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Canada’s decentralized regulatory system failing investors: Queen’s study


A new study at Queen’s School of Business has revealed that many publicly-traded Canadian firms are not revealing the results of evaluations that assess the design of their own financial safeguards against fraud, and that the Canadian regulatory system severely lags its US counterpart in enforcing compliance consistently and effectively.

The study also exposes that within Canada, companies listed on the Canadian Venture Exchange are far more likely to withhold voluntary disclosures and ignore basic reporting requirements than those listed on the Toronto Stock Exchange (TSX).

The research provides tangible proof that Canada’s 10 provincial and three territorial regulators seemingly fail to consistently enforce even the few guidelines they agree upon, such as disclosure controls and procedures effectiveness opinions, compared to the United States model, where a single, well-funded and rigorous national securities regulator successfully enforces laws that require transparent control safeguards.

“While we are not advocates of mimicking the American system of over detailed regulation, legalistic enforcement and a tick box mentality, we have consistently advocated a strong, principled made-in-Canada system,” says professor Steve Salterio, who led the research. “Unfortunately, what we have is a made-in-Canada mess.”

The study compared 158 Canadian firms that are cross-listed on US and Canadian exchanges with 199 Canadian firms that are only listed on Canadian exchanges (100 on the TSX and 99 on the Venture Exchange), and found that only a minority of companies are voluntarily disclosing the results of the mandatory evaluation of the design effectiveness of their own internal controls. This contrasts the experience in the United States, where it is mandatory for management to make and disclose this evaluation.

Key findings:

- Among the study’s sample of companies that are solely listed on the TSX, almost one in 10 (nine per cent) do not disclose anything about internal control design responsibility in their Management Discussion and Analysis, including large firms like Loblaw Companies, Power Corp, Power Financial and The Score Media.

- Among the 91 per cent that do, just over half (54 per cent) actually provide an opinion on the effectiveness of their own controls design, and fewer than half of the TSX-listed companies in the sample (46 per cent) evaluated their safeguards as being effective.

- Researchers discovered that less than one third (29 per cent) of the sample’s Venture Exchange-listed companies provide an opinion on their own financial controls, and of those, just 45 per cent (or 13 per cent overall) evaluate their controls as being effective.

This last finding demonstrates a de facto two-tiered level of compliance between companies listed on the TSX and the Venture Exchange, even though securities regulations in this area are identical for the companies in the study’s samples.

“Our sample of Venture companies was from among the oldest and largest actively traded companies - the ones making up the Composite Index,” says Regan Schmidt, co-author of the study. “If these companies are problematic, what would we have found in a random sample of all exchange companies?”

The study also concludes that instead of internal control evaluations and their disclosures acting as a deterrent to corporate malfeasance and informing investors about investment risks, because of the voluntary nature of disclosure, baseline compliance has become an example of good corporate citizenship.

“Instead of informing investors, our weak regulatory system is being used as a prop in a beauty pageant, with companies that divulge little more than the minimum required to report wearing the crown,” says Professor Salterio.

The solution, says Prof. Salterio and his colleagues at Queen’s School of Business, is a National Securities Regulator with proper powers to investigate and penalize errant companies, auditors (and audit firms), lawyers and other participants involved in accounting disclosure. In the meantime, he calls upon the provincial government in Ontario to appoint a blue ribbon commission to investigate and report quickly what are the impediments to the Ontario Securities Commission becoming a more effective regulator.

“Currently, the OSC is just not up to the standards set by other countries regulators,” says Professor Salterio.


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