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Comparison of U.S. and Canadian Regulatory Changes

Comparison of U.S. and Canadian Regulatory Changes

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Published by Ray Brooks

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Published by: Ray Brooks on Apr 19, 2010
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04/19/2010

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kpmg
©
2003 KPMG LLP, the Canadian member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
 
Comparison of U.S. and Canadian Regulatory Changes
1. Independent Oversight of the Public Accounting Profession
U.S. Standards Arising from Sarbanes-Oxley Act of 2002
1
Canadian Response
Title I: Public Company Accounting OversightBoard
The Board’s responsibilities under the Act are to:
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Inspect and register public accounting firms(“registered firms”) that prepare audit reportsfor issuers;
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Establish, adopt, or modify auditing, qualitycontrol, ethics, independence, and otherstandards for public company audits;
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Enforce compliance with the Act, the rules of the Board, professional standards, and thesecurities laws relating to the preparation andissuance of audit reports and the relatedobligations and liabilities of accountants;
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Investigate registered firms for potentialviolations of applicable rules relating to audits;
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Impose sanctions if those violations areestablished;
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Set its budget and manage its operations, and
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Perform such other duties or functions as theBoard or SEC determines necessary.The Board is to have five members, two of whommust be certified public accountants; the other threemust not be certified public accountants. Four of the Board members have been appointed and thechair is expected to be appointed shortly.
Canadian Public Accountability Board (“CPAB”)
CPAB has been established by a co-operative nationaleffort involving federal and provincial regulators alongwith Canada’s Chartered Accountants (CA).Under the terms of the CPAB, CA firms auditing publiccompanies will subject themselves to a number of newrequirements, including:
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undergoing more frequent and rigorous inspections;
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adopting proposed new Canadian auditorindependence rules as soon as practicable;
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adopting second partner review of all public companyaudits; and
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implementing new quality control requirements.In October 2002, Gordon Thiessen (former Governor of the Bank of Canada) was announced as the chair of CPAB. The remaining ten members of CPAB, a majorityof whom will be independent of the CA profession, areexpected to be announced shortly.
Auditing Standards Oversight Council
In October 2002, the establishment of the Auditing andAssurance Standards Oversight Council (AASOC) wasannounced. James C. Baillie was announced as chair of the AASOC that will oversee the Assurance StandardsBoard (ASB), providing input, strategic direction and theperspective of users into the setting of auditing andassurance standards in Canada. The ASB is the nationalbody with the authority and responsibility for settingauditing and assurance standards for the public and privatesectors.AASOC will have between nine and 12 members, with thechair and majority of members drawn from outside theaudit profession.
1
This summary does not address all sections of the Sarbanes-Oxley Act of 2002 discussed in the KPMG publication.
Sarbanes-Oxley: A Closer Look 
. It addresses those sections that most directly affect the relationship between the auditor, theaudit committee and management.
 
kpmg
Comparison of Canadian and U.S. Regulatory Changes©
2003 KPMG LLP, the Canadian member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
2
2. Strengthening the Independence of External Auditors
U.S. Standards Arising from Sarbanes-Oxley Act of 2002 Canadian Response
Title II: Auditor Independence
1. Services outside the scope of practice of auditors(Section 201)
Revises the SEC regulations related to the non-audit services that, if provided to an audit client,would impair an accounting firm's independence.
2. Pre-approval requirements (Section 202)
Requires an issuer's audit committee to pre-approveall audit and non-audit services provided to theissuer by the auditor.Requires disclosure to investors of informationrelated to audit and non-audit services provided by,and fees paid to, the auditor.
3. Audit partner rotation(Section 203) Compensation of audit partners
Prohibits specified “audit partners” from providingaudit services to the issuer for more than five orseven consecutive years, depending on the partner'sinvolvement in the audit.An accountant will not be independent from anaudit client if an “audit partner” receivescompensation based on the partner selling non-audit services to the audit client.
4. Auditor reports to audit committees(Section 204)
Requires the auditor to report certain matters to theissuer's audit committee, including “critical”accounting policies, alternative accountingtreatments the auditor has discussed withmanagement, the ramifications of thosealternatives, and the treatment preferred by theauditor.
5. Conflicts of interest (Section 206)
Prohibits an accounting firm from auditing anissuer's financial statements if certain members of management of that issuer had been members of the accounting firm's audit engagement team withinthe one-year period preceding the commencementof the audit.
Proposed Canadian Independence Standards
The Canadian Institute of Chartered Accountants (CICA)issued an exposure draft in September 2002 requestingcomments on proposed new independence standards thatare a combination of the “principles based” newindependence standards of the International Federation of Accountants and SEC “rules” then in effect for listedentities:
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consistent with the SEC, the proposed standard wouldprohibit a firm from providing certain non-auditservices to listed entities
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audit committee pre-approval requirements are notaddressed in the exposure draft as only the securitiesregulators or stock exchanges have authority toprovide direction to audit committees
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requires that the lead engagement partner on a publiccompany audit client be replaced after five years andthat the individual cannot resume that role for twoyears. The draft standard does not addresscompensation of partners.
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auditor reports to audit committees are not addressedin the draft standard as new standards were issued bythe CICA in early 2002: CICA Handbook-AssuranceSection 5751
 , Communications With Those HavingOversight Responsibility for the Financial ReportingProcess.
 
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proposed standard identifies employment of amember of the engagement team or partner of theaudit firm in a position to exert influence over theaudit engagement as a threat to independence. Itrequires safeguards similar to the previous SEC rule inthis area however it does not specifically require a“cooling off” period as introduced by the new SECrules.The CICA is currently considering the new SECindependence rules prior to issuing a final independencestandard. We expect that the new SEC rules on servicesoutside the scope of practice of auditors and audit partnerrotation will be substantially adopted by the CICA in theirfinal standards for publicly traded entities.
 
kpmg
Comparison of Canadian and U.S. Regulatory Changes©
2003 KPMG LLP, the Canadian member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
3
2. Strengthening the Independence of External Auditors
(continued) 
 
U.S. Standards Arising from Sarbanes-Oxley Act of 2002 Canadian Response
As a result of the SEC transition rules, audit partnerrotation for Canadian partners of SEC registrants wouldnot be required for at least five years. It is expected thatthe final standard issued by the CICA will require rotationof lead and concurring partners on all Canadian publiccompanies to commence sooner than this.It is possible that the CICA may also adopt the SEC ruleson conflicts of interest and partner compensation.
Securities Reform
In November 2002, the Toronto Stock Exchange (TSX)proposed revisions to its TSX Company Manual thatwould affect its listed issuers. The revisions recommendthat the audit committee consider partner rotation and thehiring by the company of former employees of the auditorwhen discussing auditor independence. In addition, itprovides guidance on other discussions the auditcommittee should have with the auditor, including criticalaccounting policies.In late 2002 the Ontario government introduced Bill 198that would give the Ontario Securities Commission(“OSC”) the authority to introduce new corporategovernance requirements. One area where it mayintroduce new rules relates to “appointment of andprescribing requirements for audit committees”. Afterthis bill becomes law, it is also possible that the OSC willintroduce requirements relating to pre-approval of auditorservices by the audit committee and public disclosures byregistrants of information related to services provided bythe auditor, including fees paid for various services. It isalso possible that changes will be made through theCanadian Securities Administrators (CSA) so that theybecome applicable to registrants in all provinces.

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