Regulators have reviewed issuers’ compliance with new audit committee rules that took effect in most jurisdictions in 2004, and found the overall level of compliance “unacceptable”.

A sample of 95 issuers was selected from across the country. The review focused on each issuer’s compliance with the rules’ requirements regarding audit committee composition and responsibilities.

It found that overall, 64% of the audit committee charters reviewed set out all of the responsibilities prescribed by the rules. This included 68% of exempt TSX issuers, 57% of non-exempt TSX issuers, and 66% of venture issuers. “In our view, a 64% overall compliance level is inadequate,” the Canadian Securities Administrators says in a notice. “It appears that many issuers were either unaware of the provisions of the instrument or were at least unaware of its transition provisions.”

“While the non-compliance was broadly dispersed across all responsibilities, the responsibilities that were most commonly excluded from non-compliant charters were the responsibility to establish procedures for the handling of complaints and employee concerns regarding accounting or auditing matters and the responsibility to review and approve the issuer’s hiring policies for partners and employees of the issuer’s current and former auditors,” it reports.

Three other responsibilities were commonly excluded from the audit committee charters of non-exempt TSX issuers. Five issuers did not include the requirement to directly oversee the work of the external auditor; the charters of six issuers did not include the requirement to review the issuer’s financial statements, MD&A and annual and interim earnings press releases prior to their release; and the charters of six issuers did not include the requirement that the audit committee satisfy itself as to the adequacy of review procedures for other financial information.

There were four venture issuers that did not have an audit committee charter.

“In several instances, issuers asserted that their audit committee charter complied with the instrument because certain responsibilities not specifically enumerated were implied by the language in the audit committee’s charter. In other instances, the audit committee was provided with discretion in its charter as to whether or not to assume certain of the responsibilities,” it reports. “In our view, neither position is justifiable.”

“In order to satisfy the provisions of the instrument, the prescribed responsibilities must be directly and clearly set out in the audit committee’s charter,” the regulators insist. “Further, the audit committee must not be provided with discretion as to whether or not to assume certain of the responsibilities.”

It also reports that 92% of TSX issuers had audit committees comprised solely of independent directors. “In four instances where we determined that a member of the audit committee of a TSX issuer was not independent, the member was replaced by an independent director prior to the completion of the review. In one instance, however, an undertaking was filed by the issuer to replace the member within a specified period of time,” it reports.

Regulators report that they did not find any instances where an issuer determined that an audit committee member was not financially literate. “In several instances it appears that, although an audit committee member was ultimately determined to be financially literate, the matter had not been carefully considered by the issuer prior to our enquiry,” it cautions. “The financial literacy of each director should be carefully assessed prior to that individual’s appointment to the audit committee.”

“In our view, the level of compliance by issuers with the provisions of the instrument was unacceptable,” it concludes. “We were particularly concerned to learn that even the largest issuers, exempt TSX issuers, were not fully compliant. We expect issuers to fully comply with the instrument.”

Regulators say they intend to conduct additional reviews of compliance by issuers in the near future, and will actively follow up on deficiencies identified in those reviews.