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November 14, 2007

CICA offers subprime crisis advice

CICA offers subprime crisis advice

The Canadian Institute of Chartered Accountants (CICA) has released a document to help company directors cope with the credit crunch in light of concerns among investors over the recent subprime crisis in the US.

It focuses on asset-backed commercial papers (ABCPs) – a secured short-term debt obligation – and was developed by the CICA’s risk management and governance board. The CICA document is designed to provide guidance to directors in their oversight roles. Further analysis and clarification on the financial reporting of ABCPs was due to be released and posted on the Canadian Accounting Standards Board website.

Investors’ concerns centre on the credit quality of many securitised products, especially those backed by subprime debt. Many large banks have had to write off huge sums of money and most countries have been affected by the credit crunch, Canada in particular. In August, trading of up to C$35 billion ($36 billion) of ABCPs had to be suspended before the a government proposal was implemented in an attempt to salvage investors’ holdings.

The CICA believes investors are still worried about companies that have exposure to asset-backed securities. According to the institute, the main problem with ABCPs is their complexity and few understand what their true value is or should be.

The CICA has devised a list of 28 questions that it feels will help directors answer investor’s worries. According to the CICA, directors must look at the wider implications of the credit crunch and how it will affect capital and debt markets.

Dave Pollard, vice-president of knowledge development for the CICA, commented: “Our document walks directors through these questions to help them understand what investors want to know and the level of information needed to provide appropriate disclosure… It is in the interest of businesses, investors and the reputation of Canada’s capital markets that all parties provide clear, accurate and complete disclosures.”

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