TORONTO—Our financial investigation and forensic accounting business provides us with daily exposure to Canadian-based white collar crime. We have the frequent unpleasant task of informing victims that their savings are gone forever. Faced with such news, they are stunned to learn the extent to which Canada allows financial con artists to operate so freely.
The biggest injustice in these cases is not the lack of restitution for victims, but the fact that the losses could have easily been prevented by proper legislative safeguards.
Perhaps in comparison to more publicized U.S. scandals, lawmakers believe that Canada has effective protections for investors. In reality, Canada seriously lags behind the U.S. due to our regulatory fragmentation, and worse, our blind acceptance of self-regulating financial gatekeepers. Oversight boards that are independent in name only do not provide the necessary counterbalance to self-regulation, and are not accepted practice in the U.S. and elsewhere.
Topping it off, the Supreme Court of Canada last year reaffirmed its long-held stance that audited annual financial statements cannot be relied upon by investors for making investment decisions. The legal interpretation of the protection afforded by an audit has become so obscure and remote that it screams for a legislative fix.
Over two decades of attempting to inform lawmakers of these major shortcomings, we have met with continuous passing of the buck from minister to minister, and eventually back to the self-regulating accountants who proclaim that there is nothing wrong with a product that is mandated by legislation, but is completely useless in the hands of investors—the major intended users.
With auditors themselves opting out of protecting investors, and securities regulators remaining fragmented, investors in Canada remain at a distinct disadvantage. Only lawmakers are left to stand up for Canadian investors, and to change the inadequate culture of financial self-regulation in our country.
Already facing competitive international headwinds, Canada’s attractiveness for foreign direct investment declines the longer that these shortcomings remain unaddressed. Repeated high-profile failures like Nortel Networks, Sino-Forest Corp, and Valeant Pharmaceuticals do not go unnoticed and have worsened Canada’s already poor international reputation. Multi-billion-dollar failures can only grow unchecked to such a size when aided by a system that allows material misrepresentation of profitability and liquidity in financial statements.
Canada’s abandonment of its own accounting standards in favour of European-based guidelines was the result of auditor self-regulation. Instead of adopting stronger U.S. standards that would align us with our largest trading partner, Canadian accountants chose rules to provide corporate executives with more flexibility in accounting rule choices. Our lawmakers deferred to the self-regulating accountants, who in turn, downloaded responsibility to corporate management. Executives should not be in charge of choosing whatever accounting rules flatter them the most, especially given that our Supreme Court has ruled that audits do not exist as a safeguard for investors.
Canadian companies now follow accounting guidelines known as International Financial Reporting Standards (IFRS). A major premise of these guidelines is that company executives should be given wide latitude to present their financial statements in the fashion they see fit, presumably in order to allow maximum flexibility for various circumstances.
If there was never a manipulative nor greedy executive, this would work. However, human nature and common sense tells us otherwise. In most professions, clear rules and prohibitions exist to rein in temptation. The same does not exist for accounting rules in Canada.
It’s difficult for lawmakers to allocate the time needed to understand the minutia of accounting rules, and to recognize the deterioration that has occurred in Canada. The response has been to defer to the accountants themselves, but unfortunately that’s been tantamount to asking a fox to guard the chicken coop.
Canada must bring itself in line with U.S. law, which establishes statutory liability for auditors when approving financial statements provided to investors in both the primary and secondary markets.
Canada must also legislate a completely independent and self-funded entity that has oversight over the accounting and auditing standard-setters in Canada, also placing us on par with the U.S.
Lawmakers need to act to reverse Canada’s declining international stature and eliminate its reputation as a safe-haven for white collar crime.
Al and Mark Rosen head up ARC|Accountability Research, and Rosen & Associates Forensic Accountants. They have authored hundreds of articles in national publications over the past 20 years on the topics of governance, investor protection, financial analysis and accounting red flags. They are also the authors of Swindlers: Cons & Cheats and How To Protect Your Investments From Them, and Easy Prey: Why Broken Safety Net Threaten Your Wealth.
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