CSA Releases Fiscal 2008 Continuous Disclosure Review Results

In August 2008, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-326, Continuous Disclosure Review Program Activities for Fiscal 2008, a report of findings and recommendations arising from continuous disclosure (CD) reviews for the fiscal year ended March 31, 2008.

Each year, staff of the CSA conducts a selective review of CD documents of reporting issuers, other than investment funds. The review program has two main objectives:

• to determine, to the extent reasonably possible within the scope of the review conducted, whether issuers are complying with their CD obligations by providing complete, accurate and timely information to investors
• to help issuers better understand their disclosure obligations under NI 51-102, Continuous Disclosure Obligations.

In this edition of Accountability e-Lert, we highlight certain accounting and disclosure matters raised in the report. Management and the audit committee should review this notice to evaluate the appropriateness of their company’s continuous disclosure filings.

For management and the audit committees of issuers that will be adopting IFRS, we also encourage you to consider these CSA staff comments from the perspective of the incremental MD&A disclosures expected regarding your company’s changeover to IFRS.

Selection criteria
In general, issuers are selected for review using a risk-based approach. This risk-based approach takes into account the potential harm to Canadian capital markets if an issuer fails to provide complete, accurate and timely disclosure about its business and affairs.

The selection criteria include market capitalization, trading activity, as well as specific issues and concerns affecting particular industries. The selection criteria may change as certain disclosure-related issues gain greater public prominence, or as consensus or concerns develop over particular accounting issues or disclosure practices.

The review may be a “full” review covering all of an issuer’s continuous disclosure documents, or an “issue-oriented” review focusing on particular disclosures believed to warrant specific regulatory scrutiny.

Fiscal 2008 reviews
In fiscal 2008, 854 CD reviews were completed, consisting of 442 full reviews and 412 issue-oriented reviews.

In 39 percent of the reviews, issuers did not need to make any changes or provide additional filing.

In 19 percent of the reviews, issuers were required to amend or refile certain CD documents because one or more CD documents failed to comply with securities regulations.

In 36 percent of the reviews, the deficiencies were not significant enough to warrant a refiling of one or more CD documents, but the issuer was expected to correct the CD document in future filings.

Management’s discussion and analysis
A significant portion of the prospective changes and refilings in 2008 resulted from deficiencies in management’s discussion and analysis (MD&A).

Common problems found in MD&A included making boilerplate disclosures and repeating information from the financial statements without providing sufficient analysis.

Recurring deficiencies in MD&A included:

• inadequate disclosure of liquidity and capital resources
• lack of quantitative analysis in the results of operations discussion
• no or limited disclosure of the adoption of new accounting policies
• inadequate related party disclosure
• absent or insufficient discussion about the risks and uncertainties expected to affect the issuer’s future performance.

Financial statements
The CSA noted measurement issues and common deficiencies in the disclosure of accounting policies in the following areas:

• cash flow statements
• financial instruments
• revenue recognition
• stock-based compensation.

Other deficiencies
Other deficiencies included:

• failing to file CEO and CFO certificates in accordance with appropriate securities regulations. In particular, improper certificates were filed or there was insufficient discussion about the disclosure controls and procedures in the MD&A
• failing to file or filing a significantly deficient technical report (oil and gas, and mining industries)
• failing to file or filing a deficient business acquisition report (BAR) (e.g., no reconciliation to Canadian GAAP, incorrect pro forma information)
• unsatisfactory executive compensation disclosures.

Issue-oriented reviews
Issue-oriented reviews were conducted by one or more jurisdictions on the following matters:

• asset-backed commercial paper (ABCP)
• business acquisition reports
• environmental reporting
• mining technical disclosure
• oil and gas technical disclosure
• options backdating.

In each of these areas, specific deficiencies were noted by the CSA and issuers encountering any of these matters should review the detailed findings in the review report.

One additional area, focused on by all jurisdictions, was financial instruments, in particular the new accounting standards that were effective for fiscal years beginning on or after October 1, 2006. These standards require that all financial assets and liabilities, including derivatives, be measured at fair value and include extensive disclosure requirements.

A number of issuers did not adopt the new standards and were required to restate their financial statements and MD&A. Certain issuers that adopted the financial instruments standards, and were selected for review, incorrectly recorded investments at cost and not fair value and had insufficient disclosure relating to fair value.

2009 CD review program
The CSA review program continues to evolve, in particular, the reviews have started to focus on specific industries.

In 2008, the oil and gas, and utilities industries were added to the industry roster.

The 2009 review program will give greater attention to issues arising from new accounting standards and regulatory changes in the following areas:

• inventories
• going concern
• forward-looking information
• financial instruments and capital disclosures
• financial instruments – recognition and measurement.

Conclusions
Again in fiscal 2008, the CSA found that in more than half of the reviews there were deficiencies in the filings of CD documents. These deficiencies resulted in numerous refilings and prospective accounting or disclosure changes. A surprising 5 percent were referred to enforcement, and 1 percent resulted in the issue of a cease trade order.

This CSA report should be reviewed by management and the audit committee. The matters raised in the report should be compared to the company’s existing practice and, if changes are necessary, they should be implemented. This approach can help reduce the risk that a CD review will necessitate refiling a company’s CD documents.

We also encourage management and the audit committee to consider these CSA staff comments in terms of the incremental MD&A disclosures now expected from issuers that will be adopting IFRS.

KPMG LLP (Canada) automatically sends these e-mail alerts to people who request them. You may request these e-mail newsletters by signing up at www.kpmg.ca/accountability or by clicking this link.