The Portfolio Management Association of Canada (PMAC), through its Industry, Regulation & Tax Committee, is pleased to have the opportunity to submit the following comments regarding the proposed revisions to Canadian Audit Standard 700, Forming an Opinion and Reporting on Financial Statements, related to the communication of Key Audit Matters (KAM) in the auditor’s report (Proposals) published by the Auditing and Assurance Standards Board (AASB) (the Exposure Draft).
As background, PMAC represents over 270 investment management firms that collectively manage in excess of $2.1 trillion. All of our member firms are registered to do business in Canada as portfolio managers with one or more of the Canadian Securities Administrators (CSA). In addition to their primary registration as portfolio managers, the majority of our members are also registered as investment fund mangers and/or exempt market dealers. PMAC’s members manage investment portfolios for private individuals, institutions, foundations, universities and pension plans.
The Exposure Draft states that the requirement to include KAM is anticipated to have significant public interest benefits by, amongst other things, increasing transparency of audits.
PMAC’s mandate is to advance standards for the benefit of investors served by our members. For this reason, we are generally supportive of measures that provide greater transparency and enhanced information to investors. We do, however, have concerns about the scope of the Proposals as they apply to all entities governed by National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106). Our submission is focused on the anticipated detrimental impact to the investors served by our members if the requirement to include KAM were to apply to all NI 81-106 entities.
NI 81-106 covers a variety of investment funds ranging from closed-end funds, exchange traded funds and mutual funds to unit trusts (commonly called pooled funds in the industry). While we believe the Proposal to require the inclusion of KAM for all entities subject to NI 81-106 was meant to facilitate the comparison of an auditing metric amongst a variety of investment funds, it is important to consider whether the additional transparency intended by the disclosure of KAM is needed in the first place in the context of funds.
The AASB’s Proposal would extend the requirement to include KAM: 1) beyond the scope adopted in major comparable markets, including the U.S.; and 2) beyond investment funds that are reporting issuers typically distributed to retail investors via a prospectus to private, exempt-market funds. This would be inconsistent with the approach taken in other large investment fund jurisdictions and, to PMAC’s mind, is an unintended negative consequence of the Proposal.
Due to the impact the Proposals would have on Canadian savers that are invested in pooled funds, PMAC has taken the opportunity to provide some background on the prevalence, use, and importance of pooled funds to Canadian investors below.