In a move designed to appease issuers worried about the cost of internal control reporting, the Canadian Securities Administrators today announced proposals that would require all publicly-traded companies to report on the effectiveness of their internal controls over financial reporting, but they will not require auditor attestation.

The proposals will put the Canadian system at odds with that of the United States where internal control reporting was introduced as part of the Sarbanes-Oxley reforms. However, the internal control reporting provisions in the U.S., known as SOX 404, proved controversial as many issuers complained that the cost involved with implementing the rules was excessive. Moreover, firms complained that auditing firms were the primary beneficiary of the rules as the requirement that they attest to the quality of firms’ controls was an expensive, time-consuming task.

The CSA says that, after extensive consultation and the debate underway in the U.S. about the merit of its approach, it “has decided not to proceed with an earlier proposal that would have required companies to obtain from their external auditors an audit opinion in respect of management’s evaluation of the effectiveness of internal controls over financial reporting.”

Instead, the CSA will expand the existing CEO/CFO certification requirements to include internal control reporting. CEOs will be required to certify that they have evaluated the effectiveness of the issuer’s internal control over financial reporting as of the end of the financial year and caused the issuer to disclose in its annual MD&A their conclusions about the effectiveness of internal control over financial reporting. However, issuers will not be required to obtain an internal control audit opinion.

These requirements will apply to all reporting issuers listed on the TSX and TSX Venture exchanges, other than investment funds, in all Canadian jurisdictions. The earliest that these requirements will apply is in respect of financial years ending on or after Dec. 31, 2007.

“All members of the CSA have agreed on an effective way to improve the quality, reliability and transparency of financial reporting for investors by requiring disclosure of the effectiveness of the internal controls that support the integrity of financial statements,” said Jean St-Gelais, chairman of the CSA, and president and CEO of Québec’s Autorité des marchés financiers, in a release.

“We believe the proposed additional disclosure will increase management’s focus on, and accountability for, the quality of internal controls over financial reporting. This will strengthen investor protection while appropriately balancing the costs and benefits associated with internal control reporting requirements for companies of all sizes,” he added.

The CSA says it intends to monitor implementation of the proposed approach and to evaluate its effectiveness. CSA staff will review the disclosure in the MD&A regarding internal control over financial reporting, together with the related certifications, as part of continuous disclosure reviews. “Based on the results of this monitoring and in light of experience in Canada and internationally, we will consider in the future whether a requirement for auditor involvement with the evaluation of the effectiveness of an issuer’s internal control over financial reporting would contribute in a cost-effective manner to further improving the quality and consistency of disclosure to investors,” it adds.

The CSA Notice 52- 313 regarding the status of internal control reporting requirements is available on several CSA members’ web sites.