Sarbanes Oxley affects Canadian financial reporting standards
In response to recent accounting scandals in the United States, most notably involving Enron and Worldcom, Canadian securities regulators plan to implement new rules on internal financial controls for the 1,300 corporations whose shares trade publicly on the Toronto Stock Exchange (TSX). In a bid to improve investor confidence in the ethics of corporate boardrooms, the industry has developed a complex and controversial set of rules called the “Multilateral Instrument 52-111”.
There are about 2,300 other publicly-traded Canadian companies, many of which trade in B.C., which will not be subject to the new regulations.
52-111 echoes the U.S. rule contained in Section 404 of the Sarbanes-Oxley Act (SOX), even though there have been no Enron-sized debacles in Canada, and thus some have questioned the need for Canadian regulators to go as far as the U.S. has in heading off possible future corporate scandals.
Named after Paul Sarbanes, a Democratic senator from Maryland, and Michael Oxley, a Republican from Ohio in the House of Representatives, SOX was designed to restore investor confidence in US publicly traded companies by toughening corporate governance rules and making executives more accountable. Punishments would include jail time for corporate executives.
The transition has been expensive and painful. Major U.S. corporations are now starting to report the costs of SOX compliance - one major U.S. corporation reported that its audit fees nearly doubled, from $U.S. 3.9 million to $US 7 million - and on average, the costs of implementing SOX jumped by 39% to an average $US 4.4 million (for large U.S. public corporations).
The new 52-111 would, when enacted, require auditors to evaluate the effectiveness of the financial internal controls of their audit clients. Many critics emphasize that controls cannot ensure accuracy - indeed, many crucial decisions are made by a small group of people who, despite all the theoretical controls imaginable, can easily circumvent them.
While few could argue with the spirit of the suggested changes, the matter of reliance, and auditor sign-off on, internal control systems is a problem that will continue to garner controversy, and no doubt headlines, in the years to come.