Accountability e-lert

OSC Staff Notice on Emerging Markets Issuer Review Reporting

The OSC recently released OSC Staff Notice 51-719 Emerging Markets Issuer Review which summarized the results of its targeted review of Ontario reporting issuers focused in emerging market jurisdictions. In performing this review, OSC staff contacted issuers and their advisors, and organizations such as Canadian exchanges, CPAB and other provincial securities regulators.

In selecting issuers to review, Staff focused on issuers with the following characteristics:

  • Those whose mind and management are largely outside of Canada; and
  • Those whose principal active operations are outside of Canada, in regions such as Asia, Africa, South America and Eastern Europe.

Staff selected and reviewed 24 issuers listed on Canadian exchanges, which represented more than 50% of the emerging market issuers for which Ontario is the principal regulator. The issuers operated in a variety of countries and included issuers distributed across the following industries:

Industry % of Issuers Reviewed
Mining 44%
Diversified industries 20%
Oil and gas 13%
Technology and clean energy 6%
Forestry 4%
Other 13%

The review involved a broad examination of the public disclosure record of each selected issuer and an examination of the issuer’s board and audit committee activities. In addition, staff examined the audit files of auditors of the selected issuers. Staff also reviewed the due diligence activities undertaken by issuers’ underwriters, focusing on the depth of the due diligence they performed when underwriting a public offering of securities. Finally, staff examined whether the core processes of the exchanges are sufficiently robust to address the unique concerns raised by emerging market issuers and if the review processes undertaken by the exchanges would benefit from additional due diligence in the emerging market context.

Staff identified four principal concerns which are discussed below together with the key concerns noted in each of these four areas.

Concern 1: Adequacy of issuer governance and disclosure

Staff concerns included the following:

  • Boards and Audit Committees needed to have a better understanding of the business and operating environment of emerging market issuers.
  • Boards appeared to have insufficient contact with senior management in the emerging market.
  • Complex business structures were common; however, the appropriateness and transparency of the structures was lacking as were controls to manage the risks arising from the complexity.
  • Management and board processes to identify and approve related party transactions could be improved. Disclosures related to related party transactions were incomplete or lacked clarity for some issuers.
  • Risk management processes and internal controls were not sufficiently robust to address the risks faced by emerging market issuers. At times, boards failed to identify, understand or manage risks. Specific risk highlighted includes risks related to political factors, the legal and regulatory framework, the movement and conversion of currency and legal title to assets.
  • Risk disclosures by issuers were not as specific or relevant as they should have been to be helpful to investors.

Concern 2: Adequacy of the audit of the annual financial statements

Overall, staff was concerned that auditors may not have performed sufficient procedures in some instances to understand and appropriately scrutinize the information provided to them by an issuer and/or foreign ‘component’ auditor. The matters noted in the OSC report are largely consistent with those noted by CPAB in its recently issued special report entitled Auditing in Foreign Jurisdictions.

Staff noted the following specific concerns related to the auditor’s work:

  • Level of professional skepticism by auditors when examining information gathered in the course of the audit was generally lacking.
  • The degree of knowledge of local cultural and business practices at times appeared insufficient.
  • The level of involvement by group auditors in work performed by foreign component auditors was insufficient.
  • Language barriers were adversely impacting the auditor’s ability to communicate with management or examine documentation.

Staff also indicated that inability to access working papers of foreign component auditors hampered their review.

Concern 3: Adequacy of the due diligence process conducted by underwriters in offerings of securities

Staff concerns included the following:

  • There were significant variations in due diligence policies, procedures and practices applied by underwriters. Further, it was not evident that the approvals process called for by the internal policies was followed.
  • The level of professional skepticism and rigor applied in the due diligence process was lacking.
  • The due diligence information examined contained little documentation or discussion of the risks association with the issuer’s operations.
  • The amount and degree of due diligence documentation varied widely.

Concern 4: Adequacy of the exchange listing approval process conducted by Canadian exchanges

Staff observed that while the exchanges have supplemental procedures and polices geared towards emerging market issuers, a reexamination of the sufficiency of the exchange’s procedures and policies may be warranted in light of an increased understanding of the risk associated with emerging markets.

Staff noted the following specific concerns:

  • There is no requirement for an emerging market issuer whose primary listing is in Canada to maintain a meaningful presence in Canada.
  • Transparency is lacking when the exchange waives some of its listing requirements.
  • The exchange places significant reliance on the role of sponsors to conduct due diligence of prospective listing; however, generally there does not appear to be publicly available information regarding the sponsor’s role in a new listing.


The Staff Notice lists a number of recommendations and next steps for each of the four concerns noted above. Staff expressed an expectation that issuers, auditors, underwriters and their other advisors, as well as exchanges will take immediate steps to improve their practices to effectively discharge their responsibilities. As such, we have highlighted the recommendations directed at issuers related to governance and disclosure so that management and directors of emerging market issuers can consider the recommendations.

These recommendations included:

  • Establishing guidance to improve corporate governance practices, particularly in the areas related to the responsibilities of the board and its committees to understand the business, operating environment and risks for issuers whose principal operations are in foreign jurisdictions
  • Clarifying the regulatory expectations of CEOs and CFOs in conducting reasonable due diligence to support their certifications for companies whose principal operations are in foreign jurisdictions
  • Requiring better disclosure to investors of complex corporate structure and their purpose
  • Requiring better explanations of risk factors relevant to emerging market issuers
  • Raising investor awareness of risks associated with investments in issuers whose principal operations are in foreign jurisdictions
  • Ensuring the maintenance of appropriate books and records in Canada
  • Considering a minimum language competency component for Canadian – resident board members in the applicable local language where the issuer’s principal business operations are located
  • Considering minimum Canadian director residency requirements.

Related Information

OSC Staff Notice
51-719 Emerging Markets Issuer Review

CPAB Special Report
Auditing in Foreign Jurisdictions

e-Lert Newsletter – Recent issues

Audit Committee Institute – Canada


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