Title: REGULATORY ENVIRONMENT: INCREASING COMPLEXITIES AND CHALLENGES
1REGULATORY 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
2OUTLINE
- 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
3Introduction
- 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
4Introduction Contd
- 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.
5Introduction Contd
- 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. -
-
6Introduction Contd
- 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
7Introduction Contd
-
- 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.
8DEFINITIONS
- 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 institutions
board of directors, management, shareholders and
other stakeholders. -
9DEFINITIONS CONTD
-
- 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. -
10DEFINITIONS CONTD
- 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.
11Characteristics of good corporate governance
citizen
- honesty
- trust and integrity
- openness
- performance orientation
- responsibility and accountability
- mutual respect, and
- commitment to the organisation
12Fiduciary 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
13Fiduciary 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 companys 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.
14Fiduciary 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.
15Fiduciary 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.
16Breach 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
17Criminal 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
18Criminal Sanctions Contd
- 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)
19Criminal Sanctions Contd
- 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.
20Other 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)
21Role 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,
22Role 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.
23 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
24Sarbanes Oxley Contd
- - attestation by the companys external
auditor
- on managements assessment of the
- effectiveness of the companys internal
- controls and procedures for financial
- reporting,
- - SOX forbids external auditors from
- 8 participating in the design and
- implementation of an
institutions
- financial system
- 8 providing actuarial, human
resources and
- investment advice.
-
25Sarbanes Oxley Contd
-
- 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.
26International 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.
27International Financial Reporting Standards
(IFRS) Contd
- 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
28International Financial Reporting Standards
(IFRS) Contd
- - 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
-
-
29International Financial Reporting Standards
(IFRS) Contd
- 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.
30Companies 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)
31Companies Act Contd
- 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 companys accounts are in agreement
- with the accounting records and returns.
-
32Securities 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.
33Securities Act Contd
- 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.
34Banking 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
-
-
-
35Banking Act and Guidelines Contd
- 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.
-
36Regional 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.
37Regional vs International Standards
- Reasonable conclusion will region
inevitably embrace IFRS, SOX and/or Basel II
Accord?
- Gradual phasing in or more abrupt approach?
-
38Complexities/Challenges Identified
- 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
-
39Complexities/Challenges Identified Contd
- 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.
40Suggested 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. -
41Suggested Approaches Contd
- 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.
42Conclusion
-
- 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.
43Questions Or Comments?
-
- Esco Henry
- Legal Adviser, ECCB
- Email esco.henry_at_eccb-
centralbank.org
- Tel 869.465.2537