The Canadian Securities Administrators today released a staff notice outlining the results of their recently conducted review regarding compliance with provisions of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings. CSA staff notes that 38% of reporting issuers reviewed substantively complied with NI 52-109. Some level of non-compliance was identified in the remaining 62%, however, with 30% of reporting issuers being required to refile their annual MD&A and/or certificates.
A majority of refilings that were required were on account of (i) issuers not fully disclosing their conclusions about the effectiveness of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) in their MD&A, and (ii) issuers making significant amendments to the wording of the certificates.
In connection with the deficiencies that were observed, the CSA staff made the following comments:
- Issuers may not qualify their conclusions about the effectives of DC&P and ICFR unless the qualifications are explicitly permitted by NI 52-109.
- If issuers choose to discuss a limitation in their MD&A (such as lack of segregation of duties or a lack of knowledgeable accounting staff in technically complex areas), the MD&A should also clearly disclose if the limitation is a material weakness relating to ICFR or a weakness in DC&P that is significant.
- Issuers should be careful not to confuse the concepts of "mitigating procedures" and "compensating controls". A mitigating procedure may help to reduce, but does not eliminate the financial reporting risk that the deficient ICFR component failed to address, whereas a compensating control fully addresses a material weakness and allows certifying officers to conclude that ICFR and DC&P are effective.
- With respect to the lack of segregation of duties, the threshold for the additional involvement of the audit committee or board of directors constituting a compensating control, rather than a mitigating procedure, is high. If the issuer has implemented only a mitigating procedure, it should identify the lack of segregation of duties as a material weakness and conclude that ICFR is not effective. In this respect, CSA Staff note that section 10.3 of the Companion Policy to NI 52-109 also states that if the certifying officers identify a material weakness in the issuer's ICFR, this will almost always represent a weakness that is significant in the issuer's DC&P.
The total sample size reviewed consisted of 198 non-venture issuers and 53 venture issuers.