Joel Kwan is a corporate lawyer based in Los Angeles, California. Currently acting as financial/legal associate for Westwood Group, a specialty finance company, Joel focuses on general regulatory compliance, creditor rights and structured finance. Visit his website to learn more.

Sunday, January 31, 2010

What Happened to Canada's Sarbanes-Oxley Act?

Is Canada equipped to properly deal with corporate fraud? Based on the recent unravelling of the Norbourg and Earl Jones cases, it is easy to understand why many investors are complaining that the justice system does not properly handle such cases. Our neighbours down south did try to make some changes by enacting the Sarbanes-Oaxley Act (SOX).
SOX were introduced in the United States following a series of corporate fraud scandals that occurred in 2001. The main aim was to prevent intentional fraud by executives, to prevent conflict of interests between corporate governance entities and to incite whistleblowers to denounce fraud without being scared of retaliation.
Enron is the poster child of the corporate scandals that happened in 2001. Executives had relied on various creative accounting techniques to undervalue the amount of debt and expenses of the company and to overvalue earnings. Although in the United States, scandals involving important banks, auditing firms and corporations demonstrated that the control mechanisms in the system were fundamentally flawed, no such scandal happened in Canada at the time. Therefore, the government decided to make some superficial regulations, more as a means to equalize playing grounds with our greatest trade partner than to protect investors.
The Canadian government shied away from fundamental reform similar to SOX on the basis that SOX was not appropriate in the Canadian context. First, the disproportionate number of small and medium enterprises in Canada would be overburdened by increasing the requirements for reporting and would potentially discourage companies from listing on the stock exchange. Second, a great share of firms is cross-listed in the Canada and the US, so they most already comply with SOX. Third, there is no federal regulating authority for stock markets in Canada, which would make legislation similar to SOX impracticable. Fourth, the government argues that increasing regulation fosters a “find the loophole” mentality whereas the present principles based system is justifiable to give room to managers for judgment that is necessary for a successful business practice.
Although Canada did adopt parts of SOX, the regulations are not effective in preventing fraud. CEOs and CFOs are required to certify that reports do not contain material misstatements. It is argued that a signature on a financial statement cannot properly help realizing on time that fraud is brewing. The Canadian government also adopted the audit committee proposal which suggests that by creating an extra watchdog to raise flags when there is some misconduct. However, since the committee must rely on the Board of Directors to react, the committee may be futile if the Board is not willing to act. The third proposal is the creation of the Canadian Public Accountability Board which conducts tests among auditing firms to assure compliance of auditing standards. The RCMP’s Integrated Market Enforcement Team (IMET) was also created at the same time, but with results that are less than impressive. Between 2002 and 2007, the US Justice Department was able to convict 1200 individuals for white-collar crimes, while the IMET only managed two in four years.
Canada seems to be lacking political will to make significant changes. To add to the problem, every province has its own regulating body, which makes enforcing more difficult. The regulating bodies are under-funded and have little power when it comes to investigations.
In Quebec, l’Autorité des Marchés Financiers (AMF) is the regulatory body. Unfortunately, it is only responsible for investment professionals that choose to register with AMF. Recently, l’Autorité des Marchés Financiers pressed charges against Vincent Lacroix and collaborators in the Norbourg case. The outcome was 5 years of imprisonment (although Lacroix was released less than a year after the beginning of his prison term) compared to 150 years imprisonment for Bernie Madoff in the US. Instead of questioning the effectiveness of regulation in Quebec to protect investors, AMF believes that investors should be responsible for making good or bad decisions when choosing an investment professional. In its campaign “Investigate”, AMF proposes five steps that an investor should follow before making investment decisions.
Unfortunately, it seems that the government of Canada is not intent on making any fundamental changes to the regulatory environment of the financial system. Although the Conservative government has announced last year that it was planning to introduce minimum sentences (2 years) for economic crimes, a report on Global Economic Crime by PriceWaterhouseCoopers concludes that Canada is a top destination for white-collar crimes.


Canada's handling of white-collar crime is a crime

A good country for crooks: Canada's losing war against white-collar crime

Harper soft on white collar crime

The Court of Appeal Reduces Vincent Lacroix’s “First” Sentence

Norbourg fraudster Vincent Lacroix sentenced to 13 years

Earl Jones pleads guilty in $50M fraud

Norbourg fraud trial ends after jurors fail to reach unanimous verdict

2009 Global Economic Crime Survey

Saturday, January 23, 2010

PEETHREEPHOBIA, OR THE FEAR OF P3s (Public-Private Partnerships)

I remember attending a conference on the economic model of Quebec in 2004, where a UK government representative was advocating for P3s and their advantages. It seemed that England had found a way to make it work and that P3s were used extensively; success stories were plentiful.

However, there is much debate in Canada and especially in Quebec on the merits of P3s. Interest groups such as labour unions finance anti-P3 campaigns such as this one currently seen on TV nationwide:

Should P3 initiatives be terminated in order to protect Canadian citizen interests? After taking a look at both sides of the argument, here are my conclusions.

First off, what are P3s? The Canadian Council for Public-Private Partnerships defines P3 as: “a cooperative venture between the public and private sectors, built on expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

Typically, P3s will tend to be long-term agreements where financing, design, construction and maintenance of facilities are shared between public and private organizations.

Although one of the first countries to use P3s was France in the 18th century(1), the UK and Australia are credit for its invention. The UK is by far the biggest purchaser of P3s, with as many as 400 projects commissioned in 2005(2). Here in Quebec, P3s were introduced by Monique Jérôme-Forget, then Minister of Public Administration and Government Services, at the turn of the century. Once the Quebec Public-Private Partnerships Agency (PPPA) was founded by Jérôme-Forget, the controversy began.

In Canada, the media has been much more responsive to failures than successes, possibly affecting public opinion on the matter (4). Despite a difficult start, there is a consensus that the media is starting to be more objective in its reporting of P3 projects and moreover, surveys show that public opinion has been more favourable to P3s recently (4).

The P3 debate plays along the following lines:

1. Are P3s less expensive than traditional public procurement schemes?

Although it is difficult to assess this in the case of Quebec because P3s are relatively recent here, data from the British Columbia Council on P3s show that 100% of projects were delivered on budget and on time or ahead of schedule (3). In the UK, this rate is 78%, but in the case of cost increases, the government agencies did not bear the difference (4).

Further, there are interesting mechanisms in the P3 framework such as honoraria and break-fees that encourage competition in the bidding process as well as more diligence in the drafting of project proposals. Honoraria are given to competing suppliers to encourage quality in their bid proposals. Break-fees are paid out when suppliers are committed, but the project is cancelled.

The bidding process is far from perfect in Canada and could be improved in terms of efficiency and effectiveness. Recently, it was found that the decision of the Government of Quebec to use a P3 for the construction of the CHUM is based on reports that are deliberately slanted towards the P3 case, with risks minimized for the partnership case and costs maximized for the traditional case (6). Evidently, there is room for improvement here.

2. Do P3s provide better services for citizens?

This question is difficult to evaluate because of the lack of data on this subject. The real test for this question will be seen 10 years from now, when the initial projects will go beyond the construction phases and into maintenance and operations.

However, if we take a look at Chile, that has invested in an important P3 infrastructure starting in 1996, the results seem favourable in terms of consumer satisfaction although if we look at projects collectively the results are mixed (5).

In this area, proponents of P3s believe that some projects are far too ambitious and lengthy in time for governments with little experience with the mechanism. It would be better than to start off with few little projects, than many big projects.

3. Are P3s creating monopolies?

Because the P3 industry in Canada is still in its infancy stage, domestic and international competition, especially in the construction industry is quite low, which can stifle innovation and competitive pricing. Again, with more time, I believe results will be more conclusive.

4. Are P3s affecting job conditions?

The argument that jobs become less secure in a P3 environment predominantly originates from labour unions. However there is little data to support his argument. According to the labour unions, P3 workers are mostly atypical workers that earn lower salaries and are subject to precarious job conditions that pose serious psychological and health hazards (1). If we take this argument further, this means that organizations that are awarded P3 contracts do not abide by federal, provincial and municipal laws on labour and work safety. Let us not forget that P3 consortia are formed of the same private companies that run business everyday in non-P3 matters, therefore work conditions cannot be alienated to the extent of making P3s harmful for workers.

5. Is the P3 bidding mechanism transparent?

There is a general trend towards non-disclosure of information because of participation of private organizations in the process (1). However, some provincial governments have made public detailed reports on P3 projects, but the market would be more confident if documents on bidding details were also made public.

6. Are P3s a “Trojan horse for privatization”(1)?

England has adopted P3s in a time where there were budget constraints on the government and major infrastructure projects had to be implemented. P3s was an alternative that was used in order to push the projects without overburdening the government with debt(2). I believe that P3’s make a good compromise between privatization and nationalization. If the public sector assures the quality and universal access for citizens and benefits from expertise from the private sector, then this compromise truly creates value. The government’s move towards P3’s does not mean that there is a desire to privatize.


There is more fear than harm in the case of P3s in Canada. Strong interest groups and slanted media has helped building a case against P3s, but there is plenty of evidence that show that there is a bright future for P3s.

However, there are important improvements to be made. P3s boil down to complex agreements between the public and private sectors. These agreements must find the right balance of accountability so as to find the perfect mix of risk between the public and private agencies. Failure to find the right balance mostly means failure of the project. For instance, higher bidding prices may be the result of too much risk placed on the side of the private sector. Also, more transparency must be applied in the bidding process in order to satisfy the market’s need for fair competition. Next, the government must not impose to many restraints in the bid offers since this could diminish innovations and lead to more expensive proposals. Lastly, the government must make sure that P3 initiatives continue on a regular basis in order to build much needed expertise in the matter, attract competition and build the market for P3s.

UPCOMING TOPIC: Corporate Governance in US and Canada... too much lax?


1. Roy, Louis. “Improving State-Building Capacity: The P3 Paradox” Confédération des Syndicats Nationaux. Presentation in Zurich Feb. 2008.
2. “Overview of Public Private Partnerships in the UK” Unison. June 2005.
3. “Public Private Partnerships” Partnerships BC. Jul. 23 2008.

Wednesday, January 20, 2010

The Economics of Hollywood Movies

I saw Avatar this past weekend. I have to admit that I have not seen a good action science-fiction movie like this for a long time. This outing at the movies inspired me to look into the blockbuster strategy in Hollywood. The blockbuster strategy started in 1975 with Jaws when the movie was released nation-wide with lots of emphasis on marketing (1). Jaws was the first movie to be advertised on national TV. More recently, a characteristic of blockbuster movies is hefty budgets. The trend has been that the average Hollywood movie cost is on the rise by nearly 7% a year (2). Avatar has set a new precedent: the New York Times estimated total costs of $500 million (3).

For the purposes of satisfying my curiosity, I did two simple regression analyses using the top 20 most expensive movies of all time adjusted in 2008 $US. I wanted to see if there was a correlation between the movie’s budget and the worldwide revenue in the first test, and in the second I wanted to see whether there was a correlation between the movie’s budget and viewer appreciation (estimated using the Internet Movie Database ratings -IMDB).

After running the tests, it seems that total movie budget is not a very good indicator of box office success. According to the first test, the movie budget accounts for a little less than 30% of the revenue stream. It is noteworthy that only 5 movies in the top 20 most expensive movies of all time end up in the top 20 most enjoyed movies of all time (4).

The second test is even less conclusive. The movie budgets accounted for only 20% of ratings by fans on IMBD. Again, out of the 20 top best rated movies on IMDB, none of the 20 top most expensive movies show up in the list.

These tests, although using small samples, show that there is not a very strong correlation between movie costs and revenues and between movie costs and viewer ratings.

Sunday, January 17, 2010

Globalization Sensitizes World to Humanitarian Crises

Indeed, as Thomas Friedman proposes, the world is flat in the 21st century as economic barriers disappear, geographical limitations become less important and technology is making the concept of distance more trivial. Now, whether this is a good or a bad thing is a totally different debate that I do not go into today. I would rather spend a few moments to consider how the world as a global village is helping citizens worldwide become more aware and sympathetic to humanitarian crises.

For many observers, the 2004 Indian Ocean tsunami represents the first global natural disaster in modern times (1). The moment images of desolate landscapes with hundreds of injured and dead starting showing up in international media, aid on private and public fronts started organizing world-wide. There had never been such an intense and rapid international response. Some researchers even found that there was a strong correlation between extent of media exposure of humanitarian crises and amount of private donations (2). Suddenly, a natural disaster in New Orleans does not only concern the United States (a total of 854 million was offered from foreign countries (3)), and an earthquake in Sichuan, China sends ripples in the international community.

The current situation in Haiti is a case in point. According to USA Today, less than three days after the earthquake, private donations were already on its way to break all-time records.
Despite the world communities increased generosity and speed in responding to such dramatic events, many believe that this trend must be taken to a new level: humanitarian crises do not only happen in a one-time event due to natural disasters. There are humanitarian crises that are ongoing in poverty-struck countries that equally need international aid. Shortly after the 2004 Indian Ocean Tsunami, Tony Blair believed that foreign aid was detracted from important causes and that “there is the equivalent of a man-made preventable tsunami every week in Africa” (4).

I prepared a small table for this post:
Transfers of public donations for selected natural disasters


1. “The Globalized world responds to the tsunami disaster.” Global Envision. Retrieved Jan. 16 2010.

2. Brown, Philip; Minty, Jessica. “Media Coverage & Charitable Giving After the 2004 Tsunami” The William Davidson Institute at the University of Michigan. Dec. 2006.

3. Solomon, John; Spencer S. Hsu (2007). ""Most Katrina Aid From Overseas Went Unclaimed"" (News Article). Washington Post. Retrieved 2010-01-16.

4. Grice, Andrew. “Blair: We must extend support to Africa” The Independent. Retrieved 2010-01-17.

5. Saito, Masaki. “Japanese People Appreciate Concern Shown by Americans” The Seattle Times. Retrieved 2010-01-16.

6. Kambayashi, Takehiko. “Volunteering in Japan: A legacy of Kobe earthquake” World Volunteer Web.,0,w
Retrieved 2010-01-16.

7. “The Globalized world responds to the tsunami disaster.” Global Envision. Retrieved Jan. 16 2010.

8. “The Globalized world responds to the tsunami disaster.” Global Envision. Retrieved Jan. 16 2010.

9. St. Onge, Jeff; Epstein, Victor. "Ex-chief says FEMA readiness even worse." April 1, 2006. Retrieved on 2010-01-16

10. Keen, Judy. “Haiti donations on track to break records” USA Today.
Retrived 2010-01-15

11. “China Earthquake Could Cost US$20 billion” China Post.
Retrived 2010-01-16

12. McGinnis, Ariel et al. “The Sichuan Earthquake and the Changing Landscape of CSR in China”
Retrieved 2010-01-16

13. “Haiti Earthquake Damage Amounts to Estimated 15% of Country’s GDP” Associated Content.
Retrieved 2010-01-16

Thursday, January 14, 2010