Audit Committees on Canada’s 'Big Board' Fall into Line; Little Guys Continue to Lag

Abstract

After a rough introduction to the post-Sarbanes Oxley era, Canadian audit committees for TSX listed firms have mostly fallen into line with the reforms enacted by the Canadian Securities Administrators in 2004. A new study just completed shows that for a sample of over 450 Canadian companies that 90% or more complied with the regulatory requirements for Audit Committee member independence and financial literacy, assigned responsibilities acknowledged and audit firm fee disclosures.

The ‘made in Canada’ approach of providing ‘daylight’ by requiring disclosure of poor governance practices hoping that it would lead to substantive changes quickly does not seem to be born out given the predominance of Venture firms having management members on Audit Committees despite several years of disclosure of this departure from ‘best practice’. The lack of compliance in the area of mandated audit committee financial literacy disclosures among TSX companies is also problematic. ‘Negotiations’ among Canada’s thirteen regulators lead to the requirement for a financial expert on the audit committee to be dropped and replaced with this disclosure - yet even that disclosure is not being uniformly followed. Compounding this is the practice of nearly 90% of Venture companies voluntarily disclosing they have financially literate audit committees but with almost a third not providing any information about how they support that assertion.

Nonetheless, the study concludes that the overall story is a good news one for Canadian regulators. In one of the rare cases where regulators went public with a strong statement of disapproval of the level of noncompliance in their first study and kept their promise to carry out the follow up study in the next fiscal year, corporate Canada as represented by those listed on the “Big Board” seemed to be convinced that the regulators were serious about enforcement of this regulation.

Keywords: audit committee, compliance, Sarbanes Oxley Act, 404, 302, Canada

JEL Classification: M40, L50,K22