A follow up compliance review by the Canadian Securities Administrators found that firms now have properly independent audit committees, but some are falling short in the tasks those committees are required to carry out.

Staff of the securities regulatory authorities in Alberta, Saskatchewan, Manitoba, Ontario and Québec conducted a follow-up review of issuers’ compliance with the provisions of their rule regarding audit committees. The follow-up review was needed because the regulators found an inadequate level of compliance with the rule when it first looked.

The CSA rule requires: all members of the audit committee must be independent and financially literate; an audit committee must have all of the responsibilities prescribed by the rule set out in its charter; and, that issuers make certain disclosure.

The regulators reviewed a sample of 25 issuers, including 15 TSX listed issuers and 10 venture issuers. They focused on each issuer’s compliance with the requirements related to audit committee composition and responsibilities.

It found that overall, the audit committees of 18 issuers (72% of issuers reviewed) had all of the responsibilities prescribed by the instrument. This included 10 of the 15 TSX issuers (67%) and eight of the 10 venture issuers. “Our review identified several instances where an issuer’s audit committee was not assigned one or more of the responsibilities prescribed by the instrument,” it said.

“For each of the seven issuers where we identified instances of non-compliance, we accepted an undertaking from the issuer to address the deficiencies within a specified period of time prior to its next annual meeting,” the CSA reported.

On the question of audit committee independence, the CSA found that all of the TSX issuers reviewed had audit committees comprised solely of independent directors. Venture issuers are not required to comply with the audit committee independence requirements, however six firms had audit committees comprised solely of independent directors nonetheless.

The regulators also did not find any instances where an issuer determined that an audit committee member was not financially literate. “This finding is particularly noteworthy for venture issuers as they are not required to comply with the audit committee financial literacy requirements,” it said.

Although, it added, “In a few instances, however, the assertion by an issuer of the financial literacy of an audit committee member was the subject of further scrutiny in our review. In these instances, we found 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.”

“Issuers are reminded that the financial literacy of each director should be carefully assessed prior to that individual’s appointment to the audit committee. The assessment should generally be supportable on the basis of the individual’s relevant education and/or experience,” it noted.

“All of the TSX issuers reviewed complied with the instrument’s audit committee composition requirements. However, we are concerned about the number of instances identified in our review where the audit committees of both TSX issuers and venture issuers were not assigned all of the responsibilities prescribed by the instrument,” the CSA concluded. “We therefore intend to review issuers’ compliance with the instrument selectively as part of our ongoing continuous disclosure review program.”