After Enron… The Thoughts of Corporate Canada's Internal Auditors.

As the dust begins to settle on the Enron affair, our colleagues in the USA are facing some changes in the way accounting standards are administrated under the Sarbanes-Oxley Act, and listed companies are going to have to pay an additional price for the new regime, literally.

Usually, when the USA gets kicked, Canada limps, but this time - at least for the time being - that does not seem to be the case.

We sent Steve McIntyre-Smith, our human resources columnist, out into the world of internal audit to snoop around and talk with Canada's internal audit teams in an attempt to 'take the temperature' of the marketplace in the wake of the Enron collapse and see how Canada is reacting so far.

The results were very interesting and there seems to be a significant consistency in much of the thinking of Corporate Canada's internal audit teams.

In speaking with the country's heads of internal audit and risk management, this is what he found…

"Canada's business leaders place greater emphasis on corporate responsibility including ethical standards. It's just part of the way we do business in Canada which has kept us largely untainted by the scandals we've seen in the US. Yes, we want to make money like anyone else, but not at any cost." - Bart Demosky, Chief Risk Officer, Ontario Power Generation.

Ontario Power Generation's (OPG) Chief Risk Officer, Bart Demosky had nothing to hide and plenty to say, and agreed to grant Steve a one-on-one interview for this project. Here's what Bart had to say.

"Enron has had a huge impact on the risk management role, and it's been felt here at OPG. But I'd like to point out, starting off, that it's not just Enron - the broader issue is a question of trust in management. This is especially true for the merchant electricity sector where investors continue to value the sector at a deep discount to historic P/E multiples.

Restoring investor trust is paramount and that's the impetus behind the move we see today towards improved disclosure and tighter controls. But it's not going to be easy. The last 12 months have seen numerous new cases of alleged corporate fraud, and the majority of these instances are aimed directly at the people in charge of financial controls, including the auditors and the CFO. It would seem to me the problem with Enron was the people responsible for establishing the controls and for auditing them were one and the same. Any time a high percentage of a company's senior finance staff are former employees of their auditors (in this case the now defunct Arthur Anderson) something has to strike you as odd."

At OPG, Bart commented that they are voluntarily working towards compliance with the Sarbanes?Oxley Act, following the intent of the Act prior to any legislation forthcoming from Canada's government.

He continued… "At OPG we have developed a number of key initiatives such as:

· Increasing the accounting and risk management disclosures in the financial statements to give greater transparency, including the key risk metrics, hedging policies, credit risk disclosures and other key factors that can effect stability of income and cash flow.

· Working as part of the Council of Chief Risk Officers - a group of roughly 32-member companies to help develop best practices in risk management and disclosure for the energy sector.

· Revising the audit committee charter.

· Forming a disclosure committee to ensure that all necessary elements are included in the disclosures in the financial statements.

· Asset retirement regulation requirements.

· Introducing CFO and CEO certification procedures.

Next, we will be working on cash flow and earnings at risk disclosure policies where the same openness and transparency will be applied.

The key is to adopt the best practices in reporting and disclosure guidelines."

So that's how OPG have responded in the accounting and disclosure policies, next I asked Mr. Demosky about the role and workload of the internal audit function, and here's what he had to say…

"The trend over the last five years has been to move towards a more process-driven approach, but I think we will now see a greater emphasis on more sophisticated approaches to risk management that provide a deeper review of the financials.

A move forward, which is in some ways a leaning back, if you like, towards a quantitative audit approach that will serve to enhance the risk assessment and control framework.

A shift in responsibility for selecting the audit firm and their fee structure is starting to happen, taking the task away from the CFO or other single officer and, instead, the auditors will be appointed by an audit committee who will also sign off on audit fees."

As for using the auditors for additional services, such as lucrative consulting assignments Bart believes that there will be an obvious cut-off point…

"Unless the consulting work can be clearly tied to the audit work, the consulting assignment should go to a different firm to remove any chance of professional conflict."

OPG have made a conscious decision to ensure that conflict does not exist with our external auditors" commented Bart.

"Will that be a motivator for some audit firms to break off certain audit relationships with some clients in order to continue with the more lucrative consulting work? Time will tell.

At OPG, we know that all eyes are on us and we will have the best standards throughout the organization. In fact, we've always worked this way, but now it is becoming more transparent to everyone else."

Time will tell what legislation is passed down from the Government, but come what may, the general feeling is that we will continue to do things the right way, the Canadian way.

© 2004, MFA Group Inc