NIN 96/12 - Further Relief Relating to Audit Committee Review and Board of Directors Approval of Interim Financial Statements [NIN - Rescinded]

On January 1, 1996, sections 3(12) and 3(13) of the Securities Rules came into effect. Under section 3(12), an issuer that is required to have an audit committee must have that committee review all financial statements filed with the Commission. Section 3(13) requires approval by the board of directors of a corporation, or by persons holding similar positions in reporting issuers that are not corporations, and requires evidence of that approval. In this NIN, reference to the board of directors includes persons holding similar positions in reporting issuers that are not corporations. One effect of these two sections is that interim financial statements filed for continuous disclosure purposes must be reviewed by the audit committee and approved by the board of directors.

In BOR#95/8 the Commission provided transitional relief with respect to these two sections. Issuers were exempted from section 3(12) for periods ending before January 1, 1996. Issuers were exempted from section 3(13) for periods ending before April 1, 1996.

Although the Commission received no comments on these two sections when they were published for comment in October 1994, we have recently received several letters raising a number of concerns relating to audit committee review and board approval of interim financial statements filed for continuous disclosure purposes. It is clear from the comments received that neither of these requirements reflect current practice for many Canadian public companies. The requirement for both audit committee review and full board approval for interim financial statements filed for continuous disclosure purposes would signficantly increase the costs for companies without corresponding benefits to investors. The concerns raised also include the inconsistency resulting from British Columbia acting on its own in mandating audit committee review and board of directors approval for interim financial statements filed for continuous disclosure purposes when no other Canadian securities legislation includes such a requirement.

In light of the comments received and in the interests of harmonization of securities requirements across Canada, the Commission has issued BOR#96/10, which provides further relief relating to audit committee review and board of directors approval of interim financial statements filed under section 144 of the Rules. Exchange issuers are reminded that Form 61, the form of Quarterly Report, requires the signature of two directors evidencing approval by the board of directors of the Quarterly Report, including the interim financial statements.

The Commission still believes that audit committee review is important. The Commission, together with other members of the Canadian Securities Administrators, issued CSA Notice #90/1, outlining their expectations of the role to be performed by audit committees. The notice indicates:

"9. The Administrators gave particular consideration to the matter of audit committee review of interim financial statements. Financial statement users rely heavily on interim financial statements but interim reporting is subject to fewer controls than annual reporting. While the external auditor may review quarterly results, any such review is frequently part of the annual audit which is conducted after the end of the fiscal year, at which time it is too late to take corrective action.

10. The Administrators recommend that audit committees review interim financial information before it is released to the public."

The Commission intends to discuss with other members of the Canadian Securities Administrators a common approach to audit committee review of interim financial statements.

DATED at Vancouver, British Columbia, on May 2, 1996

Douglas M. Hyndman
Chair