If the latest proposal from Canadian regulators requiring Canadian public companies to evaluate their internal controls moves forward, Moody’s Investors Service says it will apply the same methodology currently used to assess internal control weaknesses already in use in the U.S. to Canadian companies, too.

On March 10, the Canadian Securities Administrators released a notice indicating that they will require the CEOs and CFOs of Canadian public companies to certify their evaluations of the
effectiveness of their companies’ internal controls over financial reporting. This is a significant change from the initial proposal and current US requirements because it does not require management’s assessment to be audited by its independent auditors.

“While Canada’s proposal does not go as far to promote sound control environments relative to the US’s Section 404 requirements, Moody’s will apply the same methodology when it is considering control weaknesses cited by Canadian companies. This is the same approach we follow when US companies report control problems,” says Moody’s vice president and senior accounting analyst, Waylon Iserhoff. “Consequently, the credit quality of Canadian companies will not be distinguished solely on differences in regulatory requirements for management or auditor
reporting on controls as we have no objective or consistent means of doing so.”

Moody’s says it would expect Canadian companies to see an impact on credit ratings from reporting that is similar to that seen among US companies after Section 404 of the Sarbanes-Oxley Act went into effect last year. In the US, there have been instances where disclosures of
material weaknesses in internal controls led to negative rating actions.

“The reporting on internal controls encourages control quality, which has a direct bearing on the quality of a company’s financial reporting,” says Iserhoff, co-author of a report on the proposal. “The quality of financial reporting is an important consideration in the assessment of credit risk.”

Moody’s says its confidence in the financial reporting in any country ultimately depends on how frequently companies in that country engage in financial reporting that is misleading.