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ONTARIO SECURITIES COMMISSION, INVESTMENT FUNDS AND STRUCTURED PRODUCTS BRANCH -- IFRS RELEASE NO. 2

AUDITOR'S INVOLVEMENT WITH INTERIM FINANCIAL REPORTS

Further to IFRS Release No. 1 issued on September 30, 2014 by the Investment Funds and Structured Products Branch of the Ontario Securities Commission (OSC), staff continues to review the first IFRS interim financial reports for the period ended June 30, 2014. This communication is to alert investment fund issuers and their advisers in a timely manner to staff findings to date.

The requirement relating to an auditor's involvement with interim financial reports is set out in section 2.12 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106). This is a long-standing requirement that came into effect in 2005. While NI 81-106 does not require an investment fund that is a reporting issuer to engage an auditor to review its interim financial report, it does require a reporting issuer to disclose in an accompanying notice if an interim review has not been performed by its auditor. In the course of our IFRS reviews, we have found non-compliance with this disclosure requirement and, in such cases, have requested that investment fund issuers refile their interim financial reports with the required disclosure.

For those investment funds that have yet to file their first IFRS interim financial reports, we encourage the fund, its manager and advisers to review this release to inform their first IFRS filings.

Investor Impact

When an investment fund issuer has not engaged its auditor to perform a review, it is critical that the investment fund issuer clearly disclose this fact in a notice accompanying its interim financial report. The notice is important as it alerts investors and other users of the financial statements that the investment fund's auditor did not complete a review of the interim financial report. With this disclosure, users of the financial statements are able to consider the degree of reliance they may wish to place on an investment fund's interim financial report when deciding to buy or sell investments throughout the year.

When the first IFRS interim financial reports are not accompanied by a notice, it implies that an auditor review was conducted and such review encompassed the transition from pre-changeover Canadian GAAP to IFRS. The absence of a notice not only implies that a review was conducted, but that such review was able to be completed and the auditor did not express a reservation. This information, in staff's view, is of particular importance at this time given that there has been a significant transition in accounting principles. In our view, the exclusion of a notice in the absence of a review is a material deficiency. We understand that there could also be a concern that some responsibility for the interim report incorrectly attaches to the auditor given the mistaken perception of auditor involvement.

Review Results

Where it appeared that the interim financial reports had been reviewed by the auditor, we asked investment funds to confirm that their interim financial reports had been reviewed in accordance with Section 7060 Auditor Review of Interim Financial Statements of the CPA Canada Handbook -- Assurance (Section 7060 of the Handbook). Some investment funds confirmed that an auditor did not perform a review of their interim financial reports and yet these statements were not accompanied by a notice indicating that fact. The reasons cited for non-compliance by investment funds included: a general lack of awareness about their continuous disclosure obligations; confusion about what would constitute a review under securities legislation and Section 7060 of the Handbook; and, a misconception that clearly marking interim financial reports as "unaudited" would be sufficient to meet the requirements.

We remind financial statement preparers of section 3.4 of Companion Policy 81-106CP Investment Fund Continuous Disclosure which suggests that the notice normally should appear immediately before the interim financial report, in a manner similar to an auditor's report that accompanies annual financial statements. Item B-1 of CSA Staff Notice 81-315Frequently Asked Questions on NI 81-106 Investment Fund Continuous Disclosure, published in 2005, also points out that the requirement to disclose that an auditor has not reviewed the interim financial report is not fulfilled by marking the financial statements as "unaudited".

Regulatory Consequences and Remedies

We believe that investors and other users of the financial statements need to be able to discern the level of auditor involvement in an investment fund's interim financial report when making investment decisions. Accordingly, staff has requested investment fund issuers to refile their interim financial reports for the period ended June 30, 2014 with the required notice, and accompanied by a news release explaining the information being filed.

It is the responsibility of every investment fund issuer to meet its continuous disclosure reporting obligations. We remind investment fund managers that an investment fund that has filed financial statements or management reports of fund performance that do not comply with securities legislation or IFRS, could be placed on the list of defaulting reporting issuers maintained on the OSC website until the default is remedied. A content deficiency in any such documents could also lead to the reporting issuer being placed on the default list. For more information, please refer to OSC Policy 51-601 Reporting Issuer Defaults and OSC Staff Notice 51-711 List of Refilings and Corrections of Errors as a Result of Regulatory Reviews.

Conclusion

We will continue to monitor investment fund issuers' compliance with the disclosure requirements relating to the auditor's involvement with interim financial reports. Over the next year, this will form part of our financial examiner's process of reviewing continuous disclosure filings. We urge investment fund issuers and their audit committees, if applicable, to consult with their auditors to confirm the scope of the auditor's review engagement and determine whether a notice is required to be attached to the interim financial reports.

We will issue further releases with additional observations as our reviews continue, in order to assist investment fund issuers and their advisers with their IFRS filings.

Questions

Questions may be referred to the following staff members of the Investment Funds and Structured Products Branch:

Stacey Barker
Ritu Kalra
Sovener Yu
Senior Accountant
Senior Accountant
Accountant
416-593-2391
416-593-8063
416-593-2395
<<sbarker@osc.gov.on.ca>>
<<rkalra@osc.gov.on.ca>>
<<syu@osc.gov.on.ca>>

November 26, 2014