LITIGATION UNLEASHED - Stikeman Elliott

• having counsel review the existing D&O liability insurance policy for adequacy of coverage
with respect to personal liability of directors and officers, seeking to ensure that:
– directors and officers are entitled to select counsel under the terms of the policy,
– directors’ and officers’ legal and other costs in defending a claim are covered by the
policy and that these costs are advanced by the insurer during the defence of the
action, and
– coverage is afforded to “innocent” officers and directors in circumstances where
allegations of fraud or intentional wrongdoing are levelled against the reporting
issuer and only certain of its officers and directors;
• retaining counsel to provide independent legal advice on issues as the circumstances require;
• reviewing and, if necessary, correcting minutes of meetings; and
• taking notes and maintaining files with respect to their involvement with the issuer at all
stages of the proceeding commenced under the statutory liability regime, including at the
application for leave to commence the proceeding, a key evidentiary issue will be the
subjective knowledge of the named defendants. Individual defendants may be able to greatly
enhance their positions on this key issue if they maintain appropriate records.
4.3 Auditors
Auditors can seek to reduce the likelihood of attracting liability by complying with the
standards articulated by their professional regulatory bodies. The Canadian Institute of
Chartered Accountants has included a new section in its Handbook entitled “The Auditor’s
Responsibility to Consider Fraud and Error in an Audit of Financial Statements”. The section
details new procedural requirements, including the following:
• to ask management about its assessment of the risk that the financial statements may be
materially misstated as a result of fraud, about controls they have implemented, and whether
they are aware of any fraud, suspected fraud or material errors;
• to consider whether matters relating to internal controls should be discussed with the audit
committee at the planning stage of the audit;
• when assessing inherent and control risks, to assess how the financial statements might be
materially misstated as a result of fraud or error (the new standard also requires the auditor, as
part of the risk assessment, to consider whether fraud risk factors are present);
• if fraud risk factors are identified as being present, to address them when designing audit
procedures (the identified factors, and the auditor’s responses, should be documented); and
• to obtain additional written representations from the appropriate level of management,
including:
– that management has disclosed to the auditor all significant facts relating to any
frauds or suspected frauds, and
– that management believes the effects of unadjusted errors accumulated by the
auditor are immaterial, both individually and in the aggregate.
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