The Autorité des marchés financiers (AMF) recently released an Activity Report setting out the results of its latest review of the compliance and general quality of continuous disclosure. The AMF’s report highlights the most common deficiencies found in continuous disclosure documents such as financial statements, management’s discussion and analysis (MD&As), annual information forms (AIFs), information circulars, technical reports, and press releases and material change reports.
The AMF’s review covered continuous disclosure filings made by reporting issuers for whom the AMF is the principal regulator during the April 1, 2013 to March 31, 2014 period. The review was undertaken within the scope of the Continuous Disclosure Review Program established by the Canadian Securities Administrators (CSA) and the report should be read in conjunction with the CSA Staff Notice 51-341, which presents the activities of the pan-Canadian review program.
The AMF’s review ultimately resulted in 81% of the companies reviewed being required to make improvements owing to the deficiencies identified, with only 12 of those being required to refile documents. None were subject to a cease trade order on the basis of the deficiencies (17 cease trade orders were issued, however, for failure to comply with filing deadlines).
The main deficiencies found in financial statements include the following: (i) failure to properly disclose the company’s accounting policies, for example by resorting to boilerplate rather than properly describing the accounting policy adopted for revenue recognition, or by failing to disclose the amount of each significant category of revenue recognized during the period, including revenue arising from the sale of goods, the rendering of services or the receipt of interest; (ii) failure to adequately describe the nature and extent of the risks arising from financial instruments, by not specifying the valuation techniques and inputs used to determine the fair value of certain financial assets and liabilities for example; and (iii) failure to provide appropriate disclosure in respect of the estimates used to establish the recoverable amount of cash-generating units.
In its review of circulars, AIFs, certificates and other continuous disclosure documents, the AMF identified various recurrent insufficiencies in statements of executive compensation and in descriptions of corporate governance practices, as well as inconsistencies between the disclosure in the issuers’ annual and interim filings and the wording or content of the certificates filed under Regulation 52-109 respecting Certification of Disclosure in Issuers’ Annual and Interim Filings. Failure to describe the link between performance goals and the reported compensation of executive officers, and incomplete statements of director compensation, including share-based awards and option-based awards, or any other type of compensation, were listed among the deficiencies that relate to executive compensation. In respect of corporate governance disclosure, descriptions of the way in which the board of directors ensures compliance with the code of conduct and ethics, and of the measures taken to foster a culture of ethical business conduct were both found to be lacking. Audit committees’ written charters were equally found to be deficient for not listing all prescribed responsibilities.
Other disclosure deficiencies were identified in respect of disclosure for mineral projects following a review that focused on Regulation 43-101 respecting Standards of Disclosure for Mineral Projects. Examples include the failure to file a technical report for certain material properties presented in an AIF, failure to include certain specified cautionary language when necessary, failure to file the certificates or consents of the qualified persons who share the responsibility for the preparation of the technical report, to name but a few. We will be covering the particular findings of this review in a separate post given the industry-specific nature and extent of the deficiencies identified.
The report also includes the results of two issue-oriented reviews conducted by the AMF, which targeted a sampling of 59 companies with reporting issuer status. The first issue-oriented review focused on compliance, in both the companies’ continuous disclosure documents and websites, with the guidance provided under CSA Staff Notice 52-306 (revised) Non-GAAP Financial Measures and Additional GAAP Measures (CSA Staff Notice). It revealed such deficiencies as the failure to explain why non-GAAP financial measures (NGFM) provide useful information (or the use of overly general explanations for same) and the failure to fully comply with the guidance in the CSA Staff Notice when NGFM were presented in press releases or annual reports. When additional GAAP measures (AGM), such as EBITDA or results from operating activities, were presented in financial statements, failing to name the AGM or describing it using terms not representative of its composition were noted as common deficiencies.
The second issue-oriented review evaluated compliance with the requirements of Regulation 52-109. The AMF plans to continue this issue-related review into fiscal 2015, with a focus on the measures established by certifying officers to ensure that representations set forth in certificates are adequate. A further issue-oriented review to examine compliance by mining companies with Regulation 43-101 is also projected.