CCN Matthews: Corporate Reporting, Corporate Accounting Scandals - Neil Baird

Before making new laws, European legislators should take a look at the positive and negative effects of North America’s regulations on corporate reporting, says Neil Baird, vice-president at CCNMatthews.

It is a law of physics - and a characteristic of human behaviour as well, it seems. For every action, there is an equal and opposite reaction. Legislators and bureaucrats in the developed world reacted swiftly (in some cases) and strongly (too strongly for some) to the corporate accounting scandals perpetrated by a few North American and European companies earlier this decade.


The Sarbanes-Oxley Act of 2002 was designed to bolster confidence in US capital markets. However, ever since it was introduced, there has been a rising chorus of complaints about the cost of adhering to the law. In response to these complaints, the Securities and Exchange Commission (SEC) recently set up a committee to examine the impact of SOX - particularly on smaller public companies.

It is Section 404 of SOX that has proved to be a lot more expensive than the SEC expected - ‘at least ten times more expensive’, according to Alex Davern, CFO of National Instrument Corp and a member of the SEC’s internal control committee. Section 404 stipulates that companies must have an external auditor review and report on the effectiveness of a company’s internal controls and financial reporting – and to take action to remedy any identified weaknesses.


Canada’s National Instrument 51-102 is that country’s reaction. Since NI 51-102 was introduced, financial statements issued by Canadian public companies have shown a marked increase in length. In 2005, the average size of quarterly earnings news releases issued by Canadian companies was just above 3,000 words, which is 100% longer than the average length four years ago (see Figure 1).

The top companies in Canada (the 200+ companies on the S&P/TSX Composite Index) now average 7,500 words when reporting their quarterly results.

In Europe, consultation to address the problems of investor mistrust in public companies began after the report of the Committee of Wise Men chaired by Baron Alexandre Lamfalassey was tabled in mid-2001. The main points to emerge from the initial consultations were the need for:

  • Consolidation of disclosure obligations into one legal text
  • Upgrading of periodic reporting
  • Publication of documents on the internet
  • Retention of control of trading regulations by individual member states


In December 2004, the European Commission adopted the final Transparency Directive to help boost investor confidence in European capital markets. The Directive is expected to improve the dissemination of information by issuers, which in turn should remove barriers to cross-border investment.

Now that the first element of the Transparency Directive has been implemented, the next step appears to be the establishment of a pan-European database of disclosure material. A working group has been set up to determine the best way of creating a repository where investors can access important material information about public companies throughout Europe.


The US’s EDGAR system was established for this purpose in the mid-1990s and Canada’s SEDAR system was set up in January 1997. We encourage the European Consultative Working Group to closely examine the ease and associated costs of filing documents with EDGAR, and particularly SEDAR, in the course of their deliberations on how to set up a similar database for Europe.

There is no doubt that all of these initiatives have caused managements of companies to be more responsible for what they say to their shareholders and in many cases to say more than they ever would have without the new regulations. However, the regulations have caused considerable financial hardship in some cases and the push-back from the corporate community is growing. What is not certain is whether the legislative pendulum is beginning to swing back - just a little.

That’s another law of physics: a pendulum will eventually end at rest closest to the most powerful external force - gravitational or otherwise.

Figure 1. Average length of earnings news reports.