The OSC launched its Emerging Markets Issuer Review in July 2011 following allegations of fraud levelled against Chinese timber company Sino-Forest. The firm denies the claims and is currently under investigation by the OSC.
The review targeted 24 Ontario reporting issuers on Canadian exchanges with significant operations in emerging markets, and the report, issued yesterday, found evidence of a concerning “form over substance” approach to compliance.
“In our view, the level of rigor and independent-mindedness applied by boards, auditors and underwriters in doing their important jobs — management oversight, audit, due diligence on offerings — should have been more thorough,” the report reads.
"The OSC expects issuers and gatekeepers to act in a manner that promotes investor protection and supports confidence in our capital markets," said OSC chairman and CEO Howard Wetston. "This review uncovered a number of areas where issuers and gatekeepers need to improve in order to meet their obligations and we will be monitoring their progress to ensure the interests of investors are placed first."
The report recommends issuers improve their internal controls and corporate governance to reflect the risks associated with operations in emerging markets, such as language barriers, and legal and cultural differences.
In addition, it said auditors were relying too heavily on management when examining documentation.
“In some instances the auditor accepted management’s representations at face value and did not perform sufficient alternative procedures to independently verify the information they received,” the report says.
Toronto Stock Exchange operator TMX Group said in a statement that it welcomed the report and is already developing its own additional guidance for emerging markets issuers.
"With the growth of emerging market economies, issuers and investors from these markets are expected to increasingly seek opportunity in Canada and other developed economies around the world. The work currently being conducted by TMX Group is part of our ongoing efforts to enhance the quality and integrity of Canada's capital markets, a key competitive advantage both for us and for Canada," said Kevan Cowan, TMX’s group head of equities.