Time for a Single Regulator? 

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Time for a Single Regulator?

Signals indicate Canada may finally establish a common securities regulator. The time is also ripe for reform of accounting and auditing standard setting.

FROM: MAY-JUN 2007 ISSUE | BY POONAM PURI

Canada is the only major industrialized country without a common securities regulator. To make matters worse, the current structure of securities regulation is fragmented and plagued with inefficiency, duplication, high costs, and ineffective enforcement. The creation of a national securities regulator in which both the federal and provincial governments would play significant roles is not a new concept, but rather, an idea that has been on the public policy agenda for more than 50 years. While this topic continues to be debated across the country, the Canadian media is reporting that support for a national regulator has grown over the past few months.

Currently, Canada is out of step with the rest of the world, as accounting and audit standard setting, oversight, and inspections are premised on a self-regulatory model, as opposed to direct governmental regulation as in many other developed countries. The governance structure of our existing institutions has lead to concerns about a lack of independence from the accounting profession, a lack of transparency, and a lack of accountability to the Canadian public. Yet ensuring that we have credible standard setting and oversight institutions is vital to Canada’s competitiveness in the global marketplace for capital.

Since 2003, the Canadian Public Accountability Board (CPAB) has been, and continues to be, responsible for overseeing and inspecting accounting firms that audit public companies. But CPAB is funded directly by the audit firms that participate in its oversight program, leading to concerns about a lack of independence from those it is responsible for overseeing.

International Examples

Other leading jurisdictions around the world have developed institutions for standard setting, inspections, and oversight that are much more credible than Canada’s. In the U.K., there is now a central and independent government body called the Financial Reporting Council that oversees accounting and audit standard setting. Directors of the council are appointed by the Secretary of State for Treasury and Industry, and a key funding source is annual levies on publicly listed companies.

Australia has also taken similar steps to ensure the institution that oversees accounting and auditing standard setting is independent and accountable. Members of its Financial Reporting Council are appointed by the federal Minister of the Treasury and nominated by stakeholders including the Australian Stock Exchange, the accounting profession, and state governments. Funding for the council is provided by both the government and the accounting profession.

In North America, there are some crucial differences between the current structure of the Canadian and U.S. accounting oversight boards. Specifically, the governance structure of the Public Company Accountability Oversight Board (PCAOB) in the United States diverges from CPAB on two critical points: PCAOB’s funding is derived from a levy imposed on public companies and PCAOB is directly accountable to the U.S. Securities and Exchange Commission, whereas CPAB is funded by the firms it audits and is ultimately accountable to CICA.

Proposed Models

The time is ripe for the creation of a common securities regulator in Canada, and for reform of our accounting and auditing standard-setting institutions. Since coming to office in February 2006, the Harper government has reaffirmed its commitment to create a common securities regulator on several occasions. Support for this idea is also coming from government committees, as the House of Commons Standing Committee on Finance has recommended that “the Conservative government conclude an agreement with the provincial/territorial governments on a single securities regulator no later than March 31, 2007,” and furthermore, that “the regulator should begin operations no later than June 30.”

Discussions on what a single regulator might look like are continuing, and CGA-Canada has proposed that the principles of regulatory efficiency, professional inclusion, transparency, accountability, and regional concerns should form the basis of a new model. In the development of three models for discussion, these principles were considered as well as six criteria relevant to the public interest:

• independent governance structure;
• independent funding;
• transparency;
• fairness;
• accountability; and
• consistency with other leading jurisdictions.

Model 1: Design New Institutions

This first model proposes the creation of a Canadian Securities Commission responsible for setting accounting and auditing standards, and inspecting firms that audit public companies. These responsibilities would be delegated to three self-regulatory organizations: a new Canadian Accounting Standards Board (CAcSB), a new Canadian Auditing and Assurance Standards Board (CAASB), and a redesigned CPAB.

The CAcSB’s mandate would be to set accounting standards for public companies, while the CAASB would establish auditing standards. Both would be governed by independent boards comprised of eight to 10 individuals from a range of fields such as accounting, law, business, economics, and public policy. Board members would be appointed by the Canadian Securities Commission or the federal Minister of Finance, in consultation with provincial/territorial governments.

CPAB would be recreated by federal legislation and its current three-tier governance structure would be replaced by an eight- to 10-member independent board of directors appointed by the Canadian Securities Commission or the federal Minister of Finance. The Canadian Securities Commission would fund and oversee the activities and operation of the three new boards. The funding would come from fees paid by issuers or fees paid by a wide range of capital markets participants.

Variations on this model include consolidating the responsibilities for auditing standard setting and inspections under a restructured CPAB (similar to the U.S. model where PCOAB is responsible for both auditing standard setting and inspections), or consolidating responsibilities for accounting, auditing, and assurance standard setting and inspections into one institution overseen by the Canadian Securities Commission.

Model 2: Restructure Current Institutions

This model proposes creating a Canadian Securities Commission and restructuring the existing AcSB and the AASB (see sidebar). Both the AcSB and the AASB would be recreated by federal statute, and their boards would be restructured so that the eight to 10 members on each board would represent a broad range of capital markets stakeholders. The Canadian Securities Commission would oversee the activities and operation of the two boards, and funding would be derived from the Canadian Securities Commission or from a wide range of capital markets participants. Inspection of auditing firms would continue under CPAB as in Model 1.

Model 3: Create an Oversight Board

The third model calls for the creation of a Canadian Financial Reporting Oversight Board (CFROB). The CFROB would be created by legislation and have direct oversight responsibility for the new institutions outlined in Model 1 or the redesigned institutions created in Model 2.

The CFROB would be comprised of five to seven members appointed by the federal Minister of Finance in consultation with provincial/territorial governments, and would report directly to the Minister on its activities and those of the boards it oversees. The CFROB would appoint members to the boards of the AcSB, the AASB, and CPAB.

Contribute to the Discussion

These three models suggest what the mandate of a national Canadian Securities Commission could be in relation to accounting and auditing standard setting and oversight. You have an opportunity to be part of the discussion on this important issue, as CGA-Canada is collecting comments on these three models until June 30, 2007.

A complete paper on The Regulation of Public Accounting and Accounting and Auditing Standard Setting Under a Common Securities Regulator in Canada can be found at www.cga.org/canada under Advocacy and Research.

Make your views known about improving standard setting and regulatory efficiencies in Canada.

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Poonam Puri is an associate professor at Toronto’s Osgoode Hall Law School, York University. She specializes in corporate governance, corporate law, and securities regulation, and was commissioned by CGA-Canada to write a discussion paper on the regulation of public accounting under a common securities regulator in Canada.