1 presentation to the auditors group trinidad and tobago securities and exchange commission thursday...

1

PRESENTATION TO PRESENTATION TO THE AUDITORS THE AUDITORS

GROUPGROUP

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

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.

IAS 1- Presentation of Financial Statements

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 (cont’d)

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 anymade up and certified as prescribed and prepared in accordance with financial reporting standards Proposed Section 69 & GBL 60

13


Section 69 – Annual Financial Statements (cont’d)

(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


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


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 issuer’s directors Proposed s. 69(6)

16

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 issuer’s 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


Management Discussion & Analysis (MD&A)

(1)A reporting issuer shall prepare and file annually within 120 days of the end of its financial year, an MD&A for each financial year ending on or after (date dependent on passage of new Act).

Proposed s. 72, proposed GBL 63

(2) An MD&A of a reporting issuer shall contain and discuss such matters as may be prescribed.

18


MD&A cont’d

(3) MD&A 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

MD&A cont’d

By-Law 63 (2) - Management Discussion & Analysis

The MD&A of a reporting issuer shall include a discussion of the following items for the financial year of the reporting issuer for which the MD&A is being prepared, and a comparative discussion for the financial year immediately preceding such financial year -

Part V - Proposed General By-Laws

20

By-Law 63 (2) cont’d - MD&A

(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

Part V - Proposed General By-Laws (cont’d)

21

By-Law 63 (3), (4) - MD&A

3) An MD&A 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

4) However, a reporting issuer is not required to make disclosure of any matter in an MD&A which is not material to the reporting issuer, or which is inapplicable given the business and operations of the reporting issuer.

Part V - Proposed General By-Laws (cont’d)

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 cont’d

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


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

“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


“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


“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 scheme’s 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 investor’s assets.

28


• 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 investor’s 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


Part 10 – Borrowing PowersClause 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


Part 10 – Borrowing Powers cont’d

•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


Part 16 – Financial Statements and Management Discussion of Performance of CISClause 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


Part 16 – Financial Statements and Management Discussion of Performance of CIS cont’d

The CIS Guidelines will also include a requirement that CISs file a monthly volume report with the Commission.

33

Mutual Funds/CIS cont’d

Part 16 – Financial Statements and Management Discussion of Performance of CIS cont’dClause 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 :-

a) an income statement prepared in accordance with IFRS;

b) a balance sheet prepared in accordance with IFRS;c) a statement of cash flows prepared in accordance with

these Guidelines; d) a statement of investment portfolio 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.

34

Mutual Funds/CIS cont’d

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

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)

Disclosure of Related Party Transactions

37

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

Under the CIS Guidelines, the MD&A 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)


(CIS Guidelines)

39

Disclosure of Stock Options and Directors’ Compensation

Proposed Prospectus By-Laws – Form 1The 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 MattersInterim Statements & Auditors

Interim Financial Statements

Need not include an auditor’s 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:

1) Non-audit services are restricted2) Rotation of audit partner (but not entire

firm) required at least every 5 years3) 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

4) Improper influence by corporate personnel on the conduct of audit prohibited

44


(cont’d)

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


(cont’d)

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 cont’d

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 MattersTakeovers 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 MattersNew Disclosures

Financial Statement Disclosure in a ProspectusSubstantially similar to what’s 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 MattersNew Disclosures (cont’d)

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 (cont’d)

(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 MattersIllegal 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 (cont’d)

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 (cont’d)

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 (cont’d)

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

1 presentation to the auditors group trinidad and tobago securities and exchange commission thursday...

Documents

securities industry

directors of large

directors compensation

tobago securities

financial year

significant growth

stock options

beneficial shareholding