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REGULATORY ENVIRONMENT: INCREASING COMPLEXITIES AND CHALLENGES

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Title: REGULATORY ENVIRONMENT: INCREASING COMPLEXITIES AND CHALLENGES


1
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

2
OUTLINE
  • 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

3
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

4
Introduction 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.

5
Introduction 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.

6
Introduction 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

7
Introduction 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.

8
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 institutions
    board of directors, management, shareholders and
    other stakeholders.

9
DEFINITIONS 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.

10
DEFINITIONS 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.

11
Characteristics of good corporate governance
citizen
  • honesty
  • trust and integrity
  • openness
  • performance orientation
  • responsibility and accountability
  • mutual respect, and
  • commitment to the organisation

12
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

13
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 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.

14
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.

15
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.

16
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

17
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

18
Criminal 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)

19
Criminal 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.

20
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)

21
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,

22
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.

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

24
Sarbanes 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.

25
Sarbanes 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.

26
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.

27
International 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

28
International 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

29
International 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.

30
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)

31
Companies 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.

32
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.

33
Securities 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.

34
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

35
Banking 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.

36
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.

37
Regional vs International Standards
  • Reasonable conclusion will region
    inevitably embrace IFRS, SOX and/or Basel II
    Accord?
  • Gradual phasing in or more abrupt approach?

38
Complexities/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

39
Complexities/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.

40
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.

41
Suggested 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.

42
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.

43
Questions Or Comments?
  • Esco Henry
  • Legal Adviser, ECCB
  • Email esco.henry_at_eccb-
    centralbank.org
  • Tel 869.465.2537
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