Worlds Apart: Supreme Court rulings vs. Canadian reporting standards
Investor protections have been stripped away, says Al Rosen
TORONTO – Do money managers comprehend the disjunction between Canadian financial reporting standards and the rulings of the Supreme Court of Canada? Evidence convincingly shows that a batch of financial tricksters have known the vast difference well and became beneficiaries. Investigators regularly see the huge separation when corporate financial failures occur, when prosecutions of alleged frauds are road blocked. In contrast, the average investor appears unaware of absent protections, and suffers the surprise consequences of lost savings.
Contrary to our accounting profession’s assertions that the objective of financial information is to be “useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity,” the Supreme Court has erected serious barriers to curtail investors’ financial recoveries.
Most civil lawsuits, if pursued, are forced to be commenced by the failed company itself, which too often was governed by the alleged financial tricksters, who helped to bankrupt the company. Thus, ways have to be devised by lawyers to circumvent, if possible, the unfathomable Supreme Court version of alleged narrow objectives of reporting and investor protection.
Extensive consequences continue to arise in Canada. For example, knowledgeable investors do not bother to invest in Canadian public companies, when tricksters can so easily steal one’s savings (including pension money). Investment dollars and jobs are being sent to other countries.
The silence from our lawmakers in not having drastically revised Companies Acts and Securities Acts, in light of Supreme Court biases, sends a clear message to those who choose to prolong their thievery.
How did Canada drop to this dismal current state, where maximum risk has to be borne by investors and creditors?
The Supreme Court of Canada’s record
It began with an Supreme Court decision in 1997 involving Winnipeg’s Hercules Managements. Its auditors successfully argued that the purposes of audited financial statements were not as advertised by public accountants. Their purpose was restricted to shareholders (not potential investors) using financial statements to evaluating management.
Corporate management was authorized by the Supreme Court to prepare financial statements that shareholders would have to use to evaluate the competence of this same management. Such a philosophy bears a strong resemblance to eight-year-olds being permitted to prepare their own school report cards to take home to their parents. Financial accounting in Canada simply allows too many choices for the Supreme Court decision on the topic to make even tiny sense.
Rather than seeing an outcry to such an Supreme Court decision, silence in Canada continues to prevail. Worse, external auditors did not raise concerns that the 1997 decision was contrary to the Canadian standards, which stress the importance of investor and creditor decision-making. Two decades of accountants and auditors have come into the profession without being taught about the vast gulf between Supreme Court decisions, and what Canadian standards require.
The decade following 1997 is now famous for the failures of Nortel, Livent, the business income trusts and much more. A coincidence? The decade thereafter has brought forth Sino-Forest Corporation, Poseidon Concepts and many others. Some pensions and savings have vanished.
The worst was yet to come. Christmas 2017 saw the Supreme Court’s decision on Livent, which stripped away remaining protections, especially those that existed in securities acts across Canada. Lower court decisions since the Livent decision can only be described as depressing for investors. Yet no correction to the Court’s narrow objectives of financial reporting have been enacted by lawmakers.
Perhaps more puzzling is why Canada’s external auditors are somehow not comprehending that they are “self-inflicting” oncoming deep injuries. Audited financial statements are essentially obsolete, given the Supreme Court’s decisions. Investors are being pushed away as consumers by auditor silence. In turn, we are telling foreign investors not to invest in Canada, because we do not intend to devise legislation that shares risks and protect investors.
In the last 10 years, the TSX has been one of the worst performing stock markets in the entire world. As Maclean’s Magazine put it, “if you were unlucky enough to buy into the stock market at the peak in 2008, just before the financial crisis hit full force, your gains (excluding dividends) wouldn’t buy you much more than two loaves of price-fixed bread at Loblaws and a bag of President’s Choice sour grapes.”
Some pundits blame the collapse of oil prices. Others blame the lack of vibrant tech sector and champions. Is it possible, however, that foreign investors avoid Canada and its Wild West reputation?
Why are we remaining silent?
Individual accountants who can see what is occurring are unprofessionally remaining quiet. Lawmakers today are ignoring growing crises in marijuana, REITs, pension and other loose Canadian financial reporting. Instead, time is being wasted on archaic distractions such as a national version of provincial securities commissions that have clearly been failures at minimizing investor losses, through their inaction.
Yes, serious topics such as global warming are important and complex. But the outright swindling of investors in Canada is a serious, homegrown problem that can be cured by us, if lawmakers have the political will.
The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers.
Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research. They are the co-authors of Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth. Learn more at Accountability Research Corporation and Rosen & Associates Limited.