May 2006

• A tool to help you set your agenda
  • Early Warning Indicators
  • Corporate Governance Practices
  • CSA Notice 52-313
• Some of the Canadian Rulings Released Since 2004
• In case you missed
• Save the date

A tool to help you set your agenda

Welcome to the current issue of On the Agenda, where we continue to raise the hot topics that need to be addressed at your Board and Committee meetings. We also provide the relevant resources to allow you to understand how these events may affect your company.

Year-end meetings are now well behind, and the focus is now on the new fiscal year. In this issue of On the Agenda, we will focus on helping Directors identify early warning indicators that may be signs that their company is ailing. As well, we will report on the interim findings of a Deloitte study regarding corporate governance best practices. Finally, we will provide an update of recent developments in corporate governance, specifically CSA notice 52-313. We have prepared the following information and tools:

• Early Warning Indicators
• Corporate Governance Practices
• CSA Notice 52-313

Do not hesitate to contact your Deloitte partner or one of our corporate governance experts.

Early Warning Indicators

We start this issue of On the Agenda by considering the Board’s role in risk identification.  National Policy 58-201 states that the Board of Directors is responsible for the identification of the principal risks of the issuer's business, and for ensuring the implementation of appropriate systems to manage these risks.  The question then becomes how best to achieve this objective in an era of constant change?  Douglas Enns, of Enns & Associates, has developed an approach to the identification and effective utilization of Early Warning Indicators.  Mr. Enns believes that governance reform has placed the Board front and centre in the reporting and assessment process, and that these developments have improved the Board’s ability to identify emerging issues.

Mr. Enns states that the Senate Sub-Committee that investigated the failure of Enron concluded that the Board missed “at least a dozen” red flag indicators and by not having taken action on them was thereby complicit in Enron’s demise.

Mr. Enns has determined that only a structured and systematic process will identify valid Early Warning Indicators.  He has developed some suggestions for Boards to consider in structuring a process to identify Early Warning Indicators:

1. Select an approach:

   1. Identify key components of success and failure and then consider possible Early Warning Indicators; or

   2. Identify key risks and then consider possible Early Warning Indicators; or

   3. Research Early Warning Indicators and then compare the organization; or

   4. Use of a combination of the above approaches.

2. Bias is inevitable. Assess Management and Board behavior as a source of risk.

3. At least annually, devote a meaningful period of time to assessing key risks and Early Warning Indicators. A portion of the in-camera session at the beginning and at the end of the regular Board meeting should be devoted to forward looking issues of concern to the Board.

Finally, here are some questions that Boards should ask to begin the process of identify Early Warning Indicators in their organizations:

For further information on this topic, download the following document: Early-Warning-Indicators.

Deloitte’s objective is to promote quality and excellence in audit committee practices. To this end, we performed a study whereby we reviewed compliance with required governance practices and identified best practices adopted by audit committees.

In preparing the study, we took a twofold approach:

1. We assessed the 2005 public disclosures made by Canadian reporting issuers using a series of best practices encouraged by the various CSA Instruments as well as additional practices identified by Deloitte through its relationships with corporate governance leaders.

2. We benchmarked the current audit committee practices observed by our leaders at Deloitte clients to our Audit Committee Performance Evaluation. This evaluation includes requirements as well as best practices regarding roles and responsibilities incumbent to audit committees.

This report represents the interim results of our study as we are still very early in the 2005 financial reporting season. We will continue our study over the course of the next few months, and a final report will be released in the fall of 2006.

To this point in time, our study has covered close to 30 reporting issuers for which the 2005 annual public filings have been made. The results of our study have been reported in a manner which is consistent with the twofold approach we took while performing our research.

Our Findings

Top Five Areas of Strongest Compliance identified through Review of the Public Disclosures

Five Areas for Improvement identified through Review of the Public Disclosures

Top Five Areas of Strongest Compliance identified through Review of the Performance Evaluations

1. Audit committee members meet the required standards for director independence.

2. The audit committee reports its proceedings and recommendations to the board after each committee meeting.

3. The audit committee reviews earnings releases (including pro forma or non-GAAP information, and other financial information or earnings guidance) before they are released to third parties.

4. The audit committee reviews the appropriateness of the audit fees paid to the external auditor.

5. The audit committee pre-approves all services (audit and non-audit) provided by the external auditor.

Five Areas for improvement identified through Review of the Performance Evaluations

1. The audit committee understands and approves management’s fraud risk assessment and has an understanding of identified fraud risks.

2. In camera sessions with the audit committee by itself are held at the beginning of the meeting to get the views of members on the priorities for the meeting and issues to be focused on.

3. The audit committee meets periodically with the company’s disclosure committee (committee responsible for reviewing the company’s disclosure procedures).

4. The audit committee comprehensively reviews management’s representation letters to the external auditors (including making inquiries about any difficulties obtaining the representations).

5. The audit committee, in conjunction with the nominating committee (or its equivalent) as appropriate, creates a succession/rotation plan for audit committee members, including the audit committee chair.

Conclusion

If you are interested in benchmarking your audit committee’s practices and disclosures against our database, please contact your Deloitte partner to arrange access to the assessment form. Once completed, your Deloitte partner will guide your Committee through the results.

Deloitte can help you to develop an action plan to improve your audit committee’s practices and procedures.

We can also develop learning materials tailored to your company’s situation to assist you in meeting your director education plan objectives.

Finally, we can help you to develop an appropriate calendar and agenda for your fiscal 2006 audit committee activities. Deloitte’s objective is to ensure your audit committee is as effective as possible. Let us help you to go beyond compliance.

Additional Resources:

On March 10, 2006, the CSA issued notice 52-313, which announced that the CSA would not be proceeding with MI 52-111, Reporting on Internal Control Over Financial Reporting.  Instead, the CSA will propose an alternative approach to reporting on internal controls over financial reporting through amendments to an existing instrument, MI 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings.  This new proposal is expected to be issued sometime later this year.  Although the specific details of the new approach to reporting on internal control over financial reporting are not yet known, there are sufficient details available to get a clear understanding of the CSA’s intentions.  The differences from the past proposal are as follows:

• CEOs and CFOs of reporting issuers will be required to evaluate the effectiveness of ICFR, but will not have to issue a separate management report on internal control;
• Annual CEO/CFO certificates will be expanded to state that they have evaluated the effectiveness of the issuer’s ICFR;
• The conclusions of the CEO’s and CFO’s evaluation of the effectiveness of ICFR are to be disclosed in the issuer’s annual MD&A;
• Issuers will not be required to obtain their external auditors’ opinion of management’s assessment of the effectiveness of internal control or the auditors’ own assessment of the effectiveness of internal control;
• The requirements will apply to all reporting issuers, including all public companies listed on the TSX and TSX-V, in all Canadian jurisdictions; and
• The proposals will not come into effect before financial years ending on or after December 31, 2007.

To determine how these changes will impact your company, included below is an updated version of the CSA’s flight plan as well as a colour coded copy of the CEO/CFO annual certificates which will be required in 2006 and 2007.

Form 52-109F1 - Certification of Annual Filings

Date: ...............

_______________________

[Signature]

[Title]

In 2007, the final paragraph of the certification will read as follows:

In case you missed...

Save the date...

Upcoming Deloitte events:

• Our second season of the Directors' Series will continue on Tuesday June 6^th with a session on CSA Notice 52-313 : Implications for the Board.
• This session be our final session of the 2005/2006 series – stay tuned for the third season which will open in the fall.

• Watch for your invitation

• Review our past Deloitte Update Webcasts – topics include financial instruments, a technical update, and a U.S. GAAP review

Tell your Deloitte Partner that you're interested in these events