CAs urged to speak up on governance rules

(March 23, 2005) Canada’s business leaders have a unique opportunity to help set the rules for internal controls and reporting, but they are running out of time to voice their opinions, according to the head of a major accountancy group.

“There is a ‘new normal’ making its presence felt across corporate America and we here in Canada are being caught up in it,” said Brian Hunt, FCA, president and CEO of the Institute of Chartered Accountants of Ontario (ICAO). “The difference is, corporate Canada has just been presented with a window of opportunity to prepare for and even help define this ‘new normal’ — an opportunity that was largely denied our U.S. counterparts.”

In February, all but one member of the Canadian Securities Administrators published Multilateral Instrument 52-111 Reporting on Internal Control over Financial Reporting, a proposed regulation which would require CEOs and CFOs to certify the quality of the effectiveness of their internal controls over financial reporting (ICOFR).

The proposed instrument would essentially bring Canadian financial reporting in line with the rules laid out America’s Sarbanes-Oxley Act 2002 and related SEC rules, which were hastily brought into force in the wake of Enron’s collapse.

“Enron was a crisis in the U.S. and Sarbanes-Oxley was an exercise in crisis management. It was done in a hurry and it shows,” said Hunt, pointing out some U.S. Senators and SEC Commissioners are already questioning whether the rules go too far or are anything more than an “expensive, short-term, check-the-box-exercise.”

While some have labeled Sarbanes-Oxley a boon for the accounting profession, due to the increased scrutiny required on financial statements, Hunt says this opinion takes a short-term view. The reality is the rules place an enormous burden upon the industry, as firms take on excessive liability risk.

“With the soaring costs and, in many cases, the unavailability of insurance for the profession, these days we can literally ‘bet the firm’ on a multinational assignment,” he said.

Even smaller accountancy firms catering to private companies face these risks, despite their clients being exempt from the rules. Small companies have a habit of becoming large companies, but at the very least they usually must deal with banks who want the same stringent internal controls they find in major corporations.

“To safeguard their stake in private companies, lending institutions will increasingly look for corporate governance practices that reflect the standards that they themselves must meet,” he said.

The rules implemented under Sarbanes-Oxley govern only public firms which are listed on American stock exchanges, limiting the U.S. law’s direct impact on Canadian and other foreign corporations. But shortly after the law came into effect, Hunt says there was a dramatic surge in the number of foreign firms delisting from U.S. markets.

Since the U.S. represents such a vast pool of investment capital, Canadian regulators have sought to harmonize with the U.S. requirements. Smaller venture firms have been exempted from this process, due to the associated costs.

Many say the problem with such an approach is that it would force Canada into a “rules-based” regulatory environment, as opposed to the “principles-based” environment which they see as more easily enforced.

Hunt himself expressed concern that a rules-based system would leave Canadian investors susceptible to creative accounting which may only bend the rules, but clearly runs contrary to the principles of the regulations.

“We need to ensure that regulations safeguard the interest of shareholders and the capital markets, while ensuring that companies retain their shareholder value,” Hunt said. “You have a responsibility to be part of this process.”

To facilitate such input, the ICAO is teaming up with the Ontario Chamber of Commerce to host a series of roundtable discussions on what Ontario’s business leaders want to see in the CSA rules.

“The report that comes out of these sessions … will constitute the voice of Ontario businesses, speaking out on an issue of great importance to our competitiveness as a jurisdiction and our reputation as a good place to invest and create jobs.”

While no dates have been set for these meetings, the deadline for submissions to the CSA is June 6, 2005.

“If you speak, we are confident that the CSA will listen,” said Hunt. “But if you don’t, well, remember the old saw about democracy: If you don’t vote, you don’t get to carp about the results.”