Companion Policy to National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings

Part 9 Material Weakness

(1) Deficiency relating to the design of ICFR – A deficiency relating to the design of ICFR exists when:

(a) necessary components of ICFR are missing from the design;

(b) an existing component of ICFR is designed so that, even if the component operates as designed, the financial reporting risks would not be addressed; or

(c) a component of ICFR has not been implemented and, as a result, the financial reporting risks have not been addressed.

Subsection 6.6(2) of the Policy provides guidance on financial reporting risks.

(2) Deficiency relating to the operation of ICFR – A deficiency relating to the operation of ICFR exists when a properly designed component of ICFR does not operate as intended. For example, if an issuer’s ICFR design requires two individuals to sign a cheque in order to authorize a cash disbursement and the certifying officers conclude that this process is not being followed consistently, the control may be designed properly but is deficient in its operation.

(3) Compensating controls versus mitigating procedures – If the certifying officers identify a component of ICFR that does not operate as intended they should consider whether there is a compensating control that addresses the financial reporting risks that the deficient ICFR component failed to address. If the certifying officers are unable to identify a compensating control, then the issuer would have a deficiency relating to the operation of ICFR.

In the process of determining whether there is a compensating control, the certifying officers might identify mitigating procedures which help to reduce the financial reporting risks that the deficient ICFR component failed to address, but do not meet the threshold of being a compensating control because:

(a) the procedures only partially address the financial reporting risks or

(b) the procedures are not designed by, or under the supervision of, the issuer’s certifying officers, and thus may not represent an internal control.

In these circumstances, since the financial reporting risks are not addressed with an appropriate compensating control, the issuer would continue to have a deficiency relating to the operation of ICFR and would have to assess the significance of the deficiency. The issuer may have one or more mitigating procedures that reduce the financial reporting risks that the deficient ICFR component failed to address and may consider disclosure of those procedures, as discussed in section 9.7 of the Policy. In disclosing these mitigating procedures in its MD&A, an issuer should not imply that the procedures eliminate the existence of a material weakness.

If a deficiency or combination of deficiencies in the design or operation of one or more components of ICFR is identified, certifying officers should assess the significance of the deficiency, or combination of deficiencies, to determine whether a material weakness exists. Their assessment should generally include both qualitative and quantitative analyses. Certifying officers evaluate the severity of a deficiency, or combination of deficiencies, by considering whether (a) there is a reasonable possibility that the issuer’s ICFR will fail to prevent or detect a material misstatement of a financial statement amount or disclosure; and (b) the magnitude of the potential misstatement resulting from the deficiency or deficiencies. The severity of a deficiency in ICFR does not depend on whether a misstatement has actually occurred but rather on whether there is a reasonable possibility that the issuer’s ICFR will fail to prevent or detect a material misstatement on a timely basis.

(1) Reasonable possibility of misstatement – Factors that affect whether there is a reasonable possibility that a deficiency, or combination of deficiencies would result in ICFR not preventing or detecting in a timely manner a misstatement of a financial statement amount or disclosure, include, but are not limited to:

(a) the nature of the financial statement accounts, disclosures and assertions involved (e.g., related-party transactions involve greater risk);

(b) the susceptibility of the related asset or liability to loss or fraud (e.g., greater susceptibility increases risk);

(c) the subjectivity, complexity, or extent of judgment required to determine the amount involved (e.g., greater subjectivity, complexity, or judgment increases risk);

(d) the interaction or relationship of the control with other controls, including whether they are interdependent or address the same financial reporting risks;

(e) the interaction of the deficiencies (e.g., when evaluating a combination of two or more deficiencies, whether the deficiencies could affect the same financial statement amounts or disclosures); and

(f) the possible future consequences of the deficiency.

(2) Magnitude of misstatement – Various factors affect the magnitude of a misstatement that might result from a deficiency or deficiencies in ICFR. These factors include, but are not limited, to the following:

(a) the financial statement amounts or total of transactions relating to the deficiency; and

(b) the volume of activity in the account balance or class of transactions relating to the deficiency that has occurred in the current period or that is expected in future periods.

It is a matter for the certifying officers’ judgment whether the following situations indicate that a deficiency in ICFR exists and, if so, whether it represents a material weakness:

(a) identification of fraud, whether or not material, on the part of the certifying officers or other senior management who play a significant role in the issuer’s financial reporting process;

(b) restatement of previously issued financial statements to reflect the correction of a material misstatement;

(c) identification by the issuer or its external auditor of a material misstatement in the financial statements in the current period in circumstances that indicate that the misstatement would not have been detected by the issuer’s ICFR; and

(d) ineffective oversight of the issuer’s external financial reporting and ICFR by the issuer’s audit committee.

If the certifying officers identify a material weakness relating to the design or operation of ICFR existing as at the period-end date, the certifying officers could not conclude that the issuer’s ICFR is effective. Certifying officers may not qualify their assessment by stating that the issuer’s ICFR is effective subject to certain qualifications or exceptions unless the qualification pertains to one of the permitted scope limitations available in section 3.3 of the Instrument. As required by paragraph 6 in Form 52-109F1, the certifying officers must ensure the issuer has disclosed in the annual MD&A the certifying officers’ conclusions about the effectiveness of ICFR at the financial year end.

(1) Disclosure of a material weakness relating to the design of ICFR – If the certifying officers become aware of a material weakness relating to the design of ICFR that existed at the end of the annual or interim period, the issuer’s annual or interim MD&A must describe each material weakness relating to design, the impact of each material weakness on the issuer’s financial reporting and its ICFR, and the issuer’s current plans, if any, or any actions already undertaken, for remediating each material weakness as required by paragraph 5.2 of Form 52-109F1 and Form 52-109F2.

(2) Disclosure of a material weakness relating to the operation of ICFR – If the certifying officers become aware of a material weakness relating to the operation of ICFR that existed at the financial year end, the issuer’s annual MD&A must describe each material weakness relating to operation, the impact of each material weakness on the issuer’s financial reporting and its ICFR, and the issuer’s current plans, if any, or any actions already undertaken, for remediating each material weakness as required by subparagraphs 6(b)(ii)(A), (B) and (C) of Form 52-109F1. If a material weakness relating to the operation of ICFR continues to exist, the certifying officers should consider whether the deficiency initially relating to the operation of ICFR has become a material weakness relating to the design of ICFR that must be disclosed in the interim, as well as the annual MD&A under paragraph 5.2 of Form 52-109F1 and Form 52-109F2.

(3) Description of a material weakness – Disclosure pertaining to an identified material weakness should provide investors with an accurate and complete picture of the material weakness, including its effect on the issuer’s ICFR. Issuers should consider providing disclosure in the annual or interim MD&A that allows investors to understand the cause of the material weakness and assess the potential impact on, and importance to, the financial statements of the identified material weakness. The disclosure will be more useful to investors if it distinguishes between those material weaknesses that may have a pervasive impact on ICFR from those material weaknesses that do not.

If an issuer commits to a remediation plan to correct a material weakness relating to the design or operation of ICFR prior to filing a certificate, the annual or interim MD&A would describe the issuer’s current plans, or any actions already undertaken, for remediating each material weakness.

Once an issuer has completed its remediation it would disclose information about the resulting change in the issuer’s ICFR in its next annual or interim MD&A as required by paragraph 7 of Form 52-109F1 or paragraph 6 of Form 52-109F2.

If an issuer is unable to, or chooses not to, remediate a material weakness, but identifies mitigating procedures that reduce the impact of the material weakness on the issuer’s ICFR, then disclosure about these mitigating procedures could provide investors with an accurate and complete picture of the material weakness, including its effect on the issuer’s ICFR. If an issuer does not plan to remediate the material weakness, regardless of whether there are mitigating procedures, the issuer would continue to have a material weakness that the issuer must disclose in the annual or interim MD&A.