The income security is a blended instrument in which equity and subordinated debt are combined, paying shareholders interest as well as dividends. The securities are issued by a Canadian holding company known as an income fund, which serves to distribute much of the cash flow from the operating business in the form of dividends and interest. The issuing company minimizes its tax burden by deducting the interest paid on the debt.

Although the model has yet to take off in the States, the structure is popular in Canada. "Of the 115 IPOs done on the TSX last year, more than 20 percent were income funds," says Jeffrey Singer, a partner at Stikeman Elliott LLP in Toronto.

Five U.S. companies have listed on the Toronto Stock Exchange in the past 12 months via income security offerings. Medical Facilities Corp., a $135 million hospital business with operations in South Dakota and Oklahoma, went public using income securities in Toronto in March 2004. "The transaction provided the physician-owners with a good return and investors with some income and growth," says CFO Michael Salter. The company chose to focus on the Canadian market "because we felt we would get more recognition up there at our size," says Salter.

U.S. firms are also expressing greater interest in traditional equity offerings in the Canadian marketplace, says Kevan Cowan, senior vice president of TSX Venture Exchange. "I have had more calls about the exchange in the last two to three months than in the year prior," says Cowan, who attributes part of the interest to more-flexible governance requirements for small firms. On the Toronto Venture Exchange, firms need not certify their internal controls. "Our governance regime in Toronto [resembles Sarbox], but we have managed to carve out something more proportionate for smaller companies," says Cowan. — Kate O'Sullivan

The Best-laid Plans

Can budgeting, planning, and forecasting be considered internal controls? And if so, are they subject to Section 404 of the Sarbanes-Oxley Act?

Within days of the act's passage, it seemed, opportunistic marketers were touting budgeting-and-planning software packages as 404-compliance tools. Yet at first glance, B&P hardly seems like the sort of internal control Congress had in mind.

B&P rarely came up in debates about overkill on internal-control audits, but finance executives are evenly divided on whether 404 applies. In a recent CFO survey, 49 percent of respondents subject to the law said their companies or their auditors had reviewed B&P, while 51 percent said they had not.

Many of those who underwent a review said it was perfunctory. "[Our] Sarbox team did a cursory review of our planning process," said one respondent, while another described the auditor's check as "an overview that a process is in place and working." That's fine with Jim Winett, managing director of IC Consulting Services LLC. "Auditors are just trying to check it off their lists," he says. He tells companies to keep documentation of B&P processes simple to avoid unnecessary scrutiny. "We advise companies to formalize and document it, but don't go overboard."

One area that auditors can lay claim to: budget-to-actual reviews, on which management may in part base their 404 certifications. The reviews are a key control, says Winnett. Greg Bozigian, a director of financial planning for Carnival Corp., says the company documented its budgeting-and-planning process for Sarbox compliance.

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