Auditor Waiver: A Requirement Too Often Overlooked

The business corporations acts confer a clear right on shareholders to receive audited financial statements annually, unless they have expressly waived this right. In practice, however, this requirement is too often overlooked, and non-compliance may constitute a particularly serious form of oppression. 

Audited Financial Statements: A Clear Right 

Both the Business Corporations Act (the “QBCA”) and the Canada Business Corporations Act (the “CBCA”) require the board of directors of a corporation to present financial statements to shareholders at every annual meeting. These financial statements must include at least a balance sheet and an income statement. 

In principle, shareholders must also appoint an auditor at each annual meeting. The auditor then audits the corporation’s financial statements and submits its report to the shareholders at the same time as the board of directors present the financial statements at every annual meeting. 

To carry out its mandate, the auditor is granted broad powers: he has access to all information relating to the corporation, its subsidiaries, and any other entity whose financial information is consolidated with that of the corporation. He may require the production of any books, registers, accounts, records, or other relevant documents, and directors must provide all requested information. 

When Can a Corporation Waive the Requirement for Audited Financial Statements? 

The business corporations acts provide an exception to the annual audit requirement. All shareholders, including minority shareholders and shareholders not otherwise entitled to vote , may waive the appointment of an auditor. However, such waiver is only effective until the next annual shareholders meeting. 

This waiver option does not apply to publicly traded corporations. In such cases, an audit of financial statements remains mandatory. 

Accordingly, both provincial and federal legislation establish a clear right for shareholders to obtain audited financial statements, unless they have waived that right. Such waiver must be formalized in a unanimous resolution signed by all shareholders. Implied waivers, past practices, the family nature of a corporation, or informal agreements do not constitute a valid waiver under the law. 

A shareholder who has not approved the waiver may therefore require the production of audited financial statements. This is a statutory right that exists independently of an oppression remedy. Moreover, the right to receive audited financial statements is not contingent on the corporation’s financial health, but rather on whether shareholders have chosen not to exempt the corporation from appointing an auditor. 

Legal Risks of an Improperly Applied Waiver 

In practice, it is not uncommon to find that a corporation’s financial statements are not audited despite the absence of a unanimous waiver resolution. It also occurs that a waiver adopted several years earlier is incorrectly treated as having permanent effect. 

Such situations are not without risk. Case law recognizes that denying or limiting access to a corporation’s financial information may constitute a particularly serious form of oppression, an issue that is frequently at the heart of shareholder disputes. 

Key Takeaways 

• Shareholders are entitled to receive annual audited financial statements prepared by an independent auditor.
• Shareholders may waive the appointment of an auditor, but only if all shareholders expressly consent, including minority shareholders and those not otherwise entitled to vote.
• The waiver must be a written unanimous resolution and must be renewed annually.
• Implied waivers, past practices, or informal agreements do not constitute a valid waiver.
• A shareholder who has not consented to the waiver may require audited financial statements.
• Denying or restricting access to financial information may be considered a form of oppression and may lead to shareholder disputes. 

Further Considerations 

Issues relating to access to financial information and corporate governance are often central to shareholder disputes. In some cases, such disputes may even lead to the buyout or purchase of a shareholder’s shares, raising questions about valuation and the relevant valuation date, topics we address in our article “Shareholder Disputes: The Date That Can Impact the Value of Your Shares.” 

For any questions regarding shareholder disputes, please do not hesitate to contact our shareholder litigation team, who will be pleased to assist you.