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. Introduction Definitions
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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
- Sarbanes – Oxley Act
- Companies Act and Securities Act
- Banking Act and Guidelines
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.
- International Financial Reporting Standards (IFRS)
- Basel II Accord
- Sarbanes-Oxley Act
- Securities Act and Regulations
- Banking Act and guidelines
Effective corporate governance is an essential element in:
- safe and sound functioning of an
- arsenal for protection of investors;
- development of money and capital
- elimination of systemic risk.
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.
The new international rules:
- complex and unachievable
- the norm
- might assume mandatory status in the
The challenges for regional audit committees :
- create a realistic agenda for achieving compliance
within established or projected deadlines;
- implement the planned agenda
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.
“Corporate governance” refers to:
- the processes,
- structures, and
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.
“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.
“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.
Fiduciary duties owed by directors are primarily two-fold in nature:
Section 74 Companies Act No. 22 of 1996
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.
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”.
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 attracts a raft of remedies in tort, contract law or by statute
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
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
- that he exercised all due diligence to
prevent the commission of the offence.
Central Bank may sanction directors for:
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
Auditors and audit committees are expected to:
- respond to ever increasing regulatory
and statutory requirements, and
- add value to the organization as a
The Act is applicable to public companies trading securities.
- 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
- attestation by the company’s external auditor
on management’s assessment of the
effectiveness of the company’s internal
controls and procedures for financial
- SOX forbids external auditors from:
∞ participating in the design and
implementation of an institution’s
∞ providing actuarial, human resources and
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.
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.
- difficulty in reporting on management
performance since the standards focus
on the balance sheet and not the income
- the stresses caused by additional
regulatory interpretations; and
- 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;
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.
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)
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.
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.
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.
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;
Draft guidelines for internal and external auditors impose a duty on auditors to comply with international financial reporting 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.
Reasonable conclusion – will region inevitably embrace IFRS, SOX and/or Basel II Accord?
Gradual phasing in or more abrupt approach?
Consequences of non-compliance:
- sanctions by regulators,
- possible litigation by shareholders
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.
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.
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.
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.
Legal Adviser, ECCB
Email: esco.henry@eccb- centralbank.org