Changing Your Auditors - Brian Koscak Going Public in Canada

Law & Accounting Matters - May 2009

Brian Koscak Cassels Brock

Changing Your Auditors

Part I – The Legal Requirements1

Brian Koscak and Greg Hogan
Cassels Brock & Blackwell LLP

As part of obtaining a public listing or subsequent to a public listing, an “issuer2 may determine that it is appropriate to change its current auditors. Making such a change is not a simple process, nor is it necessarily something that can be completed quickly.  If an issuer is contemplating changing its auditor, it will need to address the requirements of its governing corporate statute and the requirements of any applicable securities laws (if the issuer is a “reporting issuer3 at the time).  In addition, the auditors will need to comply with the obligations imposed on them under their professional standards.

Circumstances Involving a Change of Auditor

While issuers and auditors may have a long working history together, there are circumstances where an issuer may need to change its auditors. These might include the following:

(i)       Circumstances when an issuer’s auditor is not registered with the Canadian Public Accountability Board (“CPAB”) -  under National Instrument 52-108 – Auditor Oversight, reporting issuers who file their financial statements with one or more Canadian securities regulators (the “Regulators”) are required to have auditors that participate in CPAB’s oversight program.  An auditor must be registered with CPAB on the date that the auditor signs off on an audit report filed with the Regulators for an issuer;

(ii)     An issuer may decide to dual list its shares in the United States -  the rules of the Public Company Accounting Oversight Board (“PCAOB”) (CPAB’s counterpart in the United States) and the Sarbanes-Oxley Act require an auditor to be registered with the PCAOB to prepare or issue an audit report with respect to any issuer.  Accordingly, a dual-listed issuer must engage an auditor that is both CPAB and PCAOB registered which may require a change of auditor;

(iii)    Following a reverse take-over or other business combination – in these circumstances, more than one auditor may be involved.  Issuers will have to make a choice as to which auditor best suits the needs of the resulting issuer going forward;

(iv)    The issuer’s business is evolving and/or growing - as an issuer matures its business becomes more robust and complex. For example, issuers with operations in multiple countries with different tax jurisdictions require an auditor that can operate effectively in these locations;

(v)      Conflict of Interest - The current auditor may have a conflict of interests or a loss of independence, thereby having to resign from the engagement; or

(vi)    Other Reasons – an issuer may simply want to change its auditor because of its changing needs, relationships or for other business reasons. 

While it may be desirable, an issuer cannot simply change auditors at any time, at least not without the cooperation of the current auditor and subject to certain requirements under corporate and securities law.

1 Current as of May 20, 2009.

2An “issuermeans a person or company who has outstanding, issues or proposes to issue, a security.

3  A “reporting issuer” in connection with the Province of Ontario includes, but is not limited to, an issuer: (a) that has filed a prospectus and for which a receipt has been obtained under the Securities Act (Ontario); and (b) any of whose securities have been listed and posted for trading on any stock exchange in Ontario recognized by the Ontario Securities Commission (which includes the CSE), regardless of when such listing and posting for trading commence.

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