Canada: OSC Review Of Disclosure Regarding Auditor Involvement With Interim Financial Statements

Last Updated: May 23 2011
Article by Brendan D. Reay and Catherine Youdan

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Regulation, May 2011


  • Recent OSC review of compliance with requirements to disclose if auditors have not reviewed interim financial statements identified 35% level of non-compliance
  • Issuers are reminded that a review must cover all financial statements and notes presented and be conducted in accordance with Section 7050 of the CICA Handbook
  • For the first IFRS interim financial report, if a review is performed, it must cover the opening IFRS statement of financial position and all IFRS 1 reconciliations presented

The Ontario Securities Commission (the OSC) recently released OSC Staff Notice 51-718 – Key Considerations Relating to an Auditor's Involvement with Interim Financial Reports. The Staff Notice summarizes the results of a review by the OSC of compliance by issuers with provisions of securities legislation relating to an auditor's review of interim financial reports, and clarifies the securities law requirements relating to auditor involvement with interim financial reports. In addition, the Staff Notice provides some further guidance relating to auditor involvement with an issuer's first interim financial report following the transition to International Financial Reporting Standards (IFRS).

Under Canadian securities laws, issuers are not required to engage their auditors to perform a review of interim financial statements that are filed to satisfy continuous disclosure obligations. This has not changed with the transition to IFRS for financial years beginning on or after January 1, 2011. However, under section 4.3(3) of National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102), the following disclosure requirements apply if an auditor has not performed or completed a review of an issuer's interim financial statements, or has noted reservations:

  • if an auditor has not performed a review of the interim financial report, the interim financial report must be accompanied by a notice indicating that it has not been reviewed by an auditor;
  • if the auditor was engaged to perform a review but was unable to complete the review, the issuer must disclose that the auditor was unable to complete the review and the reasons why; and
  • if the auditor performed a review of the interim financial report and expressed a reservation of opinion, the interim financial report must be accompanied by a written review report from the auditor.

If none of the above disclosures are made by an issuer with its interim financial report, the implication is that a full auditor review was completed without reservation.

Results of the OSC's Review
The OSC reviewed a sample of 72 issuers (28 non-venture issuers and 44 venture issuers) where it appeared that the interim financial statements had been reviewed by the auditors.

The OSC found that 35% of the issuers reviewed had not complied with the disclosure requirements relating to auditor involvement with interim financial reports – specifically, they had not disclosed that the auditors had not performed a review of the interim financial statements, as required by NI 51-102. According to the OSC, the reasons cited included a general lack of awareness of the disclosure obligations, and confusion about what would constitute a review under securities legislation and Section 7050 of the CICA Handbook.

The OSC considers this disclosure important, as it alerts investors and other users of interim financial statements to the fact that the auditor has not performed a review of those statements, which they believe investors should know when making investment decisions. In the cases referred to in the Staff Notice, the OSC required issuers to re-file their interim financial statements with disclosure that those statements had not been reviewed by the issuer's auditor.

Going Forward
To improve compliance going forward, the Staff Notice highlights the disclosure requirements under NI 51-102 described above. The OSC reminds issuers that the only time disclosure is not required is when an auditor has performed a review of the issuer's interim financial report and has not expressed a reservation. The term "review" refers to a review engagement where the auditor reports to the issuer's audit committee on the issuer's interim financial report for all of the periods presented and in accordance with Section 7050 of the CICA Handbook.

The OSC reminds issuers that limited review procedures or a review of only certain components of an issuer's interim financial report will not constitute a "review" of the financial statements under securities laws, and in those circumstances disclosure that the financial statements have not been reviewed will be required.

In the context of issuers' first IFRS interim financial reports, if an auditor is engaged to perform a review, the Staff Notice reminds issuers that all financial statements and notes presented must be subject to the review. This will include, in addition to the current and comparative financial periods, the opening IFRS statement of financial position and all IFRS 1 First-time Adoption of International Financial Reporting Standards reconciliations presented in the notes. If a review of all these components is not conducted, the issuer will have to include a notice that the interim financial report has not been reviewed. This reiterates guidance given by the OSC in its November 2010 publication Top 10 Tips for Public Companies Filing Their First IFRS Interim Financial Report.

The OSC recommends that issuers and their audit committees consult with their auditors to confirm the scope of review of interim financial reports and whether any disclosure of a lack of review will be required. The OSC indicates in the Staff Notice that they will continue to monitor compliance with these obligations as part of their continuous disclosure review programs, and will require re-filings of interim financial reports where they determine that an issuer has not complied with these disclosure obligations.

As a reminder to issuers, although auditor review of interim financial statements is not required for purposes of continuous disclosure, it is worth noting that any unaudited financial statements (other than pro forma statements) that are included or incorporated by reference in a prospectus must be reviewed by the applicable auditors. This will include the issuer's own financial statements, as well as other financial statements that may be included in a prospectus (such as financial statements of an acquired business included in a Business Acquisition Report). Accordingly, if an issuer frequently accesses the capital markets for financing or otherwise anticipates that it may do a prospectus financing in the near future, it should consider whether to have its interim financial reports reviewed by its auditor to prepare for this.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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