CSA Staff Certification Compliance Update
On October 15, 2010, the Canadian Securities Administrators (CSA) published in Staff Notice 52-327 its review of the annual management’s discussion and analysis, as well as the annual certificates filed by a sample group of reporting issuers in 2009 to assess compliance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (the Certification Rule). Overall, the CSA states that the results indicated moderate improvement in compliance compared to its 2008 review, but that progress can still be made.
Deficiencies in Annual MD&A Disclosure
Common deficiencies in annual MD&A disclosure identified in Staff Notice 52-327 include:
1. No disclosure, or unclear or incomplete disclosure, in the annual MD&A of certifying officers’ conclusions about the effectiveness of internal control over financial reporting (ICFR) or disclosure controls and procedures (DC&P). For example, issuers should consider the following in preparing their annual MD&A:
- Certifying officers cannot qualify their assessments of effectiveness by stating that the issuer’s ICFR or DC&P is effective subject to certain qualifications or exceptions — unless the qualification pertains to one of the permitted scope limitations available in Section 3.3 of the Certification Rule.
- A certifying officer may conclude that the issuer’s ICFR or DC&P is "effective" without referring to the "design" and "operation" of said ICFR and DC&P separately. However, if the effectiveness of design of ICFR or DC&P is noted, a conclusion with respect to the effectiveness of operation must also be stated.
- Issuers are not required to reference the Certification Rule definitions of ICFR or DC&P in their annual filings. Simply stating that the ICFR or DC&P is "effective" or "ineffective" will be sufficient. However, if these definitions are included, they must be replicated verbatim and in their entirety.
2. Inadequate disclosure in the annual MD&A of material weaknesses in ICFR and significant weaknesses in DC&P. Issuers should note:
- The Certification Rule does not require disclosure of a weakness or deficiency that is not significant enough to constitute a material weakness in ICFR or a significant weakness in DC&P. If any such weakness or deficiency is discussed, the disclosure should clearly indicate that it does not constitute a material weakness in ICFR or a significant weakness in DC&P.
- If a material weakness is identified, an issuer cannot conclude that ICFR or DC&P is effective, even if a remediation plan has been put into action (i.e., the material weakness existed at year-end).
- It is important to note that a material weakness in the issuer’s ICFR will almost always represent a significant weakness in the issuer’s DC&P, given the substantial overlap in the definitions.
CSA Staff also made note of common deficiencies with respect to certificates filed by reporting issuers pursuant to the Certification Rule:
3. Not using the exact wording prescribed by the required form.
The most common mistake is deleting the following paragraphs when they do not apply instead of marking them "not applicable" or "N/A": (1) paragraph 5.2 on ICFR material weakness relating to design; (2) paragraph 5.3 on limitation of scope of design; or (3) subparagraph 6(b)(ii) on ICFR material weakness relating to operation. These paragraphs must be left in the certificate in order to maintain the sequence of paragraphs.
4. Issues with dating and timing of filing of the certificates.
- The date on the certificates is not the same date as the date the certificate is filed.
- The certificates are not filed concurrently with the AIF when the AIF is filed after the financial statements and MD&A.
- The date in paragraph 7 of Form 52-109F1 is not the date immediately following the end of the period covered by the issuer’s most recent interim filing.
Restated and Re-Filed Financial Statements
The CSA also notes in Staff Notice 52-327 that issuers that restated or re-filed financial statements did not always consider if the misstatement in the financial statements was related to a material weakness in ICFR. As a result, CSA Staff found deficiencies in the disclosure of material weaknesses, in the conclusions of the effectiveness of ICFR and DC&P, and in the disclosure of material changes to ICFR when a material weakness was remediated.
CSA Staff will continue to request re-filing of MD&A or certificates in the future if an issuer has not met the requirements of the Certification Rule. In addition, CSA Staff have stated that they may consider other regulatory action as circumstances warrant. Please don’t hesitate to contact us should you have any questions. We would be pleased to assist you with the preparation of MD&A and certificates in accordance with the Certification Rule.