The Canadian Securities Administrators are proposing to introduce a new national instrument to repeal and replace Multilateral Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings (MI 52-109). If the national instrument comes into force, issuers will be required to have their CEOs and CFOs certify that they have evaluated the effectiveness of the issuer’s internal control over financial reporting (ICFR) and caused the issuer to disclose in its MD&A their conclusions about the effectiveness of ICFR. The objective of these control certification requirements is to improve the quality, reliability and transparency of financial reporting. This requirement once enacted will apply to all reporting issuers, other than investment funds, in all provinces and territories of Canada. It is proposed that the requirements should apply in respect of financial years ending on or after June 30, 2008.
On March 20, 2007, the CSA published Proposed National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings. The key features of the Proposed National Instrument are:
reporting issuers will not be required to obtain from their external auditors an internal control audit opinion concerning management’s assessment of the effectiveness of ICFR. This represents a divergence from U.S. requirements and a previous proposal of the CSA, and will reduce the costs faced by issuers;
the Proposed National Instrument will be adopted by all provinces and territories. British Columbia is not a party to existing MI 52-109;
in addition to the current certification requirements, the CEO and CFO of an issuer must certify that:
- they have evaluated, or caused to be evaluated, the effectiveness of the issuer’s ICFR at its financial year-end;
- the issuer has disclosed in its MD&A the CEO’s and CFO’s conclusions about the effectiveness of the ICFR and the process of evaluation;
- the issuer has disclosed in its MD&A any “reportable deficiency” relating to its ICFR and included a description of such deficiency, the remediation plan for such deficiency and the anticipated completion date of such plan;
- they have reported to the issuer’s auditors and board of directors or audit committee any fraud involving management or employees who have a significant role in ICFR;
- “reportable deficiency” is defined to mean a deficiency or combination of deficiencies in the design or operation of one or more controls that would cause a reasonable person to doubt that the design or operation of ICFR provides reasonable assurance regarding the reliability of financial reporting or the preparation of financial statements for external purposes in accordance with the issuer’s generally accepted accounting principles;
- in addition to the requirement to certify as to management’s evaluation of ICFR, the Proposed National Instrument enhances the current requirements regarding certification of the design of internal controls which were introduced in respect of financial years ending on or after June 29, 2006. CEOs and CFOs will be required to certify that the issuer’s MD&A discloses any reportable deficiencies regarding ICFR design, the remediation plans for such deficiencies, the control framework used to design ICFR or, if no framework was used, a statement to that effect, and any limitations on the design. Venture issuers will be allowed accommodation regarding remediation plans, provided certain disclosures regarding the deficiency are made in an issuer’s MD&A;
- the Companion Policy to the Proposed National Instrument provides guidance to issuers regarding compliance with the new ICFR certification. Such guidance includes a list of available control frameworks to provide a useful reference when designing or evaluating the effectiveness of ICFR. The Companion Policy provides guidance on using a top-down, risk-based approach to ICFR certification.
The Proposed National Instrument and the Companion Policy are open for public comment until June 28, 2007.