Accounting firms pay fines despite Ontario Securities Commission’s weak collection record

A value-for-money audit by the Auditor General of Ontario, Bonnie Lysyk, has sounded the alarm about Canada’s national securities regulator, the Ontario Securities Commission, citing political interference, failure to collect monetary penalties and communication problems with the Canadian Public Accountability Board. (Courtesy of the Office of the Auditor General of Ontario)

TORONTO, January 15, 2022 – A resource optimization audit of the Ontario Securities Commission by the Auditor General of Ontario revealed that the provincial securities regulator collected only 28%, or $145 million, of the $525 million that he imposed in monetary penalties in the ten fiscal years between 2011-2012 and 2020-21, inclusive. But Canadian accounting firms EY Canada (Ernst & Young LLP) and BDO Canada have been compliant by paying their fines for failed audits.

Sanctions were imposed for refunds, investigation costs and administrative penalties. “We have noted that while the OSC has been successful in collecting amounts through monetary sanctions from legitimate and regulated market participants, the vast majority of the uncollected balance is owed by unregistered and unregistered individuals and entities. regulated,” Lysyk wrote.

Unregulated respondents are generally less compliant with their legal or regulatory obligations, including monetary penalties ordered against them, she explained. “While the OSC has various tools it uses to enforce monetary penalty collections…the tools are not adequate to improve collections from fraudsters who are not regulated persons and entities,” notes The report.

To improve this situation, Lysyk recommended that the Ontario Ministry of Finance provide the OSC with collection enforcement powers similar to that of the British Columbia Securities Commission (BCSC). The BCSC has the power to “freeze, retain and dispose of assets that have been transferred below their fair market value to family or third parties; and restricting a person’s ability to access a driver’s license or license plate.

Financial penalties fully paid by major audit firms

In 2014, Ernst & Young LLP reached a settlement agreement to pay $8 million in connection with the firm’s audit of two China-based companies: Sino-Forest Corporation for its fiscal years 2007 to 2010 and Zungui Haixi Corporation for its initial public offering in 2009. and financial year 2010.

In a high-profile case, Sino-Forest, a forestry company, filed for bankruptcy and was found guilty by an Ontario court of committing securities fraud. Zungui Haixi, a shoemaker, also collapsed and was awarded $10.85 million by an Ontario court in a class action lawsuit.

In 2020, BDO Canada LLP paid the OSC an administrative penalty of $3.5 million and costs of $500,000 in connection with the firm’s audits of the 2014 and 2015 financial statements of two private equity funds who were subsequently placed in receivership and convicted of fraud. .

CSO vulnerable to political interference

Lysyk’s report also sounded the alarm about the OSC, noting that the provincial securities regulator was “vulnerable to political interference, which risks undermining its operational independence and impartiality.”

He cited how, for example, on “deferred selling expenses, the department [of Finance] surprised the OSC by initially publicly opposing the OSC-led CSA consensus on needed reform in September 2018. The ministry later reversed its position in May 2021. This incident demonstrated the government’s ability to overrule the judgment of the OSC and the evidence supporting a proposed reform.

The report further states that the OSC took almost a decade to decide to ban deferred sales charges and trailing commissions, and that the ban on trailing commissions only applies to discount brokers. and not to other brokers.

“Our goal in highlighting what is [because] the government has the right to make political decisions. But people expect policy decisions to be based on evidence and in the case of the situation we cite in the audit report, the evidence showed that deferred charges and trailing commissions should have been banned earlier, Lysyk told Canadian Accountant.

The OSC responded to the report’s comments. “We recognize that key investor protection reforms – including customer-focused reforms and prohibitions on deferred sales charges and trailing commissions charged by discount brokers – have taken considerable time to develop and implement. implement through multiple public consultations and implementation periods.

“We also agree that additional and timely measures should be considered if these reforms are not in the best interests of investors,” the OSC added, noting that it is closely reviewing how these reforms are implemented.

The Auditor General’s report indicates that the OSC has limited enforcement tools. For example, he noted that the Corporate Finance Branch does not have “adequate regulatory authority to respond effectively and in a timely manner when it identifies a lack of sufficient disclosure by companies that have distributed securities using regulatory exemption”.

Additionally, the OSC “lacks the technology and analytical tools necessary to conduct effective oversight of market participants,” Lysyk wrote.

She recommended that the OSC “develop a formal roadmap and budget for the review and implementation of new data analytics tools and approaches, including the ability to identify, assess and reduce violations of Ontario securities law and misconduct occurring on websites or social media”.

The OSC accepted this recommendation.

“We recognize the need for better access to data analysis tools, which would allow us to more effectively assess potential misconduct, and we will continue to prioritize this area,” he replied.

“Building an enterprise data platform with modern data, reporting and analytical tools is one of the key initiatives identified as part of the digital and data transformation at OSC. The platform will have the ability to ingest data from multiple sources, including social media. Third-party tools that enable bespoke analytics will also be considered to meet specific needs as prioritized by the application branch,” the OSC said.

The OSC must put in place the IT systems it needs to do its job better, seek to make changes so that it receives all the information it needs, and ensure that it maintains relationships with the people who provide him with the necessary information, Lysyk told the Canadian accountant.

“Even though we don’t have a national regulator, the OSC still needs to make sure it’s well organized to be a strong and effective regulator in Canada,” she said.

Jeff Buckstein is an Ottawa-based freelance business journalist.

This is a two-part series on the OSC’s value-for-money audit conducted by the Auditor General of Ontario. Read Part 1 of the series, Auditor General of Ontario calls for better communication between auditors and securities supervisors.

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