An introduction to Canadian SOX – Exploring the Background and Characteristics of the Act

  • Date: May 20, 2010
  • Source: Admin
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Widely known as “Bill 198” or “The Budget Measure Act”, CSOX is by all means a response to the U.S. Sarbanes-Oxley Act of 2002. However, considering this Canadian response as just a mere replication of the U.S. one would be incorrect as the Canadian one, keeping in mind the differences of two countries’ financial markets, has evolved from a completely different philosophical and structural base. In fact, the Canadian version promises a better measured approach thanking to its makers who had followed a ‘watch and see’ tactic and already gained knowledge and experience from the U.S. one.

Background of the CSOX

July 30, 2002, the U.S. President Bush signed the Sarbanes-Oxley Act into law. This historic law, according to him, was “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”

A several impetus can be pointed out which prompted the introduction of act:

  • Corporate Scandals – which had shaken general investor confidence
  • Corporate governance – which came under scrutiny
  • Audit committee and audit independence  - which became an area of concern that time

So, as result to fight all these odds, the Sarbanes-Oxley Act mandated several in terms of raising accountability, augmenting corporate responsibility, improving financial disclosures, and ending corporate and accounting fraud.

Additionally, with new directions and guidance, SOX helped the U.S. Securities and Exchange Commission (the “SEC”) to develop and implement new rules. Moreover, in order to keep a watch on the auditing of the public companies that are subject to U.S. securities laws, SOX created the U.S. Public Company Accounting Oversight Board (the “PCAOB”).

As a result of the strong reformative initiatives adhered by the in US government in 2001 and 2002, Canada regulators also felt the necessity of re-establishing investor confidence in Canadian securities, which by that time got shaken by the turmoil in financial U.S. as well as other domestic incidents. Incidentally, to bring back the investor confidence in Ontario’s capital market, Bill 198 was enacted in 2002 as Chapter 22 of the Statutes of Ontario, which recapitulated measures similar to the Sarbanes-Oxley Act (SOX) in the United States.

Known as “An Act to implement Budget measures and other initiatives of the Government”, Bill 198 was an omnibus bill which had a short title of “Keeping the Promise for a Strong Economy Act (Budget Measures), 2002” (the “Budget Measures Act”). The Budget Measures Act revised Ontario’s Securities Act along with several other Ontario statutes and also brought several reforms to the securities laws in Ontario.

Key Changes Brought by the Act:

As the Budget Measures Act made amendments to the Ontario Securities Act, several new features were added to the newly introduced act, of which the most important were:

  • First and foremost, the CSOX act prohibits “persons engaging in acts that a person or company knows or reasonably ought to know perpetrate a fraud or result in a misleading appearance of trading activity in, or an artificial price for, a security. The amendments also contain a general prohibition on making statements that a person or company knows or reasonably ought to know are misleading or untrue and significantly affect, or would reasonably be expected to have a significant effect on, the market price or value of a security’. (See the new sections 126.1 and 126.2 of the Act.);
  • Secondly, the amendments made Ontario Securities Commission (the “OSC”) more powerful by providing them with powers to make rules of appointment and prescribing requirements for audit committees, disclosure controls and procedures, systems of internal controls, requiring CEOs and CFOs to “provide certifications related to internal controls and to disclosure controls and procedures, and defining auditing standards for reporting on internal controls”; (See the amendments to subsection 1 (1.1) and 143 (1) of the Act.) and
  • Thirdly, the amendment “provides for civil liability for secondary market disclosure. Specified transactions are exempted from the new Part. Related amendments are made to section 1 (definitions), section 75 (duty to disclose material changes), section 142 (Crown liability) and section 143 of the Act (the OSC’s authority to make rules)….The rights of action created by section 138.3 include a right of action for damages by persons or companies who acquire or dispose of the securities of a responsible issuer during a period of time in which there is an uncorrected misrepresentation in a document released by the responsible issuer or by a person with actual, implied or apparent authority, or in a public oral statement by such a person or by an influential person (a defined expression) relating to the affairs of the responsible issuer. The right of action is given to persons or companies acquiring or disposing of the securities of the responsible issuer between the time the misrepresentation was made and the time it was publicly corrected.”

How to Implement a Bill 198 Compliance Program

When it comes to implementation, no specific guidelines have been provided by the CSA and that is why the accounting industry and businesses had to develop their method to meet compliance. However, situation was same in the U.S. as SOX also did not prescribe a particular framework to follow to be compliant.

Both in the US and Canada, the accountants are supposed to conduct internal audit and need to utilize existing control frameworks to guide their work. Like COSO’s internal control framework which was regarded as the benchmark for starting internal audits, SOX also developed a certification process in order to make certain of consistent review of all of the processes that support the financial statements.




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