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RBC Aims to Settle with OSC on Software Development Cost Disclosure

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RBC Seeks Settlement with OSC Over Software Development Cost Disclosure

The Royal Bank of Canada (RBC) is working towards a settlement with the Ontario Securities Commission (OSC) regarding allegations of improper recording and disclosure of costs related to internal software development. The OSC has scheduled a public hearing on November 3, 2023, to approve the settlement agreement reached between the OSC and RBC, Canada's largest bank.

Regulatory Concerns and Corrective Actions

The OSC alleges that RBC recorded the costs of internally developed software projects in a manner inconsistent with accounting standards and Ontario securities law. However, the regulator did not find evidence of dishonest or abusive conduct by RBC. The bank has taken corrective actions to address the deficiencies and prevent similar events in the future. The investigation did not uncover any harm or loss to investors, and there was no material impact on RBC's financial statements.

Control and Process Deficiencies

The OSC's statement of allegations highlights control and process deficiencies in RBC's accounting for aggregated costs of smaller software projects. The bank included ineligible projects in the accounting pool from 2008 to 2020 and used an unsupported capitalization rate of 78% from 2008 to 2016. RBC implemented a "rate study" in 2017, but it was deemed unreliable and lacking sufficient documentation to support project costs.

Larger Software Development Project Issues

The OSC also alleges that RBC had issues with larger software development projects, including a lack of effective impairment and amortization controls. This resulted in the bank carrying capitalized internally developed software assets on its balance sheet at full book value, instead of amortizing them over time or writing them off if impaired. The OSC emphasizes the importance of appropriate bookkeeping and compliance with accounting standards and internal accounting policies. RBC spokesperson, Gillian McArle, expressed the bank's satisfaction with resolving the matter and highlighted their commitment to financial governance and controls. The settlement agreement, once approved, will bring closure to the OSC's concerns regarding RBC's software development cost disclosure practices.

Hot Take: The Implications of RBC's Settlement with OSC for New Businesses

The ongoing settlement process between the Royal Bank of Canada (RBC) and the Ontario Securities Commission (OSC) over software development cost disclosure offers valuable insights for new businesses, particularly those in the tech sector.

Regulatory Compliance: A Non-Negotiable

The OSC's allegations against RBC underline the importance of adhering to accounting standards and securities law. Even for a bank as established as RBC, regulatory compliance is non-negotiable. For new businesses, this serves as a stark reminder that maintaining accurate records and transparent disclosures, especially in areas like software development costs, is critical.

Learning from RBC's Corrective Actions

RBC's corrective actions in response to the allegations also offer a blueprint for new businesses. The bank's proactive steps to address the deficiencies and prevent future occurrences demonstrate the importance of having robust internal controls and processes.
Final Thoughts
While RBC's situation may not have resulted in investor harm or significant financial impact, it has certainly led to reputational damage and regulatory scrutiny. For new businesses, this is a clear signal that regulatory compliance and accurate financial reporting are not just legal requirements, but also crucial for maintaining stakeholder trust and business reputation.
Story First Published at: https://financialpost.com/fp-finance/banking/rbc-osc-settlement-recording-disclosure-software-costs
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