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eSECURITIES NOTES

Update: Proposed Investor Confidence Rules: Auditor Overview and Audit Committees
Securities & Corporate Finance Group August 19, 2003

Audit Committees (Proposed Multilateral Instrument 52-110) This proposed investor confidence rule was designed to encourage reporting issuers to establish and maintain strong, effective and independent audit committees. It is based on the audit committee requirements currently being implemented in the United States. MI 52-110 applies to all reporting issuers other than investment funds, issuers of asset backed-securities; designated foreign issuers and reporting issuers that are subsidiaries of entities if the subsidiary does not have equity securities displayed for trading on a marketplace and the parent of the subsidiary is subject to the requirements of the MI 52110. Audit Committee Responsibilities MI 52-110 requires every reporting issuer to have an audit committee to which the external auditors must directly report. The committee must have a written charter that sets out its mandate and responsibilities. The audit committee must be responsible for, among other things:

overseeing the work of the external auditors engaged for the purpose of preparing or issuing an audit report or other audit, review or attest services work; pre-approving all non-audit services to be provided to the issuer or its subsidiary entities by its external auditors or the external auditors of its subsidiary entities; reviewing the issuer's financial statements, MD&A and earnings press releases before public disclosure; and establishing procedures for receipt, retention and treatment of complaints received by the issuer regarding internal accounting controls, or auditing matters

unless the prescribed period has elapsed since the end of the service or employment. a person who accepts. or of any of its subsidiary entities or affiliated entities. a current or former internal or external auditor of the issuer. or has accepted at any time during the prescribed period. or has been. other than as remuneration for acting • • • . a partner of. unless the prescribed period has elapsed since the person's relationship with the internal or external auditor. or the auditing relationship.-2 - and confidential. A “material relationship” is defined as a relationship that could. 2004] and ending immediately prior to the determination or the three year period ending immediately prior to the determination) has been. an affiliated entity of. directly or indirectly. advisory or other compensatory fee from the issuer or any subsidiary entity of the issuer. a person who is. An audit committee member is independent if the member has no direct or indirect material relationship with the issuer. a current or former internal or external auditor of the issuer. unless the prescribed period has elapsed since the person's relationship with the internal or external auditor. or whose immediate family member is or has been. has ended. in the view of the issuer's board of directors. or employed by. however. or has been. Every reporting issuer will be required to disclose in its AIF if the board of directors has not adopted a nomination or compensation recommendation of the audit committee. an affiliated entity of. anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. and each member must be independent and financially literate. reasonably interfere with the exercise of a member's independent judgement. or employed in a professional capacity by. an officer or employee of the issuer. employed as an executive officer of an entity if any of the issuer's current executives serve on the entity's compensation committee. has ended. a partner of. its parent. Persons that are considered to have a material relationship with the issuer include: • a person who is. any consulting. or the auditing relationship. require an issuer to appoint an audit committee financial expert to its audit committee. or whose immediate family member is. The audit committee will be required to recommend to the board of directors the external auditors to be nominated for the purpose of preparing or issuing an audit report (or any related work). An exemption is provided from the requirement that an audit committee pre-approve non-audit services provided by the external auditors. It does not. • a person who is. or at any time during the prescribed period (the shorter of the period commencing on [January 1. Composition of the Audit Committee MI 52-110 requires every audit committee to have a minimum of three members. so long as the non-audit services in question are de minimis. a person whose immediate family member is. as well as the compensation to be paid to such auditors. or has been. The audit committee is permitted to delegate its preapproval responsibilities to one or more of its independent members.

or (b) a partner.-3 - in his or her capacity as a member of the audit committee. or a person who occupies a similar position with. and • a person who is an affiliated entity of the issuer or any of its subsidiary entities. the indirect acceptance by a person of any consulting. consulting. an entity that provides accounting. and • “financial literacy” is the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer's financial statements. in each case. other than limited partners.an exemption for audit committee members who sit on the board of directors of affiliated entities of the issuer. the member may continue to sit on the audit committee until the later of (i) the next annual meeting and (ii) the date six months from the day the member ceased to be independent. member or executive officer of. have no active role in providing services to the entity. legal. • • There are exemptions from the requirement that each audit committee member must be independent. and • • .exemptions for a period of up to one year following an issuer's initial public offering. advisory or other compensatory fee includes acceptance of a fee by: (a) an immediate family member. Events Outside Member's Control – an exemption where an audit committee member ceases to be independent for reasons outside that member's reasonable control in that. For these purposes: • “partner” does not include a limited partner whose interest in the internal or external auditor is limited to the receipt of fixed amounts of compensation (including deferred compensation) for prior service with an internal or external auditor if the compensation is not contingent in any way on continued service. the board of directors. “compensatory fees” do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service. Controlled Companies -. investment banking or financial advisory services to the issuer or any subsidiary entity of the issuer. An individual's financial literacy is determined in relation to the issuer in question. or any other board committee. non-managing members and those occupying similar positions who. These are: • Initial Public Offerings -.

and the service fees that the issuer has paid its external auditors. whether an audit committee financial expert is serving on its audit committee. the American Stock Exchange. if the audit committee has adopted specific policies and procedures for the engagement of non-audit services. the member appointed to fill the vacancy. Under proposed MI 52-110 every audit committee must be provided with the authority to engage and compensate independent counsel and other advisers which the committee determines are necessary to carry out its duties. the composition of its audit committee. the New York Stock Exchange. describe those polices and procedures. • • If management of an issuer solicits proxies from the security holders of the issuer for the purpose of electing directors to the issuer's board of directors. disability or resignation of an audit committee member has resulted in a vacancy that the board of directors is required to fill. from the independence and financial literacy requirements until the later of (i) the next annual meeting and (ii) the date six months from the day the vacancy was created. . the management information circular must also include a cross-reference to those sections in the issuer's AIF which contain the required audit committee disclosure. if it is relying on certain exemptions contained in MI 52-110. the Nasdaq National Market. the Nasdaq SmallCap Market. the Pacific Exchange or a marketplace outside of Canada or the United States. Exemption for Venture Issuers Proposed MI 52 -110 contains an exemption for venture issuers acknowledging that it may be difficult or impossible for many small issuers to comply with the independence and financial literacy requirements. Every audit committee must also have the authority to communicate directly with the internal and external auditors.-4 - • Filling a Vacancy – an exemption where the death. if an audit committee recommendation regarding the nomination or compensation of the external auditors has not been adopted by the board of directors. A venture issuer is an issuer that does not have any of its securities listed or quoted on any of the Toronto Stock Exchange. AIF Disclosure An issuer will be required to include in its AIF the information required by Form 52110F1 including: • • • • • the text of the audit committee charter.

obligations or liabilities that are greater than the duties. Among other matters. and (ii) financially literate.S. The exemption is conditional upon compliance with U.-5 - The members of a venture issuer's audit committee are not required to be either independent or financially literate. Notwithstanding this exemption. Form 52-110F2 requires a venture issuer to disclose: • the text of the audit committee’s charter. • the composition of its audit committee and whether each member is (i) independent. obligations or liability of any other member of the audit committee or board. where applicable. obligations and liabilities imposed on such person as a member of the audit committee and conversely does not affect the duties.52-110 provides additional guidance on what the CSA view as the role of the audit committee. Effective Date . Exemption for US Listed Issuers Issuers whose securities are listed on a national securities exchange or listed in a automated inter-dealer quotation system of a national securities association registered pursuant to the 1934 Act are exempt from the requirements of the proposed instrument. the alternative disclosure required by Form 52-110F2. which will require issuers registered with the SEC to make reciprocal filings with the appropriate Canadian securities regulatory authorities or regulators. and that the venture issuer is relying upon the exemption. however. and “financial expert” and sets out the CSA view that the designation of an audit committee financial expert does not impose on such person any duties. Venture issuers relying on this exemption are also exempt from Part 5 (Disclosure Obligations). if an audit committee recommendation regarding the nomination or compensation of the external auditors has not been adopted by the board of directors. Companion Policy to MI 52-110 The Companion Policy to MI. on an annual basis. Canadian investors should have access to disclosure regarding audit committees as a result of proposed National Instrument 51-102 Continuous Disclosure Obligations. ve nture issuers must provide. the disclosure requirement in paragraph 5 of Form 52-110F1. • • • This disclosure must be provided in the venture issuer's management information circular or in its AIF or MD & A. and the meaning of “independence”. audit committee requirements and. the service fees that the venture issuer has paid its external auditors.

2004. and (ii) June 30. It requires reporting issuers to engage auditors who are participants in good standing with the CPAB at the time it issues an auditor’s report to the financial statements.-6 - Proposed MI 52-110 will only apply to issuers commencing on the earlier of (i) the first annual meeting of the issuer after January 1. independent auditing. We would be pleased to assist you with any needs you may have in this regard. disclosure and compliance matters. Barbara R.ca Tel: 416. 2004.8621 .595. Auditor Oversite and the Canadian Public Accountability Board (CPAB) (Proposed Multilateral Instrument 52-108) This proposed investor confidence rule is designed to contribute to public confidence in the integrity of financial reporting of reporting issuers by promoting high quality.C Doherty bdoherty@millerthomson. Members of the Miller Thomson LLP Securities & Corporate Finance Group regularly advise issuers with their corporate governance. An auditor which has sanctions or restrictions imposed on it by the CPBA will be required to provide notice to securities regulators and in some cases to the audit clients as well.

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