Canada’s Response to Sarbanes-Oxley

Corporate Finance and Public Policy

What is Sarbanes-Oxley?
• Enacted by Congress in 2002

• Largely in response to Enron/Worldcom scandals

• Intended to improve transparency in financial

accounting and to prevent fraud

• Extensive regulations impacting

• CEOs, CFOs, auditors, Boards of Directors,

investment analysts, investment banks
 Primary Regulations
• Audits need to be sufficiently independent of companies
being audited

• Key execs of each audited company personally certify

that financial statements are complete and accurate

• BoD audit committee is independent of management

• Financial analysts are independent of companies being

analyzed

• Companies publicly/promptly release financial condition

information
 Titles
• Consists of 11 “Titles” or Chapters

• Titles include

• Title VII- “whistle blower protection” for employees

who report fraud

• Title IX- penalties/crimes for altering or hiding

documents in an investigation

• Title X- requiring CEOs to sign tax returns

• Other titles explained in Chapter 13

 SOX-Canada Synopsis
• Canada found itself under pressure to adopt similar
reforms - why?

• Many of the firms listed on Toronto Stock

Exchange (TSX) were also listed on NYSE and
NASDAQ

• Maintain investor confidence in Canadian

regulatory system

• Uphold integrity of Canadian capital markets

 Canadian Securities
Administrators (CSA)
• CSA serves as an umbrella organization of
provincial and territorial securities commissions

• Introduced series of national instruments and

policies that closely followed SOX

• Canadian corporate governance requirements

often more “non-prescriptive” than US Corporate
Governance requirements
 Audit Committee
• Each public company in Canada is required by
both corporate and securities law to establish an
audit committee

• modeled on Section 301 of SOX

• audit committee must have at least three

directors and

• each director must be “independent” and

“financially literate”
What is “financially literate”?
• ability to read and understand financial statements

• “that you both understand the transactions your

company undertakes and the accounting issues
surrounding those transactions.” R. Weil

• understanding control systems, disclosure

requirements, and audit practice and procedure

• not just getting an MBA or taking a corporate

finance course!
Compensation Committee
• Boards should appoint compensation committees
composed entirely of independent directors

• review and approve corporate goals relevant to

CEOs compensation

• evaluate CEO’s performance with respect to

goals

• make recommendations to Board regarding

CEO’s compensation
 Auditor Independence
• Canadian Institute of Chartered Accountants
(CICA) provides systematic principles-based
framework for analyzing independence of
auditors

• Identify threats to independence

• Safeguards to be applied to mitigate threats

• Discontinue engagements where threats cannot

be eliminated
 What are threats to
independent auditing?
◦ Self-interest - when practitioners could benefit from
a financial interest in a client;
◦ Self-review - when practitioners audit their own
work;
◦ Advocacy - when practitioners promote a client's
position or opinion;
◦ Familiarity - when practitioners becomes too
sympathetic to a client's interests; and,
◦ Intimidation - when practitioners are deterred from
acting objectively, by actual or perceived threats
from a client.
Supplement