Transcript Regulatory Environment: Increasing Complexities and Challenges

REGULATORY ENVIRONMENT: INCREASING
COMPLEXITIES AND CHALLENGES
Caribbean Association of Audit Committee Members Inc
First Annual Meeting
June 21- 22, 2007
Saint Lucia
Presented by: Esco Henry, ECCB
OUTLINE
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Introduction
Definitions
Fiduciary Relationship between Director and Financial Institution
Role of auditors and audit committees in corporate governance
Standards
- Sarbanes – Oxley Act
- IFRS
- Companies Act and Securities Act
- Banking Act and Guidelines
• Complexities/Challenges
• Approaches
• Conclusion
Introduction
Corporate Governance is receiving an increasing amount of
attention from both the media and regulatory bodies such as the
Securities Exchange Commission (SEC) in the USA, the Financial
Services Authority (FSA) in the UK, the Eastern Caribbean Central
Bank (ECCB) and the Caribbean Association of Audit Committee
Members Inc (CAACM) in the Eastern Caribbean.
Emergence of:
- International Financial Reporting Standards (IFRS)
- Basel II Accord
- Sarbanes-Oxley Act
- Securities Act and Regulations
- Banking Act and guidelines
Introduction Cont’d
Effective corporate governance is an
essential element in:
- safe and sound functioning of an
institution
- arsenal for protection of investors;
- development of money and capital
markets;
- elimination of systemic risk.
Introduction Cont’d
With regulators exercising greater scrutiny over the
financial affairs of institutions, the role of auditors/audit
committees has been evolving and is being enlarged by
international standard setting bodies – mirrored in
regional benchmarks.
As the bar is raised, auditors/audit committees find their
roles being re-defined. They are being fashioned as
major partners in maintaining corporate governance
within companies.
Introduction Cont’d
The new international rules:
- complex and unachievable
- the norm
- might assume mandatory status in the
future
The challenges for regional audit committees :
- create a realistic agenda for achieving compliance
within established or projected deadlines;
- implement the planned agenda
Introduction Cont’d
This presentation seeks to highlight the
main provisions of the regulatory
framework and some of the complexities
of the new standards and suggest
practical approaches for converting the
challenges into successful outcomes.
DEFINITIONS
“Corporate governance” refers to:
- the processes,
- structures, and
- information
used for directing and overseeing the
management of an institution. It encompasses
the relationships and mechanisms utilised for
achieving accountability among an institution’s
board of directors, management, shareholders
and other stakeholders.
DEFINITIONS CONT’D
“Risk” refers to the uncertainty that surrounds future
events and outcomes. It is the expression of the
likelihood and impact of an event which has the potential
to influence the achievement of an organization's
objectives.
“Risk Management” is a systematic approach to
setting the best course of action under uncertainty by
identifying, understanding, assessing, communicating
and responding to risk issues.
DEFINITIONS CONT’D
“regulatory environment” describes the
body of laws, regulations, rules, guidelines
and standards imposed by Parliament and
regulatory authorities to govern the
conduct of participants in a particular
industry.
Characteristics of good corporate
governance citizen
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honesty
trust and integrity
openness
performance orientation
responsibility and accountability
mutual respect, and
commitment to the organisation
Fiduciary Relationship between Director and
Financial Institution
Fiduciary duties owed by directors are primarily
two-fold in nature:
• To exercise powers for the purposes for which
they are conferred and bona fide for the benefit
of the institution and by extension the benefit of
depositors;
• To avoid situations in which their personal
interests and their duties to the institution conflict
Section 74 Companies Act No. 22 of 1996
Fiduciary relationship – Duties of
care diligence and skill
Directors must ensure that the depositors’
moneys are protected. Diligence carries with it
the requirement of giving a reasonable amount
of attention to the company’s business.
Directors are expected to be familiar with lending
policies, numbers and value of major accounts,
defaulting accounts, availability of collateral,
current status and results of attempts to recover.
Fiduciary relationship – Duties of
care diligence and skill
A director is not expected to function as an
expert unless appointed to the board as an
expert in a particular field. He must however
“act with such care as is reasonably to be
expected from him, having regard to his
knowledge and experience.”
He must exercise reasonable care and diligence
but is not liable for errors of judgment.
Such reasonable care is “measured by the care
an ordinary man might be expected to take in
the same circumstances on his own behalf”.
Fiduciary relationship – Duties of
care diligence and skill
A director may rely on the opinion of an
expert who is not a director but he must in
respect of such advice exercise his own
independent judgment when arriving at a
decision.
If he acts honestly for the benefit of the
company, he discharges his legal duty to
the company.
Breach of Duty - remedies
Breach of duty attracts a raft of remedies in tort,
contract law or by statute
• Injunction or declaration
• Damages or compensation
• Rescission of contracts section 76 of Companies
Act – through application to the court by member
of the company to set aside the transaction and
to require the director to account to the company
for any profit or gain realized
• Revocation of appointment of director
Companies Act No 22 of 1996 section 78
Criminal Sanctions
The legislation governing conduct of directors has
created numerous offences to punish unethical or
dishonest behaviour by directors of companies and
licensed financial institutions
Penalties range from fine of $1000 to $250,000.00 and
imprisonment for up to five years
• Banking Act – sections 3(5)(b), 6(4), 8(8), 9(5), 12(4),
• Companies Act - section 107 (2)
• Provision is also made in the Banking Act stipulating that
each director is required to take reasonable steps to
secure compliance by the financial institution with each
requirement of the Act - section 30
Criminal Sanctions Cont’d
• Failure to declare and register related
interest and conflict of interest $10,000.00 – section 28(5)
• With intent to deceive makes false or
misleading statement/omits relevant
entry for audit purposes - $15,000.00 section 29 / Companies Act 107 (2)
Criminal Sanctions Cont’d
Section 31 of Banking Act: Liable for offences
committed by the company unless he proves:
- that the act constituting the offence
took place without his knowledge or
consent, or
- that he exercised all due diligence to
prevent the commission of the offence.
Other Sanctions
Central Bank may sanction directors for:
• engaging in unsafe or unsound practices in
conducting the business of the institution;
• violating any law, regulation or guideline issued
by the Central Bank
• Failure to comply with any requirement imposed
under section 22 - $50,000.00 – section 22 (5)
(b)
Role of Auditors and Audit Committees in
Corporate Governance
The role of auditors in general is changing to
accommodate the new demands and challenges
imposed by the regulatory regimes. So too is the
role of audit committees.
Auditors are expected to:
- fulfil their traditional functions of accounting
and financial control,
- deliver cost and efficiency savings in their
operations,
Role of Auditors and Audit Committees in
Corporate Governance
Auditors and audit committees are
expected to:
- respond to ever increasing regulatory
and statutory requirements, and
- add value to the organization as a
whole.
Sarbanes – Oxley
The Act is applicable to public companies trading
securities.
Main Provisions:
- Public companies to evaluate and disclose
effectiveness of their internal controls as they
relate to financial reporting; (Section 404)
- certification of financial reports by CEO and
chief financial officers
- auditor independence
- establishment of fully independent audit
committees
Sarbanes – Oxley Cont’d
- attestation by the company’s external auditor
on management’s assessment of the
effectiveness of the company’s internal
controls and procedures for financial
reporting,
- SOX forbids external auditors from:
∞ participating in the design and
implementation of an institution’s
financial system;
∞ providing actuarial, human resources and
investment advice.
Sarbanes – Oxley Cont’d
Conceivably, those principles may in the
future be applied in our jurisdictions to
institutions considered to be systemically
important to the financial system –
licensed
financial
institutions
and
companies trading on the ECSE.
International Financial Reporting
Standards (IFRS)
IFRS is intended to harmonise accounting practices and
to make it easier for stakeholders across country borders
to measure and compare performance and to truly
embrace a global international accounting language.
The concept of fair value accounting is perhaps the single
largest problem encountered with IFRS.
Criticism - increases the need for subjective valuations to
be performed by reporters.
International Financial Reporting
Standards (IFRS) Cont’d
Other concerns:
- difficulty in reporting on management
performance since the standards focus
on the balance sheet and not the income
statement;
- the stresses caused by additional
regulatory interpretations; and
International Financial Reporting
Standards (IFRS) Cont’d
- disclosures required by IFRS represent a
considerable amount of additional work, the
financial statement component of annual reports
being expanded up to 50% more with
introduction of IFRS;
- there are instances where certain types of
companies and sectors have new requirements
to fulfil;
International Financial Reporting
Standards (IFRS) Cont’d
IFRS has not been adopted wholesale in
any Caribbean jurisdiction.
The ECCB draft Corporate Governance
Guidelines impose a duty on licensed
financial institutions to meet IFRS
requirements.
Companies Act
Provisions (St. Kitts and Nevis Act No. 22 of
1996) mandate companies to:
- keep accounting records; (section 102)
- approve accounts and arrange for
auditing; (section 104)
- file audited accounts with the Registrar of
Companies; (section 105)
- appoint auditors (section 109)
Companies Act Cont’d
The auditors duties and powers are set out
in section 111 and include certifying
whether :
- proper accounting records have been
kept by the company; and
- the company’s accounts are in agreement
with the accounting records and returns.
Securities Act
Broker dealers and limited service brokers are
required to maintain such accounts and other
records, and file such financial statements and
reports, as may be prescribed.
The Minister may make regulations requiring
licensees to submit to the Commission, at
intervals set out in the regulations, returns of
their financial resources in a form set by the
Commission.
Securities Act Cont’d
Persons licensed under the Securities Act
are required to submit to the Commission,
audited financial statements prepared in
accordance with international
accounting standards, and which contain
such additional information as may be
prescribed.
Banking Act and Guidelines
The Banking Act stipulates that an auditor be appointed
by each licensed financial institution. (section 19)
The Central Bank may require the auditor to provide
additional information as it considers necessary.
The Central Bank is empowered to issue guidelines
respecting inter alia:
- corporate governance;
Banking Act and Guidelines Cont’d
- policies, procedures and systems for identifying,
monitoring and controlling country risk, transfer
risk, liquidity risk, interest rate risk, operational
risk; and such other risks as the Central Bank
shall specify.
Draft guidelines for internal and external auditors
impose a duty on auditors to comply with
international financial reporting standards.
Regional vs international standards
Regional reporting standards are not
considered to be onerous.
However, the noticeable trend is for regulators
to adopt and adapt international standards:
- in accordance with directives from
international standard setting bodies; or,
- in response to international pressure for
developing countries to implement the same
benchmarks as developed countries.
Regional vs International
Standards
Reasonable conclusion – will region
inevitably embrace IFRS, SOX and/or
Basel II Accord?
Gradual phasing in or more abrupt
approach?
Complexities/Challenges Identified
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Learning curve
Allocation of time
Allocation of human resources
Assessment of financial requirements
Acquisition of additional software and IT expertise
(consultancy)
Consequences of non-compliance:
- sanctions by regulators,
- possible litigation by shareholders
Complexities/Challenges Identified
Cont’d
The international standards present
particular difficulties of implementation for
small and developing states and
institutions.
While compliance is not mandatory at this
time, reasonable expectations forecast
reception of some of those measures.
Suggested Approaches
Auditors and audit committees in the Caribbean
basin area will be expected to quickly navigate
the unfamiliar territory being forged by
international standard setters in anticipation of
adoption by regional regulators and in
recognition of the benefits to the local and
regional business environment.
Suggested Approaches Cont’d
Research and preliminary reports by industry specialists highlight the
need for training and education programmes.
The benefits of networking with other institutions should not be
ignored.
The CAACM provides an ideal forum for members to forge alliances
with one another and to organise training programmes.
CAACM could position itself to serve as adviser to regulators on
which standards/hybrid best serve the interest of all stakeholders.
Conclusion
Mindful of the complexities and challenges
which are inherent in implementation of
the new accounting standards, regional
auditors have one choice – adjust as
necessary to accommodate seamless
transition to the new standards. In this
regard, credible and reliable information is
key.
Questions Or Comments?
Esco Henry
Legal Adviser, ECCB
Email: esco.henry@eccb- centralbank.org
Tel: 869.465.2537