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

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