New financial reporting requirements need tweaking, experts say

(June 3, 2005) The Canadian response to Sarbanes-Oxley, which includes a number of changes in financial reporting requirements, is well-meaning, but needs fine tuning, industry leaders say.

In February, the Canadian Securities Administrators introduced proposed amendments that would bring Canada in line with Sarbanes-Oxley, such as a requirement that CEOs and CFOs certify a public company’s financial statements and that the firm’s internal controls be subject to an external audit.

Comments were due June 2, but on Thursday the CSA extended that deadline to the end of the month.

“The Sarbanes-Oxley Act was passed in the wake of a number of financial reporting scandals in the United States,” says Brian Hunt of the Institute of Chartered Accountants of Ontario (ICAO). “It has been highly controversial since its passage in 2002, with some lauding its focus on increased accountability and others decrying increased costs for businesses.”

ICAO and the Ontario Chamber of Commerce hosted a roundtable on the subject on May 12 and submitted a response to the CSA this week.

“It was generally agreed that the costs of implementing [the new measures] in a manner similar to [Sarbanes-Oxley] would outweigh the benefits,” the submission states. “The highest levels of concern were around the costs of documenting, assessing and testing controls; the risk of distracting attention from strategy and core business; and the overall the costs of audits and professional advice.”

Participants in the roundtable — which included some of the country’s largest public financial companies (including Scotiabank, Manulife, RBC and TD) — also expressed concern that the regulations would give investors a “false sense of security that these controls would prevent fraud.”

“We brought together top experts to develop these recommendations because we believe it is crucial that Canadian regulators learn from the successes and failures of U.S. legislation and that Canadian businesses make their voices heard during the process,” said Hunt.

He also noted that in May, the U.S. Securities and Exchange Commission issued new guidance on Sarbanes-Oxley, pledging to revisit sections of the act “with a focus on clarifying the role and expectations of external auditors as a means of reducing costs and the overall compliance burden.”

With that in mind, the submission recommends that the CSA publicly commit to the same standards of compliance and enforcement as the SEC.

The firms involved in the discussions also asked the CSA to commit to “high-level principles that will help define the assessment process” and suggested that a Canadian equivalent of the SEC’s advisory committee on smaller public companies be established to look for ways to help small firms here comply with the new rules.

“We’ve done our part as requested by the CSA,” says Hunt. “Now it is up to this country’s securities regulators to take the suggestions from this submission and the others they’ve received and make sure the regulations coming into effect in June 2006 protect the needs of both investors and businesses.”

And Hunt today praised the CSA for extending the submission deadline. “It shows they’re in tune with the needs of the business community. It’s not too late for other interested parties to make their voices heard on this important issue. We urge them to do so now, because the window of opportunity to help shape these regulations is closing soon.”

(06/03/05)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.