Changing Your Auditors- Page 2

Corporate Law

Under Ontario corporate law (other Canadian jurisdictions will be similar), a change of auditor can occur if an auditor: (a) resigns; (b) is removed by the shareholders; or (c) or is not re-appointed for a subsequent financial year at the annual meeting of an issuer, each of which is discussed below.

Removal

The Business Corporations Act (Ontario) (the “OBCA”) provides that the shareholders of a corporation may remove an auditor before the expiration of the auditor’s term of office, by resolution passed by a majority of the votes cast at a special meeting of shareholders and shall by a majority of the votes cast at the meeting appoint a replacement for the remainder of the auditor’s term. The board of directors cannot simply remove the auditor.

Resignation

An issuer’s board could instead request the resignation of the auditor. Should the auditor agree to resign, the OBCA provides that its resignation is effective as of the time specified in the resignation or when the resignation is received by the corporation, whichever is later. 

The OBCA provides that the directors may fill any casual vacancy in the office of auditor.  Case law defines a casual vacancy as any vacancy not resulting from an expiration of time.  As such, any vacancy occurring by death, resignation or bankruptcy is considered a casual vacancy.  Therefore, in the event that the auditor resigns prior to the expiration of its appointed term, the directors of an issuer may appoint a new auditor.

Appointment

Under the OBCA, a successor auditor may not accept its appointment as auditor unless it has requested and received from the former auditor a written statement of the circumstances and the reasons why, in the former auditor’s opinion, that auditor is to be replaced.  A person otherwise qualified to be an auditor may accept the appointment or consent to be appointed as auditor of a corporation if, within fifteen days after making the request referred to in that subsection, the person does not receive a reply.

Securities Law

If the issuer is a reporting issuer, a termination (which includes the issuer not re-appointing the auditor) or resignation of an issuer’s auditor and the subsequent appointment of a new auditor requires the issuer and the auditor to carry out certain actions, make certain disclosure and prepare certain documents.⁴  These are summarized below and are set out in Section 4.11 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”).

Termination or Resignation

Upon a termination or resignation of its auditor, a reporting issuer must within 10 days after the date of termination or resignation:

1. prepare a “change of auditor notice” (see below) and deliver a copy of it to the former auditor; and
2. request the former auditor to review the reporting issuer's change of auditor notice and prepare a letter, addressed to the Regulators and delivered to the reporting issuer within 20 days of the termination or resignation stating, for each statement in the change of auditor notice, whether the auditor (1) agrees, (2) disagrees, and the reasons why, or (3) has no basis to agree or disagree.

A reporting issuer must within 30 days after the date of termination or resignation:

1. have the audit committee of its board of directors or its board of directors review the letter from the former auditor referred to above if received by the reporting issuer, and approve the change of auditor notice;
2. file a copy of the “reporting package” with the Regulators;
3. deliver a copy of the reporting package to the former auditor; and
4. if there are any reportable events, issue and file a news release describing the information in the reporting package.

Appointment of Successor Auditor

Upon an appointment of a successor auditor, a reporting issuer must within 10 days after the date of appointment:

1. prepare a change of auditor notice and deliver it to the successor auditor and to the former auditor;
2. request the successor auditor to review the reporting issuer's change of auditor notice and prepare a letter addressed to the Regulators and delivered to the reporting issuer within 20 days of the termination or resignation stating, for each statement in the change of auditor notice, whether the auditor (1) agrees, (2) disagrees, and the reasons why, or (3) has no basis to agree or disagree; and
3. request the former auditor to confirm within 20 days whether their letter referred to above need be updated, and if do, to update it.