Recent years have seen considerable activity in the securities regulatory area and the development of related guidance by the CICA Assurance Standards Board (ASB). This activity is expected to continue at a similar level for the next several years. In the meantime, here's an update on work completed and what remains to be done.
Because Section 7100, "The auditor's involvement with prospectuses and other offering documents," had fallen far out of date since its revision in 1983, the ASB approved a project (the 7100 project) in July 1997 to bring it up to speed. The subject was complex, however, and overlapped with a number of other practice areas and related Handbook standards. Also, because new initiatives were being developed by securities regulatory authorities, the ASB recognized the need for close liaison with the Canadian Securities Administrators (CSA).
The ASB formed a national task force to undertake the project, and arranged for the assistance of an observer from the CSA. Some preliminary drafting was done, and members of the task force met with CSA representatives to discuss the regulatory changes in the pipeline and advance a number of proposals for change that, if accepted by the regulatory authorities, would affect the revision of Section 7100. It soon became clear that revisions to the section should be put on hold until many of the issues identified in discussions with the CSA were resolved. As a basis for further discussion, in July 1999, the task force provided an issues paper to the CSA, setting out its long-term objectives for the 7100 project.
What has been accomplished
The underwriter project
One of the areas most in need of an update and expanded guidance concerned the auditor's dealings with underwriters or other securities dealers in connection with securities offerings - regarding both comfort letters and participation in due-diligence meetings. As a result, the ASB approved a separate project (the underwriter project), and established an advisory group of securities practitioners to develop the guidance. Following exposure, Section 7200, "Auditor assistance to underwriters and others," was issued in fall 2000. Details appeared in CAmagazine's December 2000 issue (see "When and where to offer comfort," p. 37).
Interim financial statements (accounting)
In the course of discussions with CSA representatives during 1998 and early 1999, commissioners and staff members expressed their concern that CICA accounting recommendations on interim financial reporting were seriously out of date. The Accounting Standards Board (AcSB) approved and gave high priority to the updating of Section 1750 of the CICA Handbook - Accounting, "Interim financial reporting to shareholders." An exposure draft was developed and issued within a short time, and, following that process, the AcSB published "Background information and basis of conclusions." Section 1751, "Interim financial statements," was published in September 2000, to come into effect on January 1, 2001, or, in certain cases, 2002.
Interim financial statements (auditor review)
Concurrent with the development of the new accounting recommendations, the ASB approved a project on auditor review of interim financial statements. In order for the new review recommendations to be available when Section 1751 first came into effect, it was necessary that they be published by April 1, 2001. The project was placed on a fast track, the advisory group of securities practitioners agreed to assist in developing the material, and Section 7050, "Auditor review of interim financial statements," was completed within 12 months. Details appeared in the "Assurance" section of CAmagazine's August 2001 issue (see "Timely guidance," p. 35).
Regulatory changes
During the period in which the projects just described were being carried out, securities regulatory authorities published for comment a number of proposals that affected the 7100 project:
- National Instrument 44-101, Short form prospectus distributions
- Ontario Rule 41-501, General prospectus requirements.
- National Instruments 44-102 and 44-103, Shelf distributions and post-receipt pricing.
- Ontario Rule 51-501, Annual information form and management's discussion and analysis.
- Ontario Rule 52-501, Financial statements.
- CSA Concept Proposal for an Integrated Disclosure System.
The task force reviewed all of these proposals in detail, and in several cases met with regulatory authorities to make suggestions and express concerns. In most cases, the task force issued a formal response to the request for comments.
Assurance Guideline AuG-30
When Ontario Rule 41-501 was issued in final form in late 2000, it contained new requirements for auditors' comfort letters to regulatory authorities that had not appeared in the exposure draft published for comment. The task force held a number of discussions with CSA officials and provided written analysis of the issues in order to resolve a form of letter that was both possible for an auditor to issue and acceptable to the regulatory authorities for their purposes. The task force believed that the requirements necessitated guidance for auditors, including a number of illustrative examples, in the form of an assurance guideline. At the same time, a decision was made to move the bulk of the material in Section 7100 relating to auditor consent and comfort to the guideline. The ASB issued Assurance Guideline AuG-30, "The auditor's consent and comfort in connection with securities offering documents," in April 2001. For additional details, see CAmagazine's August 2001 issue ("Timely guidance," p. 35).
Ontario Securities Review Advisory Committee
Early in 2000, the Ontario Minister of Finance established the Securities Review Advisory Committee to review securities legislation in Ontario. In April 2000, the committee published a request for comments on a number of questions relating to securities legislation. The task force issued a formal response and met with the committee to present its views, advance several suggestions for changes in legislation and set out its recommendations with respect to civil liability provisions contained in the securities legislation. At press time, the committee's preliminary report had not yet been published. When it becomes available, the task force will conduct a review and make further recommendations if appropriate.
Interim revision of Section 7100
In discussions with CSA representatives, the task force learned it is unlikely that expected amendments to existing regulatory requirements will become effective until the end of 2002 or later. In addition, the proposed "Integrated Disclosure System" will probably not be introduced for several years. In these circumstances, the ASB concluded that it should proceed now with certain interim amendments to Section 7100, with four objectives:
- Define more clearly the auditor's professional responsibilities with respect to securities offering documents.
- Recognize changes in practice (such as the prevalence of short form offering documents that incorporate by reference documents issued previously) and to eliminate the inconsistencies with current best practices.
- Adopt certain changes introduced in 2000 as part of the underwriter project.
- Recognize changes in regulations already in effect, largely as a result of National Instrument 44-101 and Ontario Rule 41-501.
Today, the task force (now expanded to include the advisory group of securities practitioners) is engaged in the proposed interim revision of the section.
Under the existing Section 7100, the auditor's responsibilities are framed in terms of performing the work necessary to provide the forms of consent and comfort letter required by regulatory authorities in connection with a prospectus. Although the section would apply to any offering document in which the auditor consents to the use of his or her report on audited financial statements, it is unclear what responsibility the auditor has when no formal consent is to be issued, or when the auditor is involved other than through the use of an audit opinion. As a result, practice with respect to private placement offering memoranda (which are exempt from the regulatory consent and comfort letter requirements), and some other forms of offering document (such as shareholder information circulars), has been inconsistent. The task force has identified the following areas for consideration with regard to the revision of Section 7100.
Redefinition of the auditor's responsibilities
The proposal is to define the professional responsibilities of auditors with respect to any offering documents with which they are associated, either through the use of their name in the documents or as a result of being engaged by a client to perform work on the documents.
Integration within the Handbook.
The ongoing development of an integrated system of continuous reporting in securities regulation argues strongly for a parallel treatment in the Handbook. For example, the Handbook recommendations for a review of unaudited financial statements, assurance report wording and association should apply equally to offering documents and to periodic reporting to shareholders and others.
Conformity to other countries
The practice of Canadian entities issuing securities abroad is far more common now than it was in 1984 when Section 7100 became effective, and cross-border issues have become relatively commonplace. As a result, it has become important for Canadian companies to comply with foreign laws and practices in relation to transactions involving the issuance or exchange of securities. Where feasible, Canadian practice should conform to that of other countries.
Clear and adequate guidance
The field of securities offering transactions is relatively complex. Guidance should therefore be clear and detailed enough to be useful to practitioners. Wherever possible, the guidance provided should be applicable to each different form of offering document (such as a prospectus, private placement offering memorandum, share exchange takeover bid circular or shareholder information circular).
Auditor association with public documents
Section 7100 must deal with the auditor's responsibility concerning the reproduction of audited and unaudited financial statements in an offering document, and other financial and nonfinancial information in the document. Much of the guidance required would duplicate material already in place in Section 7500, "The auditor's involvement with annual reports," and to a lesser extent in Section 5020 of the CICA Handbook - Assurance, "Association." The task force has therefore proposed, and the ASB approved, a project to revise and extend Section 7500 to deal with the auditor's responsibility for reading the financial statements and other information contained or incorporated by reference in an offering document. As well, Section 7500 will be extended to deal with interim reports when the auditor has performed a review of unaudited interim financial statements.
Further changes are coming, but for now, auditors should find the exhibit on page 25 helpful in locating the assurance standards and guidance applicable to securities offering documents.
