Most sections in this Part apply to the design of both DC&P (DC&P design) and ICFR (ICFR design); however, some sections provide specific guidance relating to DC&P design or ICFR design. The term “design” in this context generally includes both developing and implementing the controls, policies and procedures that comprise DC&P and ICFR. This Policy often refers to such controls, policies and procedures as the “components” of DC&P and ICFR. A control, policy or procedure is implemented when it has been placed in operation. An evaluation of effectiveness does not need to be performed to assess whether the control, policy or procedure is operating as intended in order for it to be placed in operation.
There is a substantial overlap between the definitions of DC&P and ICFR. However, some elements of DC&P are not subsumed within the definition of ICFR and some elements of ICFR are not subsumed within the definition of DC&P. For example, an issuer’s DC&P should include those elements of ICFR that provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with the issuer’s GAAP. However, the issuer’s DC&P might not include certain elements of ICFR, such as those pertaining to the safeguarding of assets.
The definition of DC&P includes reference to reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The definition of ICFR includes the phrase “reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP”. In this Part the term “reasonable assurance” refers to one or both of the above uses of this term. Reasonable assurance is a high level of assurance, but does not represent absolute assurance. DC&P and ICFR cannot provide absolute assurance due to their inherent limitations. Each involves diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human error. As a result of these limitations, DC&P and ICFR cannot prevent or detect all errors or intentional misstatements resulting from fraudulent activities. The terms “reasonable”, “reasonably” and “reasonableness” in the context of the Instrument do not imply a single conclusion or methodology, but encompass a range of potential conduct, conclusions or methodologies upon which certifying officers may base their decisions.
The Instrument does not prescribe specific components of DC&P or ICFR or their degree of complexity. Certifying officers should design the components and complexity of DC&P and ICFR using their judgment, acting reasonably, giving consideration to various factors particular to an issuer, including its size, nature of business and complexity of operations.
Section 3.1 of the Instrument requires a non-venture issuer to establish and maintain DC&P and ICFR. Employees or third parties, supervised by the certifying officers, may conduct the design of the issuer’s DC&P and ICFR. Such employees should individually and collectively have the necessary knowledge, skills, information and authority to design the DC&P and ICFR for which they have been assigned responsibilities. Nevertheless, certifying officers of the issuer must retain overall responsibility for the design and resulting MD&A disclosure concerning the issuer’s DC&P and ICFR.
(1) Approaches to consider for design – The Instrument does not prescribe the approach certifying officers should use to design the issuer’s DC&P or ICFR. However, we believe that a top-down, risk-based approach is an efficient and cost-effective approach that certifying officers should consider. This approach allows certifying officers to avoid unnecessary time and effort designing components of DC&P and ICFR that are not required to obtain reasonable assurance. Alternatively, certifying officers might use some other approach to design, depending on the issuer’s size, nature of business and complexity of operations. (2) Top-down, risk-based approach – Under a top-down, risk-based approach to designing DC&P and ICFR certifying officers first identify and assess risks faced by the issuer in order to determine the scope and necessary complexity of the issuer’s DC&P or ICFR. A top-down, risk- based approach helps certifying officers to focus their resources on the areas of greatest risk and avoid expending unnecessary resources on areas with little or no risk. Under a top-down, risk-based approach, certifying officers initially consider risks without considering any existing controls of the issuer. Using this approach to design DC&P, the certifying officers identify the risks that could, individually or in combination with others, reasonably result in a material misstatement in its annual filings, interim filings or other reports filed or submitted by it under securities legislation. Using this approach to design ICFR, the certifying officers identify those risks that could, individually or in combination with others, reasonably result in a material misstatement of the financial statements (financial reporting risks). A material misstatement includes misstatements due to error, fraud or omission in disclosure. Identifying risks involves considering the size and nature of the issuer’s business and the structure and complexity of business operations. If an issuer has multiple locations or business units, certifying officers initially identify the risks that could reasonably result in a material misstatement and then consider the significance of these risks at individual locations or business units. If the officers identify a risk that could reasonably result in a material misstatement, but the risk is either adequately addressed by controls, policies or procedures that operate centrally or is not present at an individual location or business unit, then certifying officers do not need to focus their resources at that location or business unit to address the risk. For the design of DC&P, the certifying officers assess risks for various types and methods of disclosure. For the design of ICFR, identifying risks involves identifying significant accounts and disclosures and their relevant assertions. After identifying risks that could reasonably result in a material misstatement, the certifying officers then ensure that the DC&P and ICFR designs include controls, policies and procedures to address each of the identified risks. (3) Fraud risk – When identifying risks, certifying officers should explicitly consider the vulnerability of the entity to fraudulent activity (e.g., fraudulent financial reporting and misappropriation of assets). Certifying officers should consider how incentives (e.g., compensation programs) and pressures (e.g., meeting analysts’ expectations) might affect risks, and what areas of the business provide opportunity for an individual to commit fraud. For the purposes of this Instrument, fraud would generally include an intentional act by one or more individuals among management, other employees, those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage. Although fraud is a broad legal concept, for the purposes of this Instrument, the certifying officers should be concerned with fraud that could cause a material misstatement in the issuer’s annual filings, interim filings or other reports filed or submitted under securities legislation. (4) Designing controls, policies and procedures – If the certifying officers choose to use a top-down, risk-based approach, they design specific controls, policies and procedures that, in combination with an issuer’s control environment, appropriately address the risks discussed in subsections (2) and (3). If certifying officers choose to use an approach other than a top-down, risk-based approach, they should still consider whether the combination of the components of DC&P and ICFR that they have designed are a sufficient basis for the representations about reasonable assurance required in paragraph 5 of the certificates.
(1) Importance of control environment – An issuer’s control environment is the foundation upon which all other components of DC&P and ICFR are based and influences the tone of an organization. An effective control environment contributes to the reliability of all other controls, processes and procedures by creating an atmosphere where errors or fraud are either less likely to occur, or if they occur, more likely to be detected. An effective control environment also supports the flow of information within the issuer, thus promoting compliance with an issuer’s disclosure policies. An effective control environment alone will not provide reasonable assurance that any of the risks identified will be addressed and managed. An ineffective control environment, however, can undermine an issuer’s controls, policies and procedures designed to address specific risks. (2) Elements of a control environment – A key element of an issuer’s control environment is the attitude towards controls demonstrated by the board of directors, audit committee and senior management through their direction and actions in the organization. An appropriate tone at the top can help to develop a culture of integrity and accountability at all levels of an organization which support other components of DC&P and ICFR. The tone at the top should be reinforced on an ongoing basis by those accountable for the organization’s DC&P and ICFR. In addition to an appropriate tone at the top, certifying officers should consider the following elements of an issuer’s control environment: (a) organizational structure of the issuer – a structure which relies on established and documented lines of authority and responsibility may be appropriate for some issuers, whereas a structure which allows employees to communicate informally with each other at all levels may be more appropriate for some issuers; (b) management’s philosophy and operating style – a philosophy and style that emphasises managing risks with appropriate diligence and demonstrates receptiveness to negative as well as positive information will foster a stronger control environment; (c) integrity, ethics, and competence of personnel -controls, policies and procedures are more likely to be effective if they are carried out by ethical, competent and adequately supervised employees; (d) external influences that affect the issuer’s operations and risk management practices – these could include global business practices, regulatory supervision, insurance coverage and legislative requirements; and (e) human resources policies and procedures – an issuer’s hiring, training, supervision, compensation, termination and evaluation practices can affect the quality of the issuer’s workforce and its employees’ attitudes towards controls. (3) Sources of information about the control environment – The following documentation might provide useful information about an issuer’s control environment: (a) written codes of conduct or ethics policies; (b) procedure manuals, operating instructions, job descriptions and training materials; (c) evidence that employees have confirmed their knowledge and understanding of items (a) and (b); (d) organizational charts that identify approval structures and the flow of information; and (e) written correspondence provided by an issuer’s external auditor regarding the issuer’s control environment.
In order for DC&P to provide reasonable assurance that information required by securities legislation to be disclosed by an issuer is recorded, processed, summarized and reported within the required time periods, DC&P should generally include the following components: (a) written communication to an issuer’s employees and directors of the issuer’s disclosure obligations, including the purpose of disclosure and DC&P and deadlines for specific filings and other disclosure; (b) assignment of roles, responsibilities and authorizations relating to disclosure; (c) guidance on how authorized individuals should assess and document the materiality of information or events for disclosure purposes; and (d) a policy on how the issuer will receive, document, evaluate and respond to complaints or concerns received from internal or external sources regarding financial reporting or other disclosure issues. An issuer might choose to include these components in a document called a disclosure policy. Part 6 of National Policy 51-201 Disclosure Standards encourages issuers to establish a written disclosure policy and discusses in more detail some of these components. For issuers that are subject to National Instrument 52-110 Audit Committees (NI 52-110), compliance with the instrument will also form part of the issuer’s DC&P design.
In order for ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP, ICFR should generally include the following components: (a) controls for initiating, authorizing, recording and processing transactions relating to significant accounts and disclosures; (b) controls for initiating, authorizing, recording and processing non-routine transactions and journal entries, including those requiring judgments and estimates; (c) procedures for selecting and applying appropriate accounting policies that are in accordance with the issuer’s GAAP; (d) controls to prevent and detect fraud; (e) controls on which other controls are dependent, such as information technology general controls; and (f) controls over the period-end financial reporting process, including controls over entering transaction totals in the general ledger, controls over initiating, authorizing, recording and processing journal entries in the general ledger and controls over recording recurring and non-recurring adjustments to the financial statements (e.g., consolidating adjustments and reclassifications).
(1) Significant accounts and disclosures and their relevant assertions – As described in subsection 6.6(2) of the Policy, a top-down, risk-based approach to designing ICFR involves identifying significant accounts and disclosures and the relevant assertions that affect each significant account and disclosure. This method assists certifying officers in identifying the risks that could reasonably result in a material misstatement in the issuer’s financial statements and not all possible risks the issuer faces. (2) Identifying significant accounts and disclosures – A significant account could be an individual line item on the issuer’s financial statements, or part of a line item. For example, an issuer might present “net revenue”, which represents a combination of “gross revenue” and “returns”, but might identify “gross revenue” as a significant account. By identifying part of a line item as a significant account, certifying officers might be able to focus on balances that are subject to specific risks that can be separately identified. A significant disclosure relating to the design of ICFR could be any form of disclosure included in the issuer’s financial statements, or notes to the financial statements, that is presented in accordance with the issuer’s GAAP. The identification of significant disclosures for the design of ICFR does not extend to the preparation of the issuer’s MD&A or other similar financial information presented in a continuous disclosure filing other than financial statements. (3) Considerations for identifying significant accounts and disclosures – A minimum threshold expressed as a percentage or a dollar amount could provide a reasonable starting point for evaluating the significance of an account or disclosure. However, certifying officers should use their judgment, taking into account qualitative factors, to assess accounts or disclosures for significance above or below that threshold. The following factors will be relevant when determining whether an account or disclosure is significant: (a) the size, nature and composition of the account or disclosure; (b) the risk of overstatement or understatement of the account or disclosure; (c) the susceptibility to misstatement due to errors or fraud; (d) the volume of activity, complexity and homogeneity of the individual transactions processed through the account or reflected in the disclosure; (e) the accounting and reporting complexities associated with the account or disclosure; (f) the likelihood (or possibility) of conditions that will give rise to significant contingent liabilities in the account or disclosure; (g) the existence of related party transactions; and (h) the impact of the account on existing debt covenants. (4) Assertions – Using a top-down, risk-based approach, the certifying officers identify those assertions for each significant account and disclosure that presents a risk that could reasonably result in a material misstatement in that significant account or disclosure. For each significant account and disclosure the following assertions could be relevant: (a) existence or occurrence – whether assets or liabilities exist and whether transactions and events that have been recorded have occurred and pertain to the issuer; (b) completeness – whether all assets, liabilities and transactions that should have been recorded have been recorded; (c) valuation or allocation – whether assets, liabilities, equity, revenue and expenses have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded; (d) rights and obligations – whether assets are legally owned by the issuer and liabilities are the obligations of the issuer; and (e) presentation and disclosure – whether particular components of the financial statements are appropriately presented and described and disclosures are clearly expressed. The certifying officers might consider assertions that differ from those listed above if the certifying officers determine that they have identified the pertinent risks in each significant account and disclosure that could reasonably result in a material misstatement. (5) Identifying relevant assertions for each significant account and disclosure – To identify relevant assertions for each significant account and disclosure, the certifying officers determine the source of potential misstatements for each significant account or disclosure. When determining whether a particular assertion is relevant, the certifying officers would consider the nature of the assertion, the volume of transactions or data related to the assertion and the complexity of the underlying systems supporting the assertion. If an assertion does not present a risk that could reasonably result in a material misstatement in a significant account, it is likely not a relevant assertion. For example, valuation might not be relevant to the cash account unless currency translation is involved; however, existence and completeness are always relevant. Similarly, valuation might not be relevant to the gross amount of the accounts receivable balance, but is relevant to the related allowance accounts. (6) Identifying controls, policies and procedures for relevant assertions – Using a top-down, risk- based approach, the certifying officers design components of ICFR to address each relevant assertion. The certifying officers do not need to design all possible components of ICFR to address each relevant assertion, but should identify and design an appropriate combination of controls, policies and procedures to address all relevant assertions. The certifying officers would consider the efficiency of evaluating an issuer’s ICFR design when designing an appropriate combination of ICFR components. If more than one potential control, policy or procedure could address a relevant assertion, certifying officers could select the control, policy or procedure that would be easiest to evaluate (e.g., automated control vs. manual control). Similarly, if a control, policy or procedure can be designed to address more than one relevant assertion, then certifying officers could choose it rather than a control, policy or procedure that addresses only one relevant assertion. For example, the certifying officers would consider whether any entity-wide controls exist that adequately address more than one relevant assertion or improve the efficiency of evaluating operating effectiveness because such entity-wide controls negate the need to design and evaluate other components of ICFR at multiple locations or business units. When designing a combination of controls, policies and procedures, the certifying officers should also consider how the components in subsection 6.7(2) of the Policy interact with each other. For example, the certifying officers should consider how information technology general controls interact with controls, policies and procedures over initiating, authorizing, recording, processing and reporting transactions.
Key features of ICFR and related design challenges are described below. (a) Segregation of duties – The term “segregation of duties” refers to one or more employees or procedures acting as a check and balance on the activities of another so that no one individual has control over all steps of processing a transaction or other activity. Assigning different people responsibility for authorizing transactions, recording transactions, reconciling information and maintaining custody of assets reduces the opportunity for any one employee to conceal errors or perpetrate fraud in the normal course of his or her duties. Segregating duties also increases the chance of discovering inadvertent errors early. If an issuer has few employees, a single employee may be authorized to initiate, approve and effect payment for transactions and it might be difficult to re-assign responsibilities to segregate those duties appropriately. (b) Board expertise – An effective board objectively reviews management’s judgments and is actively engaged in shaping and monitoring the issuer’s control environment. An issuer might find it challenging to attract directors with the appropriate financial reporting expertise, objectivity, time, ability and experience. (c) Controls over management override – An issuer might be dominated by a founder or other strong leader who exercises a great deal of discretion and provides personal direction to other employees. Although this type of individual can help an issuer meet its growth and other objectives, such concentration of knowledge and authority could allow the individual an opportunity to override established policies or procedures or otherwise reduce the likelihood of an effective control environment. (d) Qualified personnel – Sufficient accounting and financial reporting expertise is necessary to ensure reliable financial reporting and the preparation of financial statements in accordance with the issuer’s GAAP. Some issuers might be unable to obtain qualified accounting personnel or outsourced expert advice on a cost-effective basis. Even if an issuer obtains outsourced expert advice, the issuer might not have the internal expertise to understand or assess the quality of the outsourced advice. If an issuer consults on technically complex accounting matters, this consultation alone is not indicative of a deficiency relating to the design of ICFR. An issuer’s external auditor might perform certain services (e.g., income tax, valuation or internal audit services), where permitted by auditor independence rules, that provide skills which would otherwise be addressed by hiring qualified personnel or outsourcing expert advice from a party other than the external auditor. This type of arrangement should not be considered to be a component of the issuer’s ICFR design. If an issuer identifies one or more of these ICFR design challenges, additional involvement by the issuer’s audit committee or board of directors could be a suitable compensating control or alternatively could mitigate risks that exist as a result of being unable to remediate a material weakness relating to the design challenge. The control framework the certifying officers use to design ICFR could include further information on these design challenges. See section 9.1 of the Policy for a discussion of compensating controls versus mitigating procedures.
Following their initial development and implementation of DC&P and ICFR, and prior to certifying design each quarter, certifying officers should consider: (a) whether the issuer faces any new risks and whether each design continues to provide a sufficient basis for the representations about reasonable assurance required in paragraph 5 of the certificates; (b) the scope and quality of ongoing monitoring of DC&P and ICFR, including the extent, nature and frequency of reporting the results from the ongoing monitoring of DC&P and ICFR to the appropriate levels of management; (c) the work of the issuer’s internal audit function; (d) communication, if any, with the issuer’s external auditors; and (e) the incidence of weaknesses in DC&P or material weaknesses in ICFR that have been identified at any time during the financial year.
In addition to the considerations set out in this Part that will assist certifying officers in appropriately designing DC&P and ICFR, other steps that certifying officers could take to enhance the efficiency and effectiveness of the designs are: (a) embedding DC&P and ICFR in the issuer’s business processes; (b) implementing consistent policies and procedures and issuer-wide programs at all locations and business units; (c) including processes to ensure that DC&P and ICFR are modified to adapt to any changes in business environment; and (d) including procedures for reporting immediately to the appropriate levels of management any identified issues with DC&P and ICFR together with details of any action being undertaken or proposed to be undertaken to address such issues.
(1) Extent and form of documentation for design – The certifying officers should generally maintain documentary evidence sufficient to provide reasonable support for their certification of design of DC&P and ICFR. The extent of documentation supporting the certifying officers’ design of DC&P and ICFR for each interim and annual certificate will vary depending on the certifying officers’ assessment of risk, as discussed in section 6.6 of the Policy, as well as the size and complexity of the issuer’s DC&P and ICFR. The documentation might take many forms (e.g., paper documents, electronic, or other media) and could be presented in a number of different ways (e.g., policy manuals, process models, flowcharts, job descriptions, documents, internal memoranda, forms, etc). Certifying officers should use their judgment, acting reasonably, to determine the extent and form of documentation. (2) Documentation of the control environment -To provide reasonable support for the certifying officers’ design of DC&P and ICFR, the certifying officers should generally document the key elements of an issuer’s control environment, including those described in subsection 6.7(2) of the Policy. (3) Documentation for design of DC&P – To provide reasonable support for the certifying officers’ design of DC&P, the certifying officers should generally document: (a) the processes and procedures that ensure information is brought to the attention of management, including the certifying officers, in a timely manner to enable them to determine if disclosure is required; and (b) the items listed in section 6.8 of the Policy. (4) Documentation for design of ICFR – To provide reasonable support for the certifying officers’ design of ICFR, the certifying officers should generally document: (a) the issuer’s ongoing risk-assessment process and those risks which need to be addressed in order to conclude that the certifying officers have designed ICFR; (b) how significant transactions, and significant classes of transactions, are initiated, authorized, recorded and processed; (c) the flow of transactions to identify when and how material misstatements or omissions could occur due to error or fraud; (d) a description of the controls over relevant assertions related to all significant accounts and disclosures in the financial statements; (e) a description of the controls designed to prevent or detect fraud, including who performs the controls and, if applicable, how duties are segregated; (f) a description of the controls over period-end financial reporting processes; (g) a description of the controls over safeguarding of assets; and (h) the certifying officers’ conclusions on whether a material weakness relating to the design of ICFR exists at the end of the period.