Let’s look at another extract from the Ontario Securities Commission’s refilings and errors list.

You’ll recall that this is a record of companies that refiled or restated some aspect of their continuous disclosure record as a result of an OSC review – the list has the dual purpose, I believe, of providing an extra degree of visibility regarding such companies, and also of setting out identified pitfalls that other preparers can thereby learn from and avoid. Not too surprisingly, most of the cases involve issues of broader regulatory compliance (MD&A, mining technical reports and suchlike) rather than errors in applying IFRS, but there are occasional exceptions. Here’s one such instance:

• the Company filed amended unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2020…together with corresponding amended management’s discussion and analysis…
• The Company engaged its auditors to perform a review of the previously filed unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2020 …During the auditor’s review, the Company identified a number of adjustments to the financial statements. These include: the incorrect recognition of a liability related to the exploration licence, where the conditions for recognition have not yet been met; a reclassification between current assets and current liabilities; the incorrect valuation of broker warrants related to (a previous transaction); an error in the calculation of expenses for the three month period ended September 30, 2020; and an incorrect (non-retrospective) presentation of the share consolidation that occurred in connection with (that previous transaction). The net impact of the adjustments is a reduction in both assets and liabilities in the amount of $306,942, a reduction in the reported loss for the three-month period of $174,594, a reduction in the reported loss for the nine month period of $88,705, and a reduction in share capital, contributed surplus and accumulated other comprehensive income in the total amount of $88,705.

For background, it’s not required that interim financial statements of Canadian public companies be auditor-reviewed for continuous disclosure purposes; however, if they’re not reviewed, then the statements must bear a notice stating that fact (therefore, the evidence that a particular set of interim financial statements has been auditor-reviewed is simply that the issue isn’t mentioned). However, any interim statements contained in a prospectus (among other things) must indeed be auditor-reviewed; consequently, the filing of a prospectus is one event that sometimes triggers an after-the-fact review of previously-filed interims. In a worst case, as we see illustrated here, this finds enough material errors in the original document that a refiling is necessary. Of course, you might draw a lesson from this about the desirability of engaging auditors to review interim statements whether they’re required to or not, especially where there’s any reason to think those statements might at some point be subject to greater than normal scrutiny.

Potentially, such pervasive restatements (affecting five of the ten expense categories of the income statement, all three categories on the cash flow statement, etc.) might raise questions about the company’s ongoing ability to prepare compliant financial statements. Given that this particular company is listed on the second-tier “venture” exchange, the certifying officers aren’t required to (and didn’t) make any representations regarding controls and procedures. At the same time, they have a basic obligation to comply with securities law (for example, by not participating in the dissemination of false or misleading information). The regulator could in theory then use such a case as a basis for enforcement action, but it doesn’t usually come to that. That aside, it may seem unfortunate that the refiled interim statements didn’t even tangentially address the reasons for containing so many errors in the first place (simply commenting “that various changes were made” to the previous version, and tersely summing up what they were).

As for the errors themselves, the most conceptually interesting may be the incorrect recognition of the liability. This relates to an acquired lithium exploration license for which the purchase price is payable in stages. The first two stages, payable on the date of the agreement and on obtaining a stock exchange listing, were already completed, and the related amounts recognized. The third stage is payable “on completion of an initial exploration programme as recommended by a technical report” – originally the company recognized this portion as a liability, then in the revised statements it didn’t (two further stages, payable on completion of a feasibility study and on issuance of a mining licence, weren’t recognized in either version). Presumably the adjustment was rooted in a differing assessment on the part of the auditors about whether, in September 2020, the completion of the program could be assessed as being probable, but it would be educational to have further details on that. Anyway, it appears that the program finally got under way in June 2021, and the completion of it was announced in a news release issued on September 15, 2021… but dated July 15, 2021. So the company’s history of errors may not yet be completely behind it…

The opinions expressed are solely those of the author