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Title: PRESENTATION TO THE AUDITORS GROUP


1
PRESENTATION TO THE AUDITORS GROUP
  • Trinidad and Tobago Securities
  • and Exchange Commission
  • Thursday 24th November, 2006

2
The Agenda
  • Regulatory Background
  • IAS Issues
  • Filing Requirements
  • Board of Directors
  • Professional Matters
  • Market Related Matters

3
Regulatory Background
  • Market presently subject to the Securities
    Industry Act of 1995
  • Significant growth and development in the
    industry since that time new and more
    sophisticated products, including mutual funds,
    and a challenging stock exchange
  • Proposed Securities Act, based on the Stikeman
    Elliot Final Report

4
International Accounting Standards
Main Challenges Facing Registrants in the
Implementation of IFRS
5
IAS 1- Presentation of Financial Statements
  • Many instances of registrants failing to
    properly disclose information relating to their
    share capital. In particular shares reserved
    for issue under options and contracts for the
    sale of shares, including the terms and amounts
  • This information is critical since there may be
    cases where Directors who have little or no
    beneficial shareholding are entitled to a
    significant of shareholding if shares granted
    through Stock Options are taken into account.

6
IAS 24 Related Party Disclosures
  • In most cases disclosures are very broad and do
    not adequately disclose the person/persons who
    may be in positions to exert significant
    influence over the operations of the entity.
  • Directors compensation and beneficial loans or
    advances made to Management or Directors should
    be appropriately disclosed as it is in
    investors/ shareholders interest to know this
    information.

7
IAS 28 Investments in Associates
  • Significant influence - owning 20 or more of
    the voting power of the investee is the only
    interpretation considered in determining whether
    or not an investee should be accounted for as an
    associate.
  • Significant influence by an investor is usually
    evidenced in 1 or more of the following ways
  • Representation on the board of directors or
    equivalent governing body of the investee
  • Participation in policy-making processes,
    including participation in decisions about
    dividends and other distributions
  • Material transactions between the investor and
    the investee
  • Interchange of managerial personnel or
  • Provision of essential technical information.

8
IAS 28 Investments in Associates
  • In our small economic environment, there can be a
    presumption that from time to time, directors of
    large, influential companies may overlap.
  • Need to be mindful of SOX provisions and good
    corporate governance. If there are instances
    where intellectual/experienced resources are
    limited, registrants must be prepared to account
    for these overlaps appropriately and give users
    of its financial statements the information
    required to make sound investment decisions.

9
IAS 39 Financial Instruments
  • This standard has been the source of most of the
    problems encountered by our registrants.
  • Its adoption has directly impacted on the
    profitability and hence the EPS of the
    registrants.
  • Our concern consistency of interpretation

10
Filing Requirements
11
Part V - Securities Act 2006 Disclosure
Obligations of Reporting Issuers
  • Annual Reports
  • (1)A reporting issuer shall, within 120 days of
    the end of its financial year -
  • (a) file with the Commission, a copy of its
    annual report containing the prescribed
    information and
  • (b)send the annual report to each holder of its
    securities, other than debt securities, addressed
    to the latest address as shown on the securities
    register of the reporting issuer
  • Proposed Section 67, GBL 58

12
Part V - Securities Act 2006 (contd)
  • Annual Financial Statements
  • (1)Every reporting issuer shall within the
    prescribed time period (i.e. 120 days) prepare
    and file with the Commission annually comparative
    financial statements relating separately to
  • (a) the period that commenced on the date of
    incorporation or organization and ended as of the
    close of the first financial year or, if the
    reporting issuer has completed a financial year,
    the last financial year, as the case may be and
  • (b) the period covered by the financial year next
    preceding the last financial year, if
    any
  • made up and certified as prescribed and prepared
    in accordance with financial reporting standards
    Proposed Section 69 GBL 60

13
Part V - Securities Act 2006 (contd)
  • Section 69 Annual Financial Statements (contd)
  • (2)Every financial statement referred to in
    subsection (1) shall be accompanied by a report
    of the auditor of the reporting issuer, without
    reservation of opinion, prepared as prescribed.
  • (3)Auditor of a reporting issuer
  • No person shall act as the auditor of a
    reporting issuer unless such person is a member
    in good standing of the Institute of Chartered
    Accountants of Trinidad and Tobago or such other
    professional accounting body as may be prescribed

14
Part V - Securities Act 2006 (contd)
  • Officer Certification of Accuracy
  • At the time a reporting issuer files comparative
    financial statements, it shall concurrently file
    a certificate in the prescribed form and signed
    by its CEO and its CFO, or any other 2 senior
    officers if the reporting issuer does not have a
    CEO or CFO, certifying the accuracy of the
    comparative financial statements.
  • If no CEO and CFO, or any 2 other senior
    officers, any 2 directors of the reporting issuer
    shall certify the accuracy.
    Proposed s. 69(4)

15
Part V - Securities Act 2006 (contd)
  • Audit Committee
  • The Board of Directors of a reporting issuer is
    to have an audit committee composed of not less
    than 3 directors of the reporting issuer
  • The majority of this committee shall not be
    senior officers or employees of the reporting
    issuer or its affiliates Proposed s. 69(5)
  • The Audit Committee is required to review the
    comparative annual financial statements before
    their approval by the reporting issuers
    directors Proposed s. 69(6)

16

Part V - Securities Act 2006 (contd)
  • Meetings of the Audit Committee
  • Auditors entitled to
  • Receive notice of every meeting of the audit
    committee
  • Attend and be heard at these meetings at the
    reporting issuers expense
  • Attend every meeting of the committee held during
    their term of office if so requested by any
    member of the audit committee
  • Proposed s. 69 (7)

17
Part V - Securities Act 2006 (contd)
  • Management Discussion Analysis (MDA)
  • (1)A reporting issuer shall prepare and file
    annually within 120 days of the end of its
    financial year, an MDA for each financial year
    ending on or after (date dependent on passage of
    new Act).
  • Proposed s. 72, proposed GBL 63
  • (2) An MDA of a reporting issuer shall contain
    and discuss such matters as may be prescribed.

18
Part V - Securities Act 2006 (contd)
  • MDA contd
  • (3) MDA to be sent by reporting issuer to each
    holder of its securities, other than debt
    securities, to the latest address as shown on the
    securities register concurrently with the sending
    to those security holders of its annual
    comparative financial statements.

19
Part V - Proposed General By-Laws
  • MDA contd
  • By-Law 63 (2) - Management Discussion Analysis
  • The MDA of a reporting issuer shall include a
    discussion of the following items for the
    financial year of the reporting issuer for which
    the MDA is being prepared, and a comparative
    discussion for the financial year immediately
    preceding such financial year -

20
Part V - Proposed General By-Laws (contd)
  • By-Law 63 (2) contd - MDA
  • (a) the overall performance of the reporting
    issuer
  • (b) the results of operations for the reporting
    issuer
  • (c) the liquidity position of the reporting
    issuer
  • (d) the capital resources of the reporting issuer
  • (e) material related party transactions involving
    the reporting issuer
  • (f) accounting policies of the reporting issuer

21
Part V - Proposed General By-Laws (contd)
  • By-Law 63 (3), (4) - MDA
  • 3) An MDA of a reporting issuer may discuss
    such other matters which the reporting issuer
    reasonably believes are necessary for a full,
    true and complete understanding of the financial
    results, financial position and future prospects
    of the reporting issuer
  • However, a reporting issuer is not required to
    make disclosure of any matter in an MDA which is
    not material to the reporting issuer, or which is
    inapplicable given the business and operations of
    the reporting issuer.

22
Mutual Funds/CISs
  • Proposed Collective Investment Scheme By-Laws
    (now CIS Guidelines)
  • Part 3 Initial Investment
  • Clause 6 (1)
  • A new CIS shall file a prospectus for
    distribution together with documentary evidence
    demonstrating that an investment of at least 5
    million dollars in the securities of the CIS has
    been made and that those securities are
    beneficially owned before the time of filing

23
Mutual Funds/CISs contd
  • CIS Guidelines
  • Initial Capital
  • Clause 6 (2), 25
  • The sponsor or manager of a CIS shall set aside
    minimum initial capital of 2 million dollars
    from which the fees and expenses of the formation
    or initial organization of the CIS must be
    deducted.

24
Mutual Funds/CISs contd
  • CIS Guidelines
  • Part 5 Name
  • Clause 8 (1)
  • No CIS shall have a name that is misleading or
    conflicts with the type of CIS by which it is
    best characterized.

25

Mutual Funds/CISs contd
  • Money Market
  • Clause 8 (2) - A CIS shall not include as part of
    its name the words money market or be otherwise
    referred to as a money market fund unless the
    CIS has at the date of inception, and intends to
    continue to have at all subsequent times, not
    less than 90 of its portfolio assets invested in
    any or all of the following
  • cash and
  • evidences of indebtedness that have a remaining
    term to maturity of not more than one year, that
    are issued, or fully and unconditionally
    guaranteed as to principal and interest, by a
    financial institution or a government entity

26
Mutual Funds/CISs contd
  • Bond
  • Clause 8 (3) - A CIS shall not include as part of
    its name the word bond or be otherwise referred
    to as a bond fund unless the CIS has at the
    date of inception, and intends to continue to
    have at all subsequent times, not less than 70
    of its portfolio assets invested in
  • cash and
  • bonds, debentures, notes or similar instruments
    representing indebtedness, whether secured or
    unsecured, that have an original tenor of more
    than one year (other than those issued by a
    foreign governments or any political division
    thereof that issues bonds, debentures, or other
    evidences of indebtedness).

27
Mutual Funds/CISs contd
  • Bond
  • Clause 8 (4) -Apart from Money Market and
    Bond Funds, where a CIS includes as part of its
    name, words that suggest the pursuit of a
    particular investment strategy, not less than 80
    of the schemes assets shall be invested in
    pursuit of that strategy.
  • Clause 8 (5) -Where a CIS selects as part of its
    name the words guaranteed or secured or words
    of similar meaning, the sponsor or investment
    manager of the scheme shall provide evidence to
    the satisfaction of the Commission that
    sufficient assets have been set aside to give
    effect to the guarantee or to secure the
    investors assets.

28
Mutual Funds/CISs contd
  • Clause 8 (6) - Within 60 days of the end of each
    6 month period of its operation, the manager
    shall confirm in writing to the Commission the
    amount of the assets set aside to give effect to
    the guarantee or to secure the investors assets.
  • Part 7 Reporting Issuer
  • Clause 10 - Registration of the Reporting Issuer
  • The Sponsor of a CIS shall be registered with
    the Commission as a reporting issuer.

29
Mutual Funds/CISs contd
  • Part 10 Borrowing Powers
  • Clause 22 - Limitations
  • A CIS shall not borrow cash or provide a security
    interest over any of its portfolio assets unless
    the transaction is temporary and is for the
    purpose of accommodating requests for the
    redemption of securities of the CIS while the CIS
    effects an orderly liquidation of portfolio
    assets, or to permit the CIS to settle portfolio
    transactions and, after giving effect to all
    transactions undertaken under this Part, the
    outstanding amount of all borrowings of the
    collective investment scheme does not exceed five
    percent of the portfolio assets of the CIS taken
    at market value at the time of the borrowing.

30
Mutual Funds/CISs contd
  • Part 10 Borrowing Powers contd
  • For purposes of this Part, a transaction shall be
    deemed to be temporary if the borrowing is repaid
    within six months from the date of borrowing.

31
Mutual Funds/CISs contd
  • Part 16 Financial Statements and Management
    Discussion of Performance of CIS
  • Clause 29 Annual Comparative Financial
    Statements
  • A CIS shall file with the Commission and publish,
    within 120 days of its financial year end,
    audited annual comparative financial statements
    which shall include
  • (a) an income statement prepared in accordance
    with IFRS
  • (b) a balance sheet prepared in accordance with
    IFRS
  • (c) a statement of investment portfolio prepared
    in accordance with these Guidelines
  • (d) a statement of cash flows prepared in
    accordance with IFRS
  • (e) a statement of changes in net assets prepared
    in accordance with these Guidelines
  • (f) a statement of operations prepared in
    accordance with these Guidelines.

32
Mutual Funds/CISs contd
  • Part 16 Financial Statements and Management
    Discussion of Performance of CIS contd
  • The CIS Guidelines will also include a
    requirement that CISs file a monthly volume
    report with the Commission.

33
Mutual Funds/CIS contd
  • Part 16 Financial Statements and Management
    Discussion of Performance of CIS contd
  • Clause 30 Interim Financial Statements
  • A CIS shall file with the Commission and publish
    within 60 days of the end of the second quarter
    of its financial year, interim financial
    statements which shall include -
  • an income statement prepared in accordance with
    IFRS
  • a balance sheet prepared in accordance with IFRS
  • a statement of cash flows prepared in accordance
    with these Guidelines
  • a statement of investment portfolio prepared in
    accordance with IFRS
  • a statement of changes in net assets prepared in
    accordance with these Guidelines
  • a statement of operations prepared in accordance
    with these Guidelines.

34
Mutual Funds/CIS contd
  • Clause 31 Semi-Annual Reporting
  • A CIS shall file within 60 days of the end of
    each 6 month period of its operation, reports in
    a form prescribed by the Commission which shall
    include, inter alia -
  • (a) an income statement prepared in accordance
    with IFRS
  • (b) a balance sheet prepared in accordance with
    IFRS
  • (c) a statement of investment portfolio
    prepared in accordance with these Guidelines
  • (d) a statement of portfolio transactions
    prepared in accordance with these Guidelines and
  • (e) a statement of changes in net assets
    prepared in accordance with these Guidelines
  • (f) a statement of operations prepared in
    accordance with these Guidelines
  • (g) a volume report prepared in accordance with
    these Guidelines.
  • (h) any other report prescribed by the
    Commission.

35
Board of Directors
36
Disclosure of Related Party Transactions
  • A person connected with a reporting issuer (as an
    affiliate, holding company or as a result of
    controlling interests) must within 5 business
    days of becoming connected file a report with the
    Commission section 140(1)
  • Filing is not required if the person does not
    beneficially own or exercise control or direction
    over the securities of the reporting issuer
    section 140(4)

37
Disclosure of Related Party Transactions
  • A reporting issuer may require the holder of its
    securities to indicate the capacity in which he
    holds the securities, including whether any other
    person has an interest in the securities
    section 141(1), (2)
  • A reporting issuer may request a holder of its
    securities to disclose whether any of its
    securities that are held by him are subject to an
    agreement or arrangement with another person
    section 141(4)

38
Disclosure of Related Party Transactions (CIS
Guidelines)
  • Under the CIS Guidelines, the MDA must discuss
    any transaction involving a related party
    clause 39(1)(e)
  • Where a related party engages in a transaction
    with a CIS, the CIS must report the transaction
    to the Commission within 7 days of the end of the
    month in which the transaction occurred - clause
    39(2)

39
Disclosure of Stock Options and Directors
Compensation
  • Proposed Prospectus By-Laws Form 1
  • The aggregate cash remuneration and other cash or
    non-cash benefits paid to the directors and
    senior officers of the issuer for services
    rendered in all capacities to the issuer to be
    stated. Clause 8
  • A requirement for disclosure of full particulars
    of any contract or arrangement existing at the
    date of the prospectus. Clause 9
  • NB The Commission is formulating draft
    guidelines to deal specifically with ESOPs/Stock
    Options

40
Professional Matters
41
Professional Matters Interim Statements Auditors
  • Interim Financial Statements
  • Need not include an auditors report, but if an
    auditor has been associated with that statement,
    his audit report or his comments on the unaudited
    financial information shall accompany the
    financial statement.
  • Proposed s. 70(2)

42
Professional Matters Auditor Independence
  • Under the general by-law making authority of
    proposed section 150(1), the Commission can
    prescribe
  • Standards of independence and other
    qualifications for auditors Proposed s.
    150(1)(w)(iii)
  • Requirements for a change in auditors by a
    reporting issuer or a market actor Proposed s.
    150(1)(w)(iv)
  • In this regard, relevant provisions of the
    practice in other jurisdictions, such as under
    the Sarbanes-Oxley Act, 2002 (SOX), will be
    assessed.

43
Professional Matters Auditor Independence SOX
  • Auditor Independence is heightened under SOX in
    the following ways
  • Non-audit services are restricted
  • Rotation of audit partner (but not entire firm)
    required at least every 5 years
  • Auditor conflicts of interest limited by
    requiring 1 year cooling-off period before member
    of audit staff can be hired by client for high
    level executive position
  • Improper influence by corporate personnel on the
    conduct of audit prohibited

44
Professional Matters Auditor Independence SOX
(contd)
  • To prevent audit firms from appearing to be
    beholden to the public companies that employ them
    to conduct audits firms are prohibited from
    rendering the following services to a public
    company client contemporaneously with the audit
  • Bookkeeping or other services related to the
    accounting records or financial statements of the
    audit client
  • Financial information systems design and
    implementation
  • Appraisal or valuation services, fairness
    opinions, or contribution-in-kind reports
  • Actuarial services

45
Professional Matters Auditor Independence SOX
(contd)
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker or dealer, investment adviser, or
    investment banking services
  • Legal services and expert services unrelated to
    the audit and
  • Any other services determined by regulation to be
    impermissible.

46
Professional Matters Liability
  • An auditor of a reporting issuer which knowingly
    makes or provides a false or misleading audit
    report in respect of the comparative financial
    statements of a reporting issuer is guilty of an
    offence and is liable on summary conviction to a
    fine of up to 1 million dollars.
  • Proposed s. 75(4)

47
Professional Matters Liability contd
  • Where an auditor is convicted of an offence
    under subsection (5), the Commission may order if
    it is in the public interest, and in addition to
    any other order that the Commission may make,
    that the auditor be prohibited from being the
    auditor of a reporting issuer for a period not
    exceeding 5 years.
  • Proposed s. 75(4)

48
Market Related Matters
49
Market Related Matters Takeovers and IPOs
  • The Takeover By-Laws that became effective in
    March 2005 in conjunction with certain provisions
    in the Companies Act govern takeovers in Trinidad
  • IPOs no special provisions. Will be governed
    by the proposed Prospectus By-Laws (PBL) and
    accompanying prospectus form which will replace
    the current prospectus guidelines

50
Market Related Matters New Disclosures
  • Financial Statement Disclosure in a Prospectus
  • Substantially similar to whats provided under
    current by-law 45, except that
  • 3 year historical financial statements included
    (not the current 5 year requirement)
  • Inclusion of interim financial statements for
    any quarterly period ending more than 60 days
    before the date of the prospectus
  • Proposed PBL 18(1)

51
Market Related Matters New Disclosures (contd)
  • Proposed PBL 25
  • (1) A financial statement that is included in a
    prospectus and which relates to any part of a
    financial year subsequent to the last completed
    financial year of the issuer need not be reported
    on by an auditor where -
  • (a) that part of the financial year ended
  • (i) not more than 90 days before the date on
    which a receipt was issued for the prospectus
    and
  • (ii) not more than 12 months after the last
    audited financial year and
  • (b) the audited balance sheet of the issuer as
    at the end of the latest financial year is
    included in the prospectus.

52
Market Related Matters New Disclosures (contd)
  • (2) An auditor need not report on
  • (a) the interim financial statements referred to
    in subsection 18(1) of this By-Law and
  • (b) the income statement, the statement of
    surplus (i.e. cash flow) and the statement of
    changes in financial statements (changes in
    equity) and the pro forma balance sheet, for the
    same period for an acquired business referred to
    in subsections 19(1) or (2) or this By-Law.
  • (3) Where, under this By-Law, a financial
    statement contained in a prospectus is not
    reported on by an auditor, there shall be filed
    with the Commission not later than the filing of
    the prospectus, the communication of the auditor
    that is suggested for these circumstances by the
    Institute of Chartered Accountants of Trinidad
    and Tobago.

53
Market Related Matters Illegal Insider Trading
  • Two operative provisions (proposed sections 104
    (insider trading prohibition) and 105 (tipping
    prohibition) would operate to clearly prohibit
    certain uses of undisclosed price sensitive
    information by persons connected to a reporting
    issuer, including
  • trading for their own account
  • counselling others to trade and
  • disclosing the information prior to its general
    dissemination, other than in the necessary course
    of business.

54
Market Related Matters Illegal Insider Trading
(contd)
  • The determination of who is a connected person
    is simplified by deeming certain persons to be
    connected to a reporting issuer.
  • Under current subsection 120(2), a subjective
    assessment is required which may make it
    difficult to determine whether any particular
    individual is in fact connected to a reporting
    issuer.

55
Market Related Matters Illegal Insider Trading
(contd)
  • Proposed section 4(4)
  • All officers and employees are considered to be
    insiders as well as directors and significant
    security holders (i.e. those holding more than
    10 of the outstanding voting securities of the
    reporting issuer).
  • No subjective assessment is required. Based on
    their close relationship with the reporting
    issuer, these persons are considered to be
    connected to the reporting issuer and subject to
    the prohibitions on trading, and informing others
    of undisclosed price sensitive information

56
Market Related Matters Illegal Insider Trading
(contd)
  • Certain other persons, who may be privy to such
    information, namely experts retained by the
    reporting issuer and persons engaging, or
    proposing to engage in, any business or
    professional activity with or on behalf of the
    reporting issuer (or with a bidder), or an
    employee of any such person, or of the reporting
    issuer or any affiliate, would also be considered
    to be connected to the reporting issuer.

57
  • The End
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