November 30, 2006
Unearthing the Challenges of 52-109
There is certainly no shortage of challenges facing the mining industry today. Although recent media attention has focused on the unprecedented growth and resulting M&A activity in the sector, far less has been written about some of the more demanding regulatory compliance requirements.
Let’s face it. It’s not as glamorous to write about commodity price fluctuations, multi-national political risk or a burdensome environmental approval process. And there is nothing sexy about the evolving financial reporting regulations facing Canadian publicly listed mining companies.
For all that has been written about Sarbanes-Oxley (SOX) legislation in the US, the same cannot be said about the similar Canadian legislation put out by the Canadian Securities Administrators - Multilateral Instrument 52-109 (MI 52-109).
This will eventually change however, as I have noticed an increasing hunger among mining company executives to understand the regulatory risks facing their industry, particularly MI 52-109.
So, welcome to the information banquet known as MI 52-109. Consider this your appetizer.
A Taste of What’s to Come
MI 52-109 requires CEOs and CFOs of Canadian (TSX and TSX-V) listed companies (except investment funds) to provide what might be considered their ‘stamp of approval’ on their company’s financial statements. Agree with it or not, these requirements are meant to increase investor confidence and reduce the risk of future Enron-type scandals in the capital markets.
These compliance-related requirements are not only here to stay, I predict they will increasingly occupy the agendas of your company’s senior management.
Case in point: since 2004, CEO/CFO certification requirements have been expanding annually. As of June 30th 2006, CEO and CFO are now also required to certify that they have designed internal controls over financial reporting (ICFR) in the annual certificates filed with securities regulators
It’s also widely anticipated that by December 31, 2007, companies will be required to test and report on the effectiveness of those internal controls in the MD&A section of their annual report.
Yet, as we Canadians are still in the infancy stages of this new compliance regime, practical guidance in this area has been scarce. As a result, a lot of companies struggle to translate the certification requirements into a practical action plan. I suspect many senior executives are left wondering, “Have I got it right?”, or even “Have I done enough?”
For mining companies the challenges of designing and testing the effectiveness of ICFR may be exacerbated by the impact foreign operations have on financial results. Designing and evaluating financial reporting controls over your South American mining operation, for example, may present some unanticipated hurdles.
Mining companies may also need to review their financial controls in areas that require specialized expertise such as reserve valuation, mineral claims or land purchases and leases.
Three Tips on Internal Controls
Here are three basic guidelines to consider as you work through your internal controls certification project:
Map It Out. Even though MI 52-109 doesn’t specifically require it, consider using an internal controls framework to guide your ICFR work. It’s the road map that you’ll follow as you work through your project. For example, the COSO model utilizes a top down, risked-based approach for designing and managing internal controls.
Get Serious. Take the regulations seriously. Securities regulators certainly are. Nothing can send your company’s reputation spiraling south quicker than unfavorable press about your company’s financial reporting.
Be Committed. Continue developing your company’s understanding and overall competencies in the areas of internal controls. It makes good business sense and it’s becoming increasingly relevant in today’s environment.
And finally, stay tuned. You can rest assured they’ll be more to come on this topic in the future.
Let’s face it. It’s not as glamorous to write about commodity price fluctuations, multi-national political risk or a burdensome environmental approval process. And there is nothing sexy about the evolving financial reporting regulations facing Canadian publicly listed mining companies.
For all that has been written about Sarbanes-Oxley (SOX) legislation in the US, the same cannot be said about the similar Canadian legislation put out by the Canadian Securities Administrators - Multilateral Instrument 52-109 (MI 52-109).
This will eventually change however, as I have noticed an increasing hunger among mining company executives to understand the regulatory risks facing their industry, particularly MI 52-109.
So, welcome to the information banquet known as MI 52-109. Consider this your appetizer.
A Taste of What’s to Come
MI 52-109 requires CEOs and CFOs of Canadian (TSX and TSX-V) listed companies (except investment funds) to provide what might be considered their ‘stamp of approval’ on their company’s financial statements. Agree with it or not, these requirements are meant to increase investor confidence and reduce the risk of future Enron-type scandals in the capital markets.
These compliance-related requirements are not only here to stay, I predict they will increasingly occupy the agendas of your company’s senior management.
Case in point: since 2004, CEO/CFO certification requirements have been expanding annually. As of June 30th 2006, CEO and CFO are now also required to certify that they have designed internal controls over financial reporting (ICFR) in the annual certificates filed with securities regulators
It’s also widely anticipated that by December 31, 2007, companies will be required to test and report on the effectiveness of those internal controls in the MD&A section of their annual report.
Yet, as we Canadians are still in the infancy stages of this new compliance regime, practical guidance in this area has been scarce. As a result, a lot of companies struggle to translate the certification requirements into a practical action plan. I suspect many senior executives are left wondering, “Have I got it right?”, or even “Have I done enough?”
For mining companies the challenges of designing and testing the effectiveness of ICFR may be exacerbated by the impact foreign operations have on financial results. Designing and evaluating financial reporting controls over your South American mining operation, for example, may present some unanticipated hurdles.
Mining companies may also need to review their financial controls in areas that require specialized expertise such as reserve valuation, mineral claims or land purchases and leases.
Three Tips on Internal Controls
Here are three basic guidelines to consider as you work through your internal controls certification project:
Map It Out. Even though MI 52-109 doesn’t specifically require it, consider using an internal controls framework to guide your ICFR work. It’s the road map that you’ll follow as you work through your project. For example, the COSO model utilizes a top down, risked-based approach for designing and managing internal controls.
Get Serious. Take the regulations seriously. Securities regulators certainly are. Nothing can send your company’s reputation spiraling south quicker than unfavorable press about your company’s financial reporting.
Be Committed. Continue developing your company’s understanding and overall competencies in the areas of internal controls. It makes good business sense and it’s becoming increasingly relevant in today’s environment.
And finally, stay tuned. You can rest assured they’ll be more to come on this topic in the future.
