Dive Brief:

• The Royal Bank of Canada will pay a $6 million penalty to settle Securities and Exchange Commission charges that it violated the books and records and internal accounting controls provisions of securities laws related to how it accounted for internally developed software, without the bank admitting or denying the SEC’s findings, according to an SEC press release. 

• The SEC said that the Toronto, Canada-based bank, the country’s largest, from 2008 through 2020 applied a single rate to determine how much of a portion of its internally developed software projects costs to capitalize but lacked a “reliable method” for determining the right rate to apply and instead applied the same capitalization rate every year. 

• “Royal Bank of Canada had longstanding internal accounting control deficiencies that it failed to adequately address,” said Nicholas P. Grippo, director of the SEC’s Philadelphia regional office. “Properly functioning internal accounting controls are a front-line defense and help ensure accurate financial disclosures — the backbone of our capital markets.” 

Dive Insight:

An RBC spokesperson said the company was pleased to have resolved the matter relating to the capitalization rate applied to its internally developed software costs.

“While it was not material to our financial statements, we thoroughly investigated and took action to remediate our processes. We hold ourselves to the highest standards when it comes our financial governance and controls to ensure that we meet or exceed our regulators’ expectations and the expectations we have for ourselves,” the spokesperson wrote in an emailed response to a request for comment.

Separately the Autorité des marchés financiers, which is responsible for financial regulation in the province of Quebec, and the Ontario Securities Commission also reached agreements with RBC following a joint investigation into the software matter and RBC agreed to make a voluntary payment as part of its agreement with AMF, according to an AMF release. 

“RBC is alleged to have failed to keep such books and records and remediate identified non-compliance with its internal accounting policies as were necessary to properly record the financial affairs of RBC as they relate to the capitalisation of internally developed software,” the AMF release states. “The deficiencies noted by the AMF, although not material to RBC financial disclosures, nevertheless impugned the integrity of Québec's capital markets and RBC's conduct was therefore contrary to the public interest.” 

Separately on Friday, the Ontario Securities Commission approved a settlement over the issues related to how it tracked internal software development costs, The Toronto Star reported. 

The settlements come as the need for new accounting standards for tracking software costs in the U.S. has pushed the Financial Accounting Standards Board to take up a project to update standards for the first time in nearly 40 years. 

In September the board discussed a proposal to set the threshold that will trigger a software initiative to be capitalized as an asset on the balance sheet — rather than as an expense on the income statement — at the point in time when the project is likely to be completed, a benchmark dubbed “probable to be completed,” CFO Dive previously reported.