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Publicly listed companies in Canada should improve the quality of continuous disclosures in their financial statements, the Canadian Securities Administrators (CSA) have said. In a recent staff notice, the CSA published the findings of its continuous disclosure review program for the fiscal year ended March 31, 2012. "Continuous disclosure is paramount to an efficient Canadian capital market, and ensuring information is timely, reliable and relevant is fundamental for maintaining investor confidence," CSA Chair Bill Rice said in a statement.
The CSA, which co-ordinates and harmonizes capital market regulation for Canada's provincial securities regulators, noted that reliable and accurate reporting by issuers was critical for investor confidence. Its continuous disclosure review program was designed to identify material deficiencies. According to the CSA, the program's two fundamental objectives are education and compliance. In particular, the review process focused on Canada's recent transition to International Financial Reporting Standards (IFRS).
For fiscal year 2012, CSA members completed 1,248 continuous disclosure reviews. 56 percent of the review outcomes resulted in the CSA requiring issuers to take action to improve disclosure. That number was down from 70 percent in 2011.
The rate of non-compliance, still relatively high, was related to the first-time adoption of IFRS, Murad Bhimani, a partner at Toronto-based accounting firm MNP LLP, told Thomson Reuters. "Transition to IFRS in the context of regulatory reporting and continuous disclosures is an on-going evolution and work in progress; the question is whether things are heading in the right direction," Bhimani said. "For the most part, I believe we are progressing towards our goals."
Canadian boards were looking at the value of IFRS compliance compared to the consequences of legislation like the Sarbanes-Oxley Act, Bhimani said. He added that a perfect compliance score among all reviewed issuers was an impossible target.
"I believe, however, that stakeholders (companies, regulators and auditors) have stepped up their commitment and are supporting actions to ensure the rigorous and robust application of accounting and auditing guidelines," Bhamani said. "The audits are performed in the context of materiality and in giving reasonable assurance that the financial statements aren't materially misstated."
As a result of the CSA reviews, 2 perent of issuers had their shares blocked from trading, placed on a default list or referred to enforcement. Nine percent of reviewed issuers were alerted by the CSA to specific areas where disclosure enhancements should be considered. Seventeen percent of the reviews resulted in reporting issuers being required to amend or re-file certain continuous disclosure documents. Twenty-eight percent of the reviews resulted in "prospective changes," requiring reporting issuers to make enhancements to their disclosure in future filings.
Excluding investment funds and issuers whose shares were blocked from trading, there are approximately 4,200 active reporting issuers in Canada. These issuers are subject to regular full and issue-oriented reviews as part of the on-going CSA review program.
According to the CSA, the most notable deficiencies concerned disclosure requirements related to first-time adoption of IFRS, the presentation of financial statements and the specificity management discussions.
The new reporting standards require issuers to explain the effect of identified differences or changes in accounting policies resulting from the transition to IFRS from the pre-changeover Generally Accepted Accounting Principles (GAAP). The CSA noted that many issuers did not provide explanations for all material adjustments, or did not sufficiently explain the nature of those adjustments. Additionally, the CSA observed that some issuers did not change all their accounting policies to comply with IFRS, or that no reconciling items were identified for changes in accounting policies. "We also noted that some issuers provided boilerplate and nonspecific accounting policy disclosures," the CSA said. It reminded reporting issuers that they must provide clear and entity-specific accounting policy disclosures.
In particular, the CSA stressed the continuing deficiencies in the quality of Management Discussion and Analysis (MD&A) disclosures. According to the standard-setter, MD&A is a narrative explanation through the eyes of management of how the issuer performed during the period covered by the financial statements, and what the issuer?s financial condition and future prospects are. "We often find boilerplate disclosure that does not change from period to period," the CSA said. "Issuers frequently replicate disclosure from the financial statements without any analysis."
According to the review, Canadian issuers also continued to use "boilerplate" MD&A disclosures in the discussion of operations, liquidity, and general provisions.
In terms of issuers' discussion of operations, common deficiencies included the disclosure of immaterial information, without the inclusion of details that may be material to investors, as well as insufficient analysis of why certain operational changes had occurred. The CSA reminded issuers that the MD&A should contain a balanced discussion of their operations.
"If other elements affected revenue, such as the introduction of a new product or new competitors, the MD&A should also address these factors," the CSA said. "Issuers should not limit the operational analysis to revenue; if issuers experienced a change in their gross profit percentage, the MD&A should discuss the factors behind the change."
The CSA also stressed that MD&A disclosures should identify and discuss fluctuations and trends in an issuer?s liquidity, taking into account demands, commitments, events or uncertainties. "Where applicable, the discussion should also include disclosure of any defaults or risk of defaults on debt covenants and how the issuer intends to cure the default or otherwise address the risk," the regulator said. "It is especially important when issuers have negative cash flows from operations, a negative working capital position or have breached or expect to breach their debt covenants."
The CSA's review also observed deficiencies in statements of executive compensation. "All direct and indirect compensation provided to certain executive officers and directors for, or in connection with, services they have provided to the issuer or subsidiary of the issuer must be disclosed," the CSA stressed. "Many issuers continue to provide insufficient disclosure related to the summary compensation table, as well as in their compensation discussion and analysis."
Disclosure of corporate governance practices also garnered the CSA's criticism. For example, many Canadian issuers failed to adequately describe the process by which their boards identified new candidates for board nomination. "Some issuers simply indicated that the nominating committee or another board committee was responsible for identifying candidates," the review said. "Others merely stated that the nominee committee was responsible for recommending candidates for board nomination."
This article was originally published for Thomson Reuters - Accelus by Daniel Seleanu.
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