News from the profession    
 
   
 

News from the profession

A summary of current CICA projects and initiatives

Canada’s corporate reporting getting better every year

According to CICA’s annual Corporate Reporting Awards (CRA), annual reports of Canada’s public companies are getting bigger, bolder and better.

“The quality of corporate reporting continues to improve,” says Bill Buchanan, FCA, the CRA overall judging coordinator. “The beneficiary of improved disclosure is the Canadian investor who is provided greater access to more transparent and better information on which to base investment decisions. This, after all, is what corporate reporting should always be about.”

To provide clear guidance on the information needs of primary users — investors — the CICA will soon publish a comprehensive research study, Corporate Reporting to Stake-holders (refer to the CICA website at http://www.cica.ca/crs). The study, prepared by current and former CRA judges, is ac-companied by a survey of content of annual reports and websites of 125 companies that have participated in the awards.

Changing to meet user needs
In the 56 years since the CRAs were launched, annual reports have changed dramatically in response to stakeholder interests. While the hardcover annual report remains a cornerstone of the awards program, that report has evolved from basic financial statements to documents filled with supplemental information. Financial reporting also includes interim reports, MD&A, earnings, press releases and website disclosures.

This evolution is cited in the CICA study, which notes that the average size of the 2005 annual reports was 91 pages — they ranged from 29 to 223 pages. In contrast, the average size of 1990 annual reports was 40 pages — ranging from nine to 113 pages. To counteract the potential for information overload, 98% of the surveyed companies provided their website addresses as sources of additional information on financial (43%), governance (33%) and sustainability (14%) matters.

Trends in corporate reporting
To identify trends in corporate reporting, the CICA study analyzed the changes in the 2004, 2005 and 2006 annual reports of award-winning companies. The analysis shows that 2006 reports provided more information than ever, mostly because of corporate growth, new regulations and the goal of overall transparency.

In recent years there has been a trend in the use of two-part annual reports — one contains the financial statements and MD&A while the other has everything else. More companies are providing scorecards on their performance, considered an important ingredient in corporate reporting.

Electronic reporting
The CICA corporate reporting research shows that electronic disclosure and Web-based reporting of financial and non-financial information is now commonplace. With the rapid advancement of information technology and related technologies such as eXtensible business reporting language, organizations are adopting new means of communicating with investors and other stakeholders. For example, information is being delivered online in the form of corporate news, quarterly earnings releases, annual reports (typically in PDF format), audio and/or video conferencing and e-mail alerts. Together, organizations and stakeholders are shifting to a new paradigm — real-time online reporting.

“Corporate reporting has taken a considerable turn in recent years,” says Jerry Trites, FCA, who headed the group that worked on the research study. “At one time, the annual report was virtually the only reporting done by companies. Now, the focus of many stakeholders has shifted to the website, such that it has become the primary vehicle for the communication of corporate financial and business information. It is expected this evolution will continue.”

But the 125 company websites reviewed for the research study generally did a poor job of communicating essential information, presenting it and facilitating navigation. “The technological problems associated with preparing reliable, real-time data are daunting,” the study concludes. “They merit further study.”

There is also a growing trend noticed over the past year — a heightened interest by disclosure committees in ensuring comprehensive disclosure controls and records for the corporate website. That’s good for both the company and the investment public.

Still the most useful
Whatever the challenges ahead, annual reports are an integral part of corporate reporting to stakeholders. According to a 2005 Canadian Investor Relations Institute survey, “of all the tools used by publicly traded companies to communicate with their investors, the annual report offers the most comprehensive picture of where the company has been and where it is going.” Fortunately, the quality of that picture seems to get better every year.

Aline Girard, PhD, CA, associate professor, HEC Montreal.

Paul-Émile Roy, CA, CICA


CAs impacted by changes to anti-money laundering rules

New anti-money laundering (AML) rules will come into effect in less than a year and Canada’s CAs had better be aware. If they are involved with the proceeds of crime — even unintentionally — the penalties could be severe. Starting June 2008, Canada’s AML regulations will be as stringent as others in the world.

The new laws notwithstanding, criminals will continue to try to hire reputable and unsuspecting accountants — CAs, CMAs or CGAs — to establish lawful businesses for converting proceeds of crime into legitimate assets. Should accountants be susceptible to “willful blindness” when accepting clients and/or fees, this could be construed as an act of complicity if a “dishonest” situation were the result. Accountants also run risks if they do not report or are alerted to situations where they ought to have had some suspicions about their client(s) and/or the business.

Effective June 30, 2008, new regulations for accountants will affect record keeping, client identification and reporting obligations. The changes are the result of the 2007 passage of amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which propelled Canada’s commitment to battling money laundering to international standards. All reporting entities (as defined below) face new, stringent compliance requirements, such as adopting aggressive, proactive, documented self-policing and disclosure programs. The rules also apply to all involved in certain types of transactions.

Under the PCMLTFA, reporting entities comprise financial institutions, life and other insurers, securities dealers, real estate brokers, foreign exchange dealers and money services businesses, accountants and casinos. To comply with the PCMLTFA regulations, reporting entities will have to designate an employee to be responsible for AML compliance function, introduce a broad set of AML training programs and implement specific internal self-policing and reporting procedures.

The Canadian regulator designated to oversee the PCMLTFA is the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), an agency of the federal government of Canada, Ministry of Finance. FINTRAC, also now known as Canada’s financial intelligence unit, monitors compliance and receives all reports required under the legislation.
According to FINTRAC, the purpose of the PCMLTFA is:

  • to implement specific measures to detect and deter money laundering and the financing of terrorist activities;
  • to facilitate the investigation or prosecution of money laundering and terrorist financing offences;
  • to respond to the threat posed by organized crime by providing law enforcement officials with the information they need to investigate and prosecute money laundering and terrorist financing activities;
  • to assist in fulfilling Canada’s international commitments to participate in the fight against transnational crime, particularly money laundering and the fight against terrorist activities.

FINTRAC has the power to compel reporting entities to disclose relevant information and to assess heavy penalties and fines if they fail to demonstrate compliance. Certain reporting entities may also be required to register with FINTRAC. The PCMLTFA imposes obligations on other business, especially those dealing in commodities and encountering suspicious or attempted suspicious transactions.

There are now many international AML organizations (including the EU and the World Bank) supporting the fight against money laundering, each issuing compliance principles aimed at deterring and detecting the legitimization of the proceeds of crime. Although Canada was among the last industrialized nations to pass AML legislation, most Canadian reporting entities have begun adhering to the AML legislation of other countries. Canadian banks, financial institutions and insurance companies have known for some time that even having a bank account in other jurisdictions subjects them to foreign AML legislation. Any Canadian bank doing business in US dollars or maintaining a presence in the US has to com-ply with the provisions of the Bank Secrecy Act.

The PCMLTFA reflects Canada’s international commitment to remain an active AML leader and is intended to integrate with similar legislation of other nations. The CICA supports the intent of the legislation, even though the PCMLTFA’s long-term contribution is still to be measured. (See CICA’s Online Anti-Money Laundering Resource Centre at http://www.cica.ca/index.cfm/ci_id/2081/la_id/1.htm.)

Howard Wasserman, CA, CIRP, CFE, CFI, is a trustee in bankruptcy and consultant on forensic investigations, insolvency, restructuring and white-collar crime. He is the chair of the CICA’s Anti-Money Laundering Advisory Committee

Paul-Émile Roy, CA, is a principal in the CICA’s research studies department. He provides staff support to the Anti-Money Laundering Advisory Committee


CICA helps small issuers build a better MD&A

Canada’s chartered accountants are helping smaller public companies maximize the usefulness of their disclosures to investors.

CICA has developed a special guide aimed at enhancing investor communications through improved reporting. The guide urges companies to consider Management’s Discussion and Analysis (MD&A) as a key communications vehicle to investors and not simply a regulatory compliance document.

“In today’s environment, investors turn to the MD&A to learn the story behind the numbers,” says Dave Pollard, CICA vice-president, knowledge development. “A well done MD&A provides the context investors need to better understand the company’s performance and prospects.”

The CICA document is an easy-to-follow “how-to guide” offering many practical suggestions for small public companies.

“In an era when the bar is continually rising on the quality of corporate disclosures, how a company reports to shareholders can have a major impact on its reputation,” says Pollard. “Clearly written, informative, and timely disclosures can build investor confidence and management credibility.”

The guide entitled “Building a better MD&A — a guide for smaller issuers,” is mainly directed at smaller issuers, but it may prove useful to companies of any size. The guide can be found on the CICA website at www.cica.ca.

Clock is ticking on new accounting standards

The arrival of a new year always leads to thoughts about what lies ahead.

The CICA is encouraging financial and business leaders to start planning today for the pending transition to International Financial Reporting Standards (IFRSs).

The new standards are scheduled to take effect in 2011 and will have a significant impact on financial reporting for all publicly accountable enterprises, including Canada’s 4,500 publicly listed companies. The move to global financial reporting standards will place Canada on the same reporting playing field as more than 100 countries.

Indications from a variety of sources are that while progress is being made in preparation for the changeover, a significant amount of work remains to be done.

“The clock is ticking,” says Ron Salole, CICA’s vice-president, standards. “We urge companies to start now to gauge the scope and complexity of these changes on their businesses. While the changeover is just three years away, global experience clearly demonstrates that the earlier organizations begin implementation, the smoother the transition.”

Last year, CICA launched a dedicated Web link called Transition to International Standards that can be accessed through its website (www.cica.ca) or through those of the provincial institutes/ordre across Canada. This one-stop information source offers a variety of special products to assist companies through the transition process.

“The move by Canada to IFRS is a prime example of the global economy that is rapidly taking shape,” says Salole. “We are committed to ensuring that Canadian enterprises are well equipped for this change.”