The Canadian Securities Administrators are seeking comments on a proposal to revise securities rules to require CEOs and chief financial officers to certify the effectiveness of their internal controls.

The proposed revisions introduce a new requirement for the CEO and the CFO to certify that they have evaluated the effectiveness of their internal control over financial reporting (ICFR) and disclosed their conclusions, including information about identified deficiencies, in the Management’s Discussion and Analysis. The proposed requirements would apply to all reporting issuers other than investment funds.

“Following extensive consultation and careful consideration of the debate about internal control reporting in the U.S., the CSA has concluded that these proposals will increase management’s focus on the quality of internal control over financial reporting and provide greater transparency to investors about deficiencies,” said Jean St-Gelais, chair of the CSA and president & chief executive officer of the Autorité des marchés financiers.

In the U.S., the process of certifying internal controls includes a requirement that an issuer’s auditor attest to the quality of controls too, a process which has proven expensive at many firms.

Initially, the CSA planned to follow the US approach, according to a rule published in 2005. In 2006, it backed away from that plan, introducing a less onerous certification alternative. Now, it is proposing provisions that follow the 2006 plan.

“We propose to require management to evaluate an issuer’s ICFR and provide MD&A disclosure about their conclusions about the effectiveness of ICFR based on such evaluation. We do not propose requiring an issuer to obtain from its auditor an internal control audit opinion concerning management’s assessment of the effectiveness of ICFR,” the notice says. “We think our proposal will balance the costs and benefits associated with internal control reporting requirements, while increasing management’s focus on, and accountability for, the quality of ICFR.”

“In developing our proposals, we have endeavoured to reinforce the importance of high quality, reliable and transparent financial reporting while appropriately balancing the costs and benefits of the new requirements,” St-Gelais added.

The comment period is open until June 28. The proposed effective date of the rule is June 30, 2008. The CSA says that since all issuers (other than investment funds) must certify the design of ICFR for financial years ending after June 29, 2006, issuers will have significant time between the certification of design and the certification of the evaluation of the effectiveness of ICFR to complete the evaluation. “As a result, we believe issuers will have adequate time to prepare for and complete an evaluation of their ICFR,” it concludes.