The B.C. Securities Commission has released the results of an independent study that casts doubt of the Ontario Security Commission’s estimate that its proposed corporate governance rules will mean between $1 billion and $10 billion in benefits to investors.

BCSC chair, Doug Hyndman, spells out the findings in a letter to OSC chair David Brown, which comments on proposed Multilateral Instruments 52-108 Auditor Oversight, 52-109 Certification of Disclosure in Companies’ Annual and Interim Filings, and 52-100 Audit Committees, published by the Canadian Securities Administrators on June 27, and the related cost-benefit analysis published by the OSC.

The OSC has proposed that company executives be required to certify their financial statements and rules surrounding audit committees.

The BCSC hired Dr. April Klein, a Professor at the New York University Stern School of Business, to review the OSC’s analysis. It asked her to focus on the proposed audit committee instrument, which is supposed to generate 90% of the projected benefits.

In the letter to the OSC, Hyndman says that “Dr. Klein’s analysis suggests that our initial skepticism was warranted,” noting that she says there are several flaws in the study, any one of which could reduce the demonstrable level of those benefits to zero. Klein’s review suggests that the costs could well exceed the benefits.

Klein argues that the OSC study uses only one measure of shareholder benefits, economic value-added, which is extremely difficult to measure, she believes that alternative measures of shareholder benefits are necessary.

The OSC study also uses only one measure of earnings management, earnings smoothing, which she says is the least appropriate measure of earnings management.

She also argues that the study’s calculation of earnings smoothing is inherently flawed, that the analysis fails to account for important variables, and that it includes several calculation errors.

Klein concludes, “Given these errors, I put little stock in the monetary numbers in [the table that sets out the claimed benefits of $1billion to $9.2 billion].”

Based on her review, Hyndman says, “The benefits, from the audit committee rule at least, appear to be very questionable.”

“Given the questionable benefits and the cost concerns arising from the U.S. experience, we suggest that you and the other CSA members reconsider whether it is appropriate to proceed with the certification and audit committee instruments in their present form,” Hyndman concludes.

BCSC letter
http://www.bcsc.bc.ca/Publications/Hyndman_OSC.pdf