FP Magazine - Unprotective custody Two months ago, the Ontario Securities Commission reported a litany of lax governance practices among emerging market companies listed on Canadian exchanges after a nine-month review. The country’s largest securities watchdog said these “deficiencies” abound at most of the 24 foreign issuers it scrutinized. The OSC report then pointed a finger at BOARDS OF DIRECTORS, UNDERWRITERS, STOCK EXCHANGES and AUDITORS. Clearly, this is cause for concern. Consider that there are 108 issuers on the TSX or TSX Venture from China, Asia, Africa, South America and Eastern Europe that have a combined total market capitalization of just over $40 billion.
Equally significant is the verdict by the Canadian Public Accountability Board (CPAB), which bluntly concluded that work done by Canadian audit firms with Chinese clients was a “disappointment.” In a special report released in February, the country’s audit regulator found the auditing by Canadian firms in foreign jurisdictions did not meet acceptable standards in Canada. In particular, the review highlighted the wide gulf in auditing standards between Canada and China. Last year, 56 companies from China and other parts of Asia listed on the two TSX exchanges, mainly through reverse takeovers.
Like the OSC, the CPAB examined 24 companies and discovered the most basic and fundamental auditing processes weren’t being applied. In some cases, auditors didn’t appropriately identify and assess the risks of material misstatement in financial statements, and they failed to exercise a degree of professional skepticism when confronted with evidence that should have raised red flags about potential fraud. Worse, the audit regulator doesn’t think this problem is unique to Chinese companies listing in Canada.
In a separate inspection of high-risk audits last year, the CPAB discovered little progress in the quality of audits performed in Canada. The failure rates were between 20% and 26%. That this is still happening in the post Bre-X and YBM Magnex scandal era is not only unsettling, it’s unacceptable. Canada’s auditors, underwriters, stock exchanges and securities regulators have to improve the way they perform. But how to remedy a problem everyone acknowledges still exists? For one, let’s stop studying it to death. Talking has achieved little. It’s time for a concrete blueprint to fix the shortcomings.
When cultures are different, insist on Canadian professional standards or forgo the listing. It shouldn’t matter that TMX Group is a private, for-profit company focused on volume. Why compete to attract companies to list in Canada if there’s a heightened risk that some are ticking time bombs? Problems with a company listed on the TSX reflect on the credibility of the exchange and the other companies trading on it as well.
https://business.financialpost.com/2012/05/01/unprotective-custody/