
- image005.jpg (47.21 KiB) Viewed 7125 times
Begin forwarded message:
From: Communications <Communications@oag-bvg.gc.ca>
Date: August 1, 2017 at 9:52:12 AM EDT
To: Joseph Killoran <joe.killoran@icloud.com>
Subject: RE: Q. has our GOC OAG approved Cda's switch from CDN GAAP to IFRS accounting practices?
Dear Mr. Killoran:
Thank you for your follow up email.
As we stated in our previous email, it is not the role of the Office of the Auditor General to advocate specific legislative measures or standards, nor are we involved in the process of creating legislation or standards.
Each year, the Office audits the federal government’s summary financial statements, the results of which are published annually in the Public Accounts of Canada, the summary financial statements of the governments of Nunavut, the Yukon, and the Northwest Territories, and the financial statements of most Crown corporations and many federal organizations. The Office does not choose to audit crown corporations or federal organizations based on which accounting standards they apply use but rather because the audit obligation is set out in the Auditor General Act and the Financial Administration Act.
All audit staff have a graduate degree, or a bachelor’s degree and professional designation (like CPA, CGA, ACCA etc.), at a minimum. Since the IFRS and PSAS accounting transitions, accounting standards have significantly increased both in complexity and volume. Financial auditors are now required to work with multiple financial reporting frameworks that are constantly evolving at a fast pace. In response to this, the Office has renewed its accounting training strategy and has entered into a partnership with Deloitte for accounting training services. This approach provides the Office’s auditors with learning opportunities that both promote the development of technical accounting skills and the application of knowledge in practical situations.
Sincerely,
Communications
Office of the Auditor General of Canada
communications@oag-bvg.gc.ca / Tel: 1-888-761-5953 / TTY: 613-954-8042
Communications
Bureau du vérificateur général du Canada
communications@oag-bvg.gc.ca / Tél : 1-888-791-5359 / ATS : 613-954-8042
From: Joseph Killoran [mailto:joe.killoran@icloud.com]
Sent: July-25-17 7:21 PM
To: Communications <Communications@oag-bvg.gc.ca>
Subject: Re: Q. has our GOC OAG approved Cda's switch from CDN GAAP to IFRS accounting practices?
ATTN: Michael Ferguson, FCA
GOC Auditor General
Office of the Auditor General
Re: Q. has our GOC OAG approved Cda's switch from CDN GAAP to IFRS accounting practices?
“I understand from your reply that a Crown corporation, that adopts IFRS accounting practices can be, or is, audited by your office (OAG). Correct?
My question is very simple and basic for the credibility of the OAG audits, and our GOC OAG itself.
Do your field auditors receive adequate training to be able to detect all of the trickery that is inherent in IFRS?
Related thereto, what is the source of your GOC OAG-based (and I profoundly must pray it is not our Big Four Audit firm based) audit education and training?
Please see Gretchen Morgenson's 07-07-17 column @
https://www.nytimes.com/2017/07/07/busi ... anada.htmland in my original email to you on July 8, 2017, below.
IFRS has especially serious deficiencies that are being easily manipulated in Canada.
IFRS is not just destined to facilitate and perpetuate huge financial frauds, they are already beginning to surface after only 6.5 years.
Q. And do you personally Michael / does your GOC OAG want these beyond embarrassing financial euthanasia instigating IFRS implosions of the sacred savings of retirees and the coming will be threatening sovereignty of Canada as a nation be on your personal record as our GOC AG?”
Regards,
Joe
Sent from my iPhone
Joe Killoran
1 (905) 767-7747
From: Communications <Communications@oag-bvg.gc.ca>
Date: July 18, 2017 at 3:34:58 PM EDT
To: Joseph Killoran <joe.killoran@icloud.com>
Subject: RE: Q. has our GOC OAG approved Cda's switch from CDN GAAP to IFRS accounting practices?
Dear Mr. Killoran:
Thank you for your email.
The Office of the Auditor General of Canada conducts independent audits of the programs and activities of federal government departments and agencies, Crown corporations and other federal entities, and reports its findings to Parliament.
It is not the role of the Office to advocate specific legislative measures or standards, nor are we involved in the process of creating legislation or the standards. The Office does however use the International Financial Reporting Standards (IFRS) to complete Financial Statements of departments and some crown corporations.
Sincerely,
Communications
Office of the Auditor General of Canada
communications@oag-bvg.gc.ca / Tel: 1-888-761-5953 / TTY: 613-954-8042
Communications
Bureau du vérificateur général du Canada
communications@oag-bvg.gc.ca / Tél : 1-888-791-5359 / ATS : 613-954-8042
From: Joseph Killoran [mailto:joe.killoran@icloud.com]
Sent: July-08-17 6:57 AM
To: Communications <Communications@oag-bvg.gc.ca>
Subject: Q. has the OAG approved Cda's switch from GAAP to IFRS accounting practices?
ATTN: Michael Ferguson, FCA
Q. has the Office of the Auditor General of Canada (OAG) approved / anointed / given his blessing to Canada's switch from GAAP to IFRS accounting principles?
Best regards,
Joe Killoran, 1979 Ethical Ivey MBA
Kimberley, ON
iPhone cell: 1 (905) 767-7747
Begin forwarded message:
From: Joseph Killoran <joe.killoran@icloud.com>
Date: July 7, 2017 at 4:05:04 PM EDT
To: NDP MP Pierre-Luc Dusseault <Pierre-Luc.Dusseault@parl.gc.ca>
Cc: "Right Hon. PM Justin Trudeau" <pm@pm.gc.ca>, "Hon. William Morneau" <Bill.Morneau@parl.gc.ca>, "Hon. Kathleen Wynne Premier" <premier@ontario.ca>, "Hon. Debby Matthews" <dmatthews.mpp@liberal.ola.org>
Subject: 07-07-17 NYTimes: Warren Buffett Invests in Canada, but Should You?
Business Day
https://www.nytimes.com/2017/07/07/busi ... anada.htmlWarren Buffett Invests in Canada, but Should You?
·
·
·
Image removed by sender.
The forensic accountant Al Rosen, who founded the Accountability Research Corporation with his son Mark, wants people to be wary of investing in Canadian stocks.
COLE BURSTON FOR THE NEW YORK TIMES
JULY 7, 2017
Fair Game
By GRETCHEN MORGENSON
When Warren Buffett acts, investors notice. And after he took a roughly $300 million position last month in Home Capital Group, a troubled Canadian mortgage underwriter, some investors saw it as a vote of confidence not only in that company, but also in Canadian stocks over all.
Al Rosen takes a different view. A veteran forensic accountant and independent equity analyst who predicted the collapse of Nortel Networks, the Canadian telecom company, two years before its 2009 demise, Mr. Rosen has a message for people investing in Canadian stocks: be wary.
It is a mystery to Mr. Rosen why Mr. Buffett bought into Home Capital Group, a company that has been the subject of a titanic battle between the investors who believe in the company and other investors — short sellers — who do not. Certainly, Mr. Buffett expects to make money on his deal. But in an interview, Mr. Rosen said he thought there was more to the story than the markets yet know.
Mr. Rosen is certain of this: International accounting rules followed by Canadian companies since 2011 are putting investors in Canadian stocks — not just Home Capital Group’s — at peril. Canada’s rules, which are substantially different from the generally accepted accounting principles (G.A.A.P.) governing American companies, give much more leeway to corporate managers when it comes to valuing assets and recording cash flows.
In addition, a 1997 decision by the Supreme Court of Canada has severely limited investors in suing company auditors for malpractice. Combined, these two factors generally make Canadian stocks a danger zone, Mr. Rosen said.
American investors often fail to recognize this, though, because they assume Canadian companies are abiding by American accounting standards. “I’ve been trying to alert investors in the U.S. to this,” Mr. Rosen said in an interview. “But there’s just that belief that Canada is following U.S. standards when it’s not.”
Mr. Rosen provides forensic accounting services and also works with his son Mark Rosen at the Accountability Research Corporation in Toronto. The two men recently published a book called “Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth.”
In Mr. Rosen’s view, the international accounting standards followed by Canadian companies allow managers to apply overly rosy assumptions to the financial figures they report to investors. For a while, these assumptions can propel stock prices — and executive bonuses — well beyond where they would be otherwise, he said.
Canadian accounting rules can also mask problems at a company. How else, Mr. Rosen asked, to explain the events leading up to the June 22 bankruptcy filing by Sears Canada? The company’s shares trade on both the Toronto Stock Exchange and the Nasdaq market in the United States.
Like many retailers, Sears Canada’s fiscal year ends in January. It compiled its 2016 annual financial statement in accordance with International Financial Reporting Standards, set by the International Accounting Standards Board, a group of experts from an array of countries.
Sears Canada’s numbers weren’t good. Both revenues and same-store sales had fallen, but it reported shareholders’ equity of 222 million Canadian dollars (about $171 million) and 1.24 billion Canadian dollars ($956 million) in total assets.
In the report, company management characterized Sears Canada as a going concern. In accounting parlance, that meant the business was expected to operate without the threat of liquidation for the next 12 months.
The auditor for Sears Canada did not challenge this view and assigned the company an unqualified — or “clean” — opinion on April 26. The report fairly represented Sears Canada’s financial position, the opinion said. And that opinion may well have been justified under Canadian rules.
On April 26, an International Financial Reporting Standards auditor assigned Sears Canada an unqualified — or “clean” — opinion after evaluating its annual financial statement. On June 22, the company filed for bankruptcy.
FRANK GUNN / CANADIAN PRESS, VIA ASSOCIATED PRESS
Less than two months later, Sears Canada was bankrupt.
“What are the auditing and accounting rules in Canada that allow you to give this totally clean opinion on a company and you can’t even look beyond six weeks?” Mr. Rosen asked. “That’s the scary situation with Sears, and we’re just seeing it more and more on other cases coming forward.”
Canada is not alone in following the International Financial Reporting Standards, or I.F.R.S. Some 150 jurisdictions in Europe, Africa, Asia and elsewhere also use these rules. Many are underdeveloped nations whose previous accounting rules were none too stringent.
The international standards came about in 2002, when the European Union required adherence to them for all its listed companies beginning in 2005. The rules are designed to “bring transparency, accountability and efficiency to financial markets,” the I.F.R.S. Foundation says in a mission statement on its website.
But that’s not the outcome, Mr. Rosen said. In practice, the rules allow company executives to inflate their revenues and hide excessive acquisition costs. They also let managers overstate assets and understate liabilities, he said.
Not all managers will do so, of course. But Mr. Rosen’s forensic accounting work has taught him that “for every honest manager, there’s a cheat waiting to pounce.”
A spokeswoman for the I.F.R.S. Foundation, Kirstina Reitan, said its members disagree with Mr. Rosen’s take. “The success of accounting standards depends on companies applying them properly and exercising sound judgment,” she said in an emailed statement. “Both U.S. G.A.A.P. and I.F.R.S. are high-quality standards, and one is not more prone to abuse than the other.”
Still, the differences between the two standards can be significant. Consider, for example, the approach taken to recognizing revenue under the international standards.
Under these rules, companies can record revenues based on only a 50.001 percent probability of eventually collecting the money — something Mr. Rosen calls the “more-likely-than-not rule.” By contrast, under American guidelines, managers must have a reasonable assurance that they will generate the revenues before they can record them; companies generally interpret this as 70 percent to 80 percent certainty, he said.
Valuing assets is another problem with international standards, Mr. Rosen said. Under the generally accepted accounting principles used in Canada before 2011, a company would have to complete the sale of a property or building before recording the results of the transaction for financial reporting purposes.
Because the international standards instead focus on current value accounting, executives have much more freedom to assign value to assets that may or may not be real.
Mr. Rosen presents a hypothetical example in his book. Say a company owns a building that may sell for $10 million. But based on medium-term contracts, the company’s managers assess the building’s current value at $18 million. In Canada, the managers can use the higher figure in the company’s financial statements.
What can these differences mean to a particular company? In “Easy Prey Investors,” Mr. Rosen presents a side-by-side example of one public company’s 2011 financial results based on the previously applicable generally accepted accounting principles and the new international standards. The company, which owned rental properties, showed a $4 million loss under G.A.A.P. and an $82 million profit under the international standards.
“Many Canadian-traded stocks are trying to appear more financially adequate by utilizing the massive holes in I.F.R.S.,” Mr. Rosen wrote in his book. He calls financial reporting in Canada right now “the calm before the storm.”
The Toronto Stock Exchange index is up 6 percent over the past 52 weeks. Although that pales next to the Standard & Poor’s 500 return, it is nonetheless respectable.
Seems as good a time as any to heed a warning from an experienced investigator like Mr. Rosen.
Twitter: @gmorgenson
From: Joe Killoran [mailto:
joe.killoran@icloud.com]
Sent: Thursday, June 15, 2017 10:55 PM
To: Right Hon. PM Justin Trudeau (
pm@pm.gc.ca); Hon. William Morneau (
Bill.Morneau@parl.gc.ca); Hon. Kathleen Wynne, Premier (
premier@ontario.ca); 'Hon. Debby Matthews, Deputy Premier (
dmatthews.mpp@liberal.ola.org)'; Maureen Jensen (OSC Chair & CEO) (
mjensen@osc.gov.on.ca)
Cc: 'WAITZER Ed'
Subject: 06-14-17 CDN Accountant: Has auditing become obsolete?
Importance: High
CDN Governance = IFRS . . . International Financial Reporting Standards
Here’s the latest Canadian Accountant column from Dr. Al Rosen, FCA, FCMA, FCPA
For more information on Canadian Accountant, please click here.
Has auditing become obsolete?
Jun 14, 2017
image005.jpg
Author: Al Rosen
A new column from forensic accountant Dr. Al Rosen
questions the relevance of auditing, particularly to investors.
Read the new book from
Al and Mark Rosen
Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth
Easy Prey Investors
How obsolete court decisions, lawmaker inaction, and conflicted self-regulators are facilitating the theft of wealth and retirement savings in Canada.
OVER the past 30 years in Canada, external auditors have significantly narrowed their liability exposure to claims by investors that they gave clean audit reports on materially misleading financial statements. Liability, the responsibility for financial misstatements, has been passed on to others, such as boards of directors. Meanwhile, primarily because of IFRS, investors have found it more difficult to find worthwhile and credible financial information.
Have external auditors painted themselves into a corner? Disclaiming responsibility in many cases, such as looking for unfair related party transactions, leads one to ask just what are external auditors claiming is their expertise, legal obligation and role in Canadian business?
A mismatch has arisen between what investors need and what external auditors are willing to offer. Unless securities acts are revised, legislated audit requirements are at risk of becoming costly nothings, as far as investor protection is concerned.
Who is ultimately responsible for materially misleading financial statements?
Securities cases that address these crucial accounting and auditing issues have virtually vanished from the courts. Lawmakers have permitted auditors and accountants to write their own easy-to-circumvent obligations, such as with IFRS. In turn, auditors have seriously restricted their responsibilities to detect frauds and most control weaknesses, self-dealing thievery, and various liquidity deficiencies in companies.
By far the strangest auditor attempt at buck-passing has brought deep, self-inflicted damage. Auditor-introduced IFRS thoughtlessly dumped 60-plus years of old Canadian GAAP, including many specific and protective prohibitions, and brought an attitude of management freedom to financial reporting. The effects are badly comprehended by most Canadians, which leads to a deficient and unbalanced investing environment.
The differences in philosophy between IFRS and old Canadian GAAP are tremendously alarming. The notion of separately reporting third-party, settled transactions to investors is either seriously downplayed or too often is ignored by IFRS. Yet, for centuries, such reporting has been the very essence of allowing public corporations to exist — the obligation to inform shareholders of what “actually happened.”
The focus of financial reporting in Canada thus has materially shifted from attempting to account for recent third-party settled transactions to one of letting corporate management include, in audited numbers, its optimistic, biased and largely unsubstantiated view of the future. What actually happened in an entity’s most recent period is repeatedly obscured under IFRS.
Further, loose IFRS often allows corporate management assumptions and choices to be rubber-stamped, simply because IFRS permits management “guesstimates.” Consequently, the traditional role of the auditor in society simply vanishes. What is left is management’s opinion of itself, as well as huge opportunities for unwarranted executive bonuses. The declaration that figures have been “audited” is misleading and dangerous to ill-informed investors.
Why bother to audit accounting that is deeply flawed, multi-directional and absent of the many specific rules that prohibit known financial tricks? IFRS is so divorced in scope from an entity’s operating cash flows that it often borders on aiding securities frauds.
Lawmakers and securities regulators must wake up to the severe lack of utility in audited financial statements in Canada. And our profession must recognize that the dire consequence of impunity is irrelevance.
Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research to investment advisors and institutional portfolio managers. Learn more at Accountability Research Corporation and Rosen & Associates Limited.
The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers.
Al Rosen
Rosen & Associates Limited
90 Adelaide Street West | Suite 802 | Toronto, Ontario M5H 3V9
Tel: 416-363-4515 | Fax: 416-363-4849
Begin forwarded message:
From: "L.S. (Al) Rosen" <al.rosen@rosen-associates.com>
Date: February 28, 2017 at 2:29:26 PM EST
To: 'Joseph Killoran' <joe.killoran@icloud.com>
Subject: Decline of Canadian Corporate Financial Reporting
FYI.
Joe,
The below article dealing with Canada’s serious problems of declining quality of corporate financial reporting was just released by Thomson Reuters this morning. The article ties in with our recently-published book “Easy Prey Investors.”
As both forensic accountants and equity analysts we are concerned that inadequate attention is being given to a matter where investors/savers money is being diverted from their pension funds and other savings. We hope that you can give this matter sufficient attention, so that your readers/clients are alerted to the dangers of what is currently happening in Canada.
Click here to view book:
http://www.mqup.ca/easy-prey-investors- ... 548190.php L.S. (Al) Rosen
Rosen & Associates Limited
121 King Street West | Suite 830 | Toronto, Ontario M5H 3T9
Tel: 416-363-4515 | Fax: 416-363-4849
THOMSON REUTERS ACCELUS
OPINION: Canadian profit statements need a credibility fix
Feb 28 2017 | Al Rosen and Mark Rosen
Canadian investors have been left vulnerable to significant losses resulting from unreliable financial statements permitted by a regulatory system that does more to facilitate corporate profits than safe markets. While most investors are aware of corporate accounting improprieties, such as manipulated profits, Canadian investors have particular reason to doubt the credibility of earnings statements.
Lax regulatory oversight is the primary culprit. Canadian regulators inadvertently enable financial deception through their inaction against vague standards and auditor immunity. Such failings diminish domestic wealth and, when publicized internationally, erode confidence in Canada as a destination for foreign investment.
Auditors, regulators, lawmakers, sell-side research analysts, and financial media all bear responsibility for the lack of reliability in financial statements. Most of these parties have inherent conflicts of interest, and many investors wrongly assume these institutions are responsible for protecting investments.
Several solutions exist, including:
· Forming a national securities enforcement authority separate from provincial commissions;
· Giving a national enforcement regulator full authority over acceptable accounting rules; and
· Introducing legislation that makes auditors accountable to investors in cases of negligence.
Auditors
Twenty years ago, the body representing financial statement auditors in Canada — Chartered Professional Accountants (CPA) Canada — convinced the Supreme Court that they essentially owe no responsibility to investors that use audited financial statements. The CPA's stance was that they should not owe a fiduciary duty of care to an unknown number of investors. Since then, investors can only rarely sue auditors successfully for losses based on misleading annual financial statements.
What then is the point of auditing financial statements if investors cannot trust the numbers?
Conversely, why should companies waste investors' money on auditors if the audits do not help investors? Dropping the pretense of investor protection would at least leave investors better informed about where they stand — vulnerable and exposed.
Audit firms are self-regulated, profit-seeking entities whose use by public companies is legally mandated in Canada.
With no other checks on the reliability of financial statements, national lawmakers must intervene to make auditors accountable to investors. Instead, however, Canadian lawmakers and regulators brush off the problem and delegate problems back to the auditors, creating a false sense of investor confidence in Canadian markets.
International Financial Reporting Standards Since auditors need not consider the interests of investors, they can concentrate entirely on addressing the wants of their corporate clients. Accordingly, Canadian auditors wholeheartedly backed the adoption of International Financial Reporting Standards (IFRS). It was an easy decision; looser rules and regulations make for happier companies.
For many nations, IFRS represented progress. The European Union (EU), for example, used IFRS to harmonize accounting rules among member states. For Canada, however, IFRS significantly muddled financial transparency and reliability. The country already had reasonable accounting rules — the Canadian Generally Accepted Accounting Principles (GAAP) — that were refined over decades to address loopholes and investor concerns.
IFRS allows Canadian executives to choose the value of their own assets, with little or no outside verification, if they desire. The situation would be akin to acquiring a mortgage by telling the bank what you thought your house was worth.
The resulting questionable numbers then become cemented into balance sheets, despite not being based on actual transactions or sales. Given the way accounting works, they produce a picture of higher profits (and asset values), which analysts and investors might misinterpret when determining value.
IFRS is overly focused on placing "current values" on the balance sheet, while providing excessive leeway for executives to craft numbers that make them look best come bonus-time. It has shifted attention away from previously fundamental accounting concepts, such as profits triggered by the realization of third-party transactions and high-confidence assurances of cash collection before reporting revenue. Under GAAP, expenses had to be matched to reported revenues, while "conservatism" had to apply when doubts existed.
The new rules have failed investors by creating fake profits, low-quality earnings, inflated asset values, and misstated cash flows. This has created many concerns for parties tasked with financial compliance and risk assessment. Even basic values used for lending practices have been thrown into question now that corporate executives can bolster reported figures based on little more than enthusiastic assumptions.
To defend their position, Canada's auditing industry deploys marketing based on simplistic platitudes that do not withstand deeper analysis. Auditors will claim, for example, that IFRS allows for financial statement comparability around the world. In reality, IFRS does not improve corporate comparability, even within the same country, or even the same industry. In fact, the same company might not even be comparable to itself, from quarter to quarter, under IFRS.
The major problem is that IFRS rules are deliberately light on substance, supposedly to maximize management's ability to reflect their own company. The thinking from auditors is that management knows their company best, so give them the leeway to tell their story.
Ultimately, this allows auditors to rest on the notion that companies "could" be comparable under IFRS. What is left unsaid is that the management of those different companies would need to share a brain. Like asking two executives to draw a picture of a house, given the same instructions and materials, the end results would differ greatly. But if you gave them more rules, greater clarity, defined measurements, and clear prohibitions, the resulting pictures would be closer in substance to each other. Investors do not want to compare a fast-food chain in India to a biotech firm in Canada. They want actual comparability and greater utility of financial statement figures nearer to home.
Proponents of IFRS have neglected the reality that some executives will exploit regulatory vagueness to their own advantage. While there will be shady practices under any accounting framework, IFRS is worse than any rules-based system, because when it comes time to prosecute someone who veers outside the bounds of fairness, there needs to be something of time-tested substance to pin on them.
For more evidence on the deficiencies of IFRS, much greater detail is noted in our recent book,
"Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth." Securities regulators
Securities regulators in Canada are conflicted, having the dual mandate of promoting domestic markets, while also protecting investors. The fees needed to run the regulatory framework are collected from the issuing companies, whose money and collective voice drowns out those of individual investor advocates. Amid this conflict, the practice seemingly followed by regulators is to introduce limited rules that clamp down on small-time scams, while largely ignoring accounting and financial reporting issues at larger public companies.
Investors need only look at the poor track record of Canadian securities regulators on everything from the abuse of non-GAAP measures to the enforcement failings on cases like Nortel and Sino-Forest.
It does not help that Canadian securities regulation remains fragmented across 13 provincial and territorial jurisdictions, with no national capital markets authority. Recent efforts to establish a national securities regulator were put on hold last year, due to ongoing resistance from some provinces, led by Quebec and Alberta.
Despite repeated false starts over the last two decades, one could argue that securities regulation in Canada has improved its ability to address some white-collar crime. Unfortunately, Canadian regulators do not seem to believe that fighting financial crime should include serious investigation of IFRS deficiencies or of the widespread deterioration of financial statement reliability. In essence, they have deferred to the creators of IFRS to establish the framework for acceptability.
Canada urgently needs an independent national securities enforcement agency tasked with addressing the issues that have too frequently fallen to U.S. regulators to act first, such as Livent, Hollinger, Nortel and other instances ofdual-listed Canadian failures. On a larger scale, Canada must clamp down on pervasive non-GAAP abuses, and take ultimate charge of accounting in Canada, similar to how the U.S. Securities and Exchange Commission (SEC) has the final say on American GAAP.
Lawmakers Canadian lawmakers have failed by not correcting the major gaps that leave investors open to abuse. It has been two decades since the nation's highest court ruled that investors cannot rely on financial statements (the Hercules Managements case). The biggest failure has been to allow self-regulation by the audit firms.
Canada must stop allowing self-regulatory institutions to exist unchecked. They allowed auditing firms to choose IFRS on behalf of investors, even after disavowing any duty of care to the public. Quite often, when a conflict of interest arises, lawmakers' first and sometimes only response was to ask SROs to judge their own behaviour, making it a clear case of asking the fox to guard the chicken coop.
Sell-side analysts Equity analysts at investment banks do not write research for the prime benefit of individual investors, and banks have a profit incentive to encourage the sale of new issues.
There is no better way to facilitate this than to accept corporate earnings figures at face value, and to promote the same in written research reports. While not every research report from a given firm is unreliable, the investing public lacks the crucial ability to effectively screen out the many conflicted ideas.
A well-known example is Valeant Pharmaceuticals. Research analysts substantiated sky-high target prices for the firm on the basis of the company's non-GAAP performance metric. In the year it collapsed, Valeant reported $8.14 per share in "adjusted EPS" versus an actual loss per share of $0.85.
Those compromises in research helped underwriters raise roughly $30 billion of debt for Valeant to fund an extended acquisition spree right up to the point it came crashing down in a haze of accounting and regulatory concerns.
Institutional investors may have access to more of the real picture by paying for special one-on-one analyst access, but much of the official story is obscured by inflated profit figures produced from pliable IFRS rules and non-GAAP adjustments. The lack of independent research providers in Canada, relative to the United States, makes it difficult to find a reasonable balance of opinion.
Re-prioritising enforcement and liability
Lawmakers must make auditors liable to investors harmed by misleading financial statements. No other single measure would do more to clamp down on inflated profits than making those who check the books responsible for the quality and reliability of their work.
Additionally, Canada should establish an enforcement body responsible for deterring and punishing financialreporting abuses. To be effective, the new entity must be completely separate from the existing administrative framework that seems more focussed on easing capital formation.
The new enforcement authority should also have exclusive authority to determine the acceptability of specific IFRS rules, instead of the International Accounting Standards Board (IASB), which seems frequently consumed by European politics, now including Brexit.
A new regulator overseeing IFRS in Canada could also give specific thought to the uniqueness of Canada's resources-heavy capital markets, its past history of financial institution failures, and its penchant for tightly-controlled companies with weak governance.
Until such fixes occur, however, investors, directors, issuers, and compliance personnel need to be aware of the large gaps in regulation and investment safety that exist in Canada and ultimately impact market confidence.
Al Rosen, PhD, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE run ARC I Accountability Research Corp, and Rosen & Associates Limited, providing independent equity research and forensic accounting services.
http://www.accountabilityresearch.com.