Canada's securities regulators have published new National Instrument 52-109 on CEO and CFO certifications and related MD&A (management's discussion and analysis) disclosure. The new rule is substantially unchanged from the proposal published in April 2008 and discussed in Torys' bulletin, Canada's Securities Regulators Release New Proposals on Internal Controls 1 The rule will apply to annual and interim filings of all reporting issuers (except investment funds) beginning with periods ending on or after December 15, 2008. This bulletin summarizes the new aspects of NI 52-109 in comparison with current requirements.
The new forms of annual and interim certificates for non-venture issuers appear at the end of this bulletin. The forms of venture issuer certificates and other certificates to be used in certain special situations can be found in the Notice of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings. 2
Highlights of the New Certification Requirements
- CEOs and CFOs of non-venture issuers will have to certify that
they have evaluated the company's internal control over
financial reporting (ICFR).
- Material weaknesses will have to be disclosed in
- Venture issuers' certifications will not have to cover ICFR
or disclosure controls and procedures (DC&P).
Evaluation of ICFR
Under NI 52-109, CEOs and CFOs will be required to certify annually that they have
- evaluated, or caused to be evaluated under their supervision,
the effectiveness of the issuer's ICFR; and
- disclosed in the annual MD&A their conclusions about the
effectiveness of the issuer's ICFR.
CEOs and CFOs will also have to certify annually that they have disclosed to the issuer's auditors and either the board of directors or the audit committee any fraud involving management or other employees with a significant role in ICFR.
MD&A Disclosure of Material Weaknesses
If a material weakness exists in the design or operation of ICFR, the CEO and CFO will have to certify (quarterly for design weaknesses, but only annually for operational weaknesses) that the issuer's MD&A discloses
- a description of the material weakness;
- the impact of the material weakness on the issuer's
financial reporting and ICFR; and
- the issuer's current plans, if any, or any actions already
undertaken for remediating the material weakness.
A "material weakness" is defined as "a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the reporting issuer's annual or interim financial statements will not be prevented or detected on a timely basis." This is the same as the U.S. definition.
In designing DC&P and ICFR, issuers will be permitted to exclude proportionately consolidated entities, variable interest entities and businesses acquired not more than 365 days before the end of the financial period to which the certificate relates.3 Issuers will have to disclose any exclusions in MD&A and provide summary financial information for the excluded entities.
Venture Issuer Basic Certificates
The certificates filed by venture issuers will not have to refer to DC&P or ICFR, and venture issuers will not have to make the related MD&A disclosures. Instead, venture issuers' certificates will have to include a note to readers explaining how the certificates differ from those of non-venture issuers.
Issuers must use a control framework to design their ICFR. The framework must be a suitable one that has been established using due process procedures, including the broad distribution of the framework for public comment. These are the same criteria as in the U.S. rules for selecting a control framework. Like the SEC, Canadian regulators have not mandated the use of any particular control framework. The companion policy to NI 52-109 refers to the following frameworks commonly in use:
- Risk Management and Governance: Guidance on Control
(COCO Framework), published by The Canadian Institute of Chartered
- Internal Control – Integrated Framework
(COSO Framework), published by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO); and
- Guidance on Internal Control (Turnbull Guidance),
published by The Institute of Chartered Accountants in England and
Certifications Following an IPO, a Reverse Takeover or Ceasing to Be a Venture Issuer
The first CEO and CFO certificates – whether for an annual or interim period – following an issuer's IPO, reverse takeover or ceasing to be a venture issuer may omit all references to ICFR and DC&P. Instead, this initial certification will have to include a note to readers explaining how it differs from a regular certificate.
As under existing rules, cross-border issuers that comply with the SEC's certification and internal control requirements will not have to comply with the new Canadian rules. In lieu of filing the Canadian certifications, these issuers will be able to file their SEC certifications, management's report on internal control and the related auditor's attestation with Canadian regulators.
Companion Policy Guidance
The companion policy describes how the securities regulators intend to interpret and apply new NI 52-109 and provides guidance on, among other things,
- fair presentation, financial condition and reliability of
- design of ICFR and DC&P and evaluation of their operating
- use of a service organization or specialist for ICFR;
- material weaknesses in ICFR, including compensating controls
versus mitigating procedures;
- significant weaknesses in DC&P;
- the role of the board and audit committee, which would include,
as part of the board's review of the issuer's annual
MD&A, understanding why the certifying officers concluded that
a deficiency or combination of deficiencies is or is not a material
- business acquisitions and certain long-term investments;
- venture issuer basic certificates and certificates for new
reporting issuers; and
- certification of revised or restated annual or interim
CERTIFICATION OF ANNUAL FILINGS
I, [identify (i) the certifying officer, (ii) his or
her position at the issuer, (iii) the name of the issuer and (iv)
if the certifying officer's title is not "chief executive
officer" or "chief financial officer", indicate in
which of these capacities the certifying officer is providing the
certificate] , certify the following:
1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the "annual filings") of [identify issuer] (the "issuer") for the financial year ended [state the relevant date].
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.
4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the financial year end
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is [insert the name of the control framework used] .
[insert paragraph 5.2 or 5.3 if applicable. If paragraph 5.2 or 5.3 is not applicable, insert "5.2 N/A" or "5.3 N/A" as applicable. For paragraph 5.3, include (a)(i), (a)(ii) or (a)(iii) as applicable, and subparagraph (b).]
5.2 ICFR – material weakness relating to design: The issuer has disclosed in its annual MD&A for each material weakness relating to design existing at the financial year end
(a) a description of the material weakness;
(b) the impact of the material weakness on the issuer's financial reporting and its ICFR; and
(c) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 Limitation on scope of design: The issuer has disclosed in its annual MD&A
(a) the fact that the issuer's other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of
(i) a proportionately consolidated entity in which the issuer has an interest;
(ii) a variable interest entity in which the issuer has an interest; or
(iii) a business that the issuer acquired not more than 365 days before the issuer's financial year end; and
(b) summary financial information about the proportionately consolidated entity, variable interest entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer's financial statements.
[insert subparagraph 6(b)(ii) if applicable. If subparagraph 6(b)(ii) is not applicable, insert "(ii) N/A".]
6. Evaluation: The issuer's other certifying officer(s) and I have
(a) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and
(b) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's ICFR at the financial year end and the issuer has disclosed in its annual MD&A
(i) our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation;
(ii) for each material weakness relating to operation existing at the financial year end
(A) a description of the material weakness;
(B) the impact of the material weakness on the issuer's financial reporting and its ICFR; and
(C) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer's ICFR that occurred during the period beginning on [insert the date immediately following the end of the period in respect of which the issuer made its most recent interim or annual filing, as applicable] and ended on [insert the last day of the financial year] that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
8. Reporting to the issuer's auditors and board of directors or audit committee: The issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer's auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer's ICFR.
Date: [insert date of filing]
[If the certifying officer's title is not "chief executive officer" or "chief financial officer", indicate in which of these capacities the certifying officer is providing the certificate.]
1. Torys' on Corporate and Capital Markets, April 24, 2008, http://www.torys.com/Publications/Documents/Publication PDFs/CCM2008-12.pdf
3. The new rule clarifies, however, that these scope limitations are available for proportionately consolidated entities and variable interest entities only in situations in which the certifying officers do not have a reasonable basis for making the representations in the certificates because of insufficient access to the relevant entity.
4. Smaller issuers can also refer to Internal Control over Financial Reporting: Guidance for Smaller Public Companies published by COSO.
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.