed by the CEO and CFO in conducting their evaluation and their conclusion about the effectiveness of the controls.

Issuers may choose to engage the external auditor to assist in the evaluation process, but there will be no requirement for the issuer to obtain an audit opinion on the effectiveness of these controls.

The earliest that these requirements will apply is in respect of financial years ended on December 31, 2007. A single implementation date is proposed for all issuers and the rules will apply to "venture issuers" in the same manner as to other issuers. In accordance with the current CEO/CFO certification rule, the CEO and CFO must acknowledge responsibility for internal control over financial reporting, and certify that they have designed such controls and disclosed any material changes in such controls effective with the first financial year ending on or after June 30, 2006. OSC staff has indicated that the CEO and CFO must review and document the controls to provide substantive support for these certifications, so a significant amount of work will be required this year despite the fact that the evaluation will not be required for a year or more.

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A copy of CSA Notice 52-313, Status of Proposed MI52-111 Reporting on Internal Control over Financial Reporting and Proposed Amended and Restated MI52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings, can be obtained on the Ontario Securities Commission’s website at:
www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/csa_20060310_52-313_status-52-111.pdf

Footnote

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.

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.