©  Copyright 2002 Rogers Media. The following article first appeared in the March 2002 edition of BENEFITS CANADA magazine.

Accountants are on the hot seat. with the collapse of a giant like Enron Corp., it's obvious that just about every securities watchdog in the U.S. let a whale of a problem slip through their nets.

Fear that the balance sheets of other corporate entities might be subject to the same slippery accounting practices that brought Enron down has led to widespread mistrust among investors.

This has driven down equity markets worldwide. Now, in the aftermath, investors want to know who is responsible for checking the books.

CSA NOTICE
In an effort to address concerns about accounting practices, the Canadian Securities Administrators (CSA) has issued a notice to all staff about the widespread use of unconventional measures in company earnings reports. The timely notice outlines the CSA's expectations regarding the publication of earnings measures other than those outlined by generally accepted accounting principles (GAAP). The notice warns that, in recent years, it has become common for some Canadian firms to stray from GAAP in reports issued to investors and the media.

Opaque terms such as "pro-forma earnings," "operating earnings," "cash earnings," "EBITDA" (earnings before interest, taxes, depreciation and amortization) and "adjusted earnings" are sometimes used to cover up the less-than-satisfactory performance of corporate clients. And they confuse many retail investors. As the CSA points out, these non-GAAP earnings measures lack a standard, agreed-upon meaning. More to the point, they don't present a complete picture of how well or poorly a company is doing.

Cameron McInnis, senior accountant with the Ontario Securities Commission in Toronto, says there is no specific securities rule that deals with the use of additional information such as non-GAAP earnings measures in company reporting. However, there are rules that state companies must not use misleading information. If they do, they are clearly in violation of the Canadian Securities Act. "It is hoped that companies are going to take the guidance in the notice and use it to act responsibly to their shareholders," says McInnis.

The CSA notice outlines six main guidelines for issuers using non-GAAP earnings measures in their reports. In the recommendations, issuers are encouraged to discuss why they are using non-GAAP earnings measures if they do so. As McInnis explains: "if a company has undergone a restructuring and they had restructuring charges and wanted to show their results without the effect of these charges, they would call that 'adjusted earnings.' We want the company to tell us why they are adjusted--what's the reason and why are they using this?"

Canada's securities regulators would also like to see a "clear reconciliation" between non-GAAP and GAAP earnings measures in all reports. This means that when issuers use non-GAAP earnings measures they should be presented prominently with the earnings measures for the period in accordance with GAAP.

SETTING AN EXAMPLE
One example of a company that has taken steps to provide greater transparency in its reports is Nortel Networks. Following criticism that its third-quarter earnings report was confusing, Nortel made its fourth-quarter report more transparent. Improvements include a clearer reconciliation between non-GAAP and GAAP measures and more cautious language.

Nortel is a positive example of change. But how likely is it that other companies will follow suit--especially if they have not been subject to the level of public scrutiny that Nortel has faced?

As the Enron case has proven, accounting standards are central to the integrity of any capital-market system. The CSA's guidelines are commendable, but without specific legislation the question still remains--do Canada's securities watchdogs have the teeth needed to prevent disasters like Enron from happening here? BC

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."