Caribbean Association of Audit Committee Members AUDIT COMMITTEES: MAKING CORPORATE GOVERNANCE WORK IN THE CARIBBEAN

1. Castries, St. Lucia June 21 – 22, 2007 Caribbean Association of Audit Committee MembersAUDIT COMMITTEES: MAKING CORPORATE GOVERNANCE WORK IN THE CARIBBEAN

2. International Financial Reporting Standards AUDIT COMMITTEE FUNDAMENTALSTOPIC

3. Agenda • Introduction to Financial Reporting and Investor Relations • What are International Financial Reporting Standards (IFRS) • Introduction to the Framework of Financial Reporting • Bridging the Gap – Management Accounts and Financial Statements, Understanding Financial Statement Assertions • Probing Questions to ask of Management on Financial Reporting • Closing remarks

4. Introduction to Financial Reporting &Investor Relations

5. Introduction to Financial Reporting and Investor Relations IGNORANCE IS BLISS??? Think back to the ENRON debacle….. Who would you say was most disadvantaged by the undoing of ENRON? Who would you say was most culpable for the demise of ENRON? What could the investors have done differently? What could those charged with corporate governance have done differently? How could more timely, higher quality financial information have made a difference?

6. Introduction to Financial Reporting and Investor Relations INVESTOR RELATIONS WHAT ARE SOME OF THE NEEDS OF INVESTORS? • Positive returns on investments. • Information to assist in deciding when to buy, hold or sell an equity investment. • More quality investment options from which to choose to increase their net worth. • Accountability from management, Boards of Directors, Audit Committees in their stewardship. • Confidence in quality of their investments. • Confidence in quality of financial information relating to their investments. • Information to assess (a) the ability of the entity to pay and provide other benefits to its employees, (b) the security of amounts lent to the entity, and (‘c) current and future obligations (eg. Litigation, pensions, capital commitments, etc).

7. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING WHAT IS THE MAIN OBJECTIVE OF FINANCIAL STATEMENTS? To provide information on the financial position, overall performance, cash flows and the entity's ability to adapt to changes in the economic environment in which it operates. The main objective of the financial statements is decision usefulness.

8. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING The 4 characteristics of the content and quality of financial statements are as follows: Decision usefulness Qualitative factors Understandability Comparability Relevance Reliability ConstraintsTimeliness Cost-benefit balance True and Fair View

9. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING The financial reporting characteristics and constraints are all self explanatory. We will however take a closer look at these: Understandability The information presented to the users should be in state that it is not confusing. There is a reasonable expectation that financial information is generally understood by those for whom it is prepared.

10. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING Comparability Users must be able to compare an entity’s financial statements through time in order to identify trends in financial performance. Hence policies on recognition, measurement and disclosure must be applied consistently over time. Where an entity changes its accounting for the recognition or measurement of transactions, it should disclose the change in the Basis of Accounting section of its financial statements and follow the guidance set out in IFRS.

11. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING Relevance The information presented to the users is relevant if it has the capacity to influence user’s economic decisions. Relevant information will help users to evaluate the past, present and, importantly, the future events in an entity.

12. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING Reliability The information presented to the users must represent faithfully the effect of transactions and events that it reflects. The true impact of transactions and events can be compromised by the difficulty of measuring transactions reliably. Financial information is reliable if it is free from material error and is complete. Information is material if its omission or misstatement could influence decisions that users make on the basis of the financial statements. Reliability is a function of several factors: • Reliability of underlying information prepared by the Company’s information (IT) system; • Reliability of underlying management information; • Expertise and competence of the Company’s financial professionals; • Expertise and competence of the Board of Directors; and • Expertise and competence of the Audit Committee.

13. Introduction to Financial Reporting and Investor Relations FINANCIAL REPORTING The Organisation as a whole has a responsibility to ensure the quality of the financial information disseminated for the consumption of the users. Specifically, the following groups are accountable for the quality and reliability of the financial information disseminated: • Management • Board of Directors • Audit Committee

14. WHAT ARE INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

15. What are International Financial Reporting Standards (IFRS)? IFRS International Financial Reporting Standards (IFRS) refers to the group of standards issued by the International Accounting Standards Board (“IASB”) as guidance in preparation of financial statements. IFRS is one of several frame works that an organisation can adopt for the preparation of its financial statements. E.g., in the UK there is UK GAAP, in the USA there is US GAAP. Globally IFRS is one of the most widely used frame-works for the preparation of financial statements.

16. What are International Financial Reporting Standards (IFRS)? IFRS The Standards provide guidance for preparers to deal with: • The recognition, • The measurement, • The presentation; and • The disclosure requirements for transactions and events. Most IFRS are intended for application across industries. A second tier of guidance comes from the Interpretations developed by the Standing Interpretations Committee, now IFRIC. These pronouncements clarify or interpret the standards where the preparer community identifies the need for improved guidance. The IASB has issued a total of 68 exposure drafts (EDs), 41 International Accounting Standards (IAS), 8 International Financial Reporting Standardsand 25 Interpretations of IAS (IFRICs).

17. What are International Financial Reporting Standards (IFRS)? IFRS The focus of international standard setting is on profit-oriented reporting entities, including non-corporate entities such as mutual funds. Despite concentrating on profit-type entities, the IASB envisages that non-profit entities in the private and public sectors may nevertheless find its Standards an appropriate basis for financial reporting. A non-profit entity that states compliance with IFRS should, however, comply with IFRS in full. A profit-oriented reporting entity is one that reports to users, who rely on the financial statements as a major source of financial information about the entity. IFRS are directed to the information needs of users such as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments and the public at large.

18. What are International Financial Reporting Standards (IFRS)? IFRS The term financial statements refers to several statements that display different aspects of the entity's financial performance. Financial position is reflected in the balance sheet and a statement of changes in shareholders' equity. Financial performance is reported in the income statement and liquidity position in the cash flow statement. These statements are supplemented by a series of detailed notes.

19. Introduction to the Framework of Financial Reporting

20. INTRODUCTION TO THE FRAME-WORKOF FINANCIAL REPORTING International Financial Reporting Standards WHY IFRS? • What GAAP is currently used by your entity? • What is the recognised / codified frame-work of your territory/ island/ country? • The IASB’s goal is that of establishing an accounting frame-work which can be used globally allowing for consistency, transparency and comparability in financial information; andoverall international harmonisation.

21. INTRODUCTION TO THE FRAME-WORKOF FINANCIAL REPORTING International Financial Reporting Standards WHO IS THE IASB? The IASB is the international standard setting body responsible for existing IASs, IFRSs and future standards. The IASB achieves its objectives primarily by developing and publishing IFRSs and promoting the use of those standards in general purpose financial statements and other financial reporting. Other financial reporting comprises information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions. In developing IFRSs, the IASB works with national standard-setters to maximise the convergence of IFRSs and national standards.

22. INTRODUCTION TO THE FRAME-WORKOF FINANCIAL REPORTING International Financial Reporting Standards The IASB’s objective is to require like transactions and events to be accounted for and reported in a like way and unlike transactions and events to be accounted for and reported differently, both within an entity over time and among entities. Consequently, the IASB intends not to permit choices in accounting treatment. Also, the IASB has reconsidered, and will continue to reconsider, those transactions and events for which IASs permit a choice of accounting treatment, with the objective of reducing the number of those choices.

23. INTRODUCTION TO THE FRAME-WORKOF FINANCIAL REPORTING International Financial Reporting Standards WHY IFRS? The adoption of IFRS (encouraging international harmonisation – convergence) is seen to have several potentially positive affects for regional development and institutions in developing economies in general, with regards to their financial reporting. Specifically, where financial information is prepared under a universally understood frame-work: - Access to international financing and investment opportunities (growth in foreign investment) increases. - Ability to establish linkages, partnerships, networks, mergers, etc. (e.g., correspondent banks, international related parties) increases; and - Ability to comply with non local / international financial reporting requirements that may arise as a result of cross-border transactions increases.

24. INTRODUCTION TO THE FRAME-WORKOF FINANCIAL REPORTING International Financial Reporting Standards HOW SHOULD STANDARDS BE IMPLEMENTED? Once an entity adopts IFRS it must comply with all of the Standards and Interpretations, despite any differences that may exist between an entity’s local GAAP and IFRS. (E.g., loan loss provision per IAS 39 versus local Central Bank). All changes of each individual standard must be implemented at the same point. Selective application of different elements within an individual standard is not permitted.

25. Bridging the Gap – Management Accounts &Financial Statements, Understanding Financial Statement Assertions

26. Bridging the Gap Management accounts: Summary • These are primarily financial information prepared for internal purposes only. • Management accounts are prepared for management information purposes. • These are used for management’s decision making within the business. • These do not generally take a prescribed format.

27. Bridging the Gap Financial statements: Summary • These are primarily financial information prepared for external purposes. • Financial statements are used by different stakeholders for varying information purposes. • These are used for a wide range of decision-making. • These generally take the prescribed format, as shown below:

28. Bridging the Gap Financial statements: Summary • A complete set of financial statements includes: • a balance sheet, • an income statement, • a statement showing either all changes in equity or changes in equity other than those arising from capital transactions with owners and distributions to owners, • a cash flow statement, and • accounting policies and explanatory notes. The term ‘financial statements’ includes a complete set of financial statements prepared for an interim or annual period, and condensed financial statements for an interim period.

29. Bridging the Gap Financial statements: Summary Underlying assumptions: Financial statements must be prepared on the accrual basis of accounting, and on the assumption that the entity is a going concern. The accrual basis requires that the effects of transactions and other events are recognised as and when they occur and not when cash is received or paid. Financial statements should be prepared on the assumption that the entity is a going concern and will continue to operate for the foreseeable future. Hence the user can assume that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its activities. The going concern basis of accounting should only be abandoned when the entity cannot or will not continue to operate for the foreseeable future.

30. Bridging the Gap Can the Gap be Bridged? The characteristics of financial statements prepared under a recognised financial reporting frame-work, results in these being distinctive from management accounts. There will continue to be a gap between the level of reliance that can be placed on management accounts (generally low) compared to the reliance that can be placed on financial statements once certain differences exist. The Gap between the level of reliability that can be placed on Management accounts compared to Financial statements is primarily reflective of the following: - The fact remains that management accounts are generally not prepared within the context of a financial reporting frame-work; and - They tend to be less reliable as there information content is driven by the needs of management (who within this context is usually the primary and only user of these statements).

31. Bridging the Gap Understanding financial statement assertions Accuracy Completeness Valuation & Allocation Existence/Occurrence Cut-off Classification & Understanability [Presentation & Disclosure] Rights & Obligations

32. Bridging the Gap • Management is responsible for the fair presentation of the financial statements. This is a requirement of International Standards on Auditing (ISA 500.5). • In representing that the financial statements are true and fair/presented fairly, in all material respects, in accordance with the applicable financial reporting framework, management implicitly makes the assertions as stipulated in ISA (ISA 500.15). Risks of material misstatement at an assertion level are assessed by considering the different types of potential misstatements that may occur. Management is expected to design and implement controls and procedures that are responsive to mitigating against those risks. Can the Gap be Bridged?

33. Bridging the Gap • Assertions about classes of transactions and events for the period under audit include: • Occurrence:  transactions and events that have been recorded have occurred and pertain to the entity • Completeness:  all transactions and events that should have been recorded have been recorded • Accuracy:  amounts and other data relating to recorded transactions and events have been recorded accurately • Cutoff:  transactions and events have been recorded in the correct accounting period • Classification: transactions and events have been recorded in the proper accounts

34. Bridging the Gap Assertions about account balances at the period end include: • Existence: assets, liabilities and equity interests exist • Rights and obligations:  the entity holds or controls the rights to assets and liabilities are the obligations of the entity • Completeness:  all assets, liabilities and equity interests that should have been recorded have been recorded • Valuation and allocation:  assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded

35. Bridging the Gap Assertions about presentation and disclosure include : • Occurrence and rights and obligations:  disclosed events, transactions, and other matters have occurred and pertain to the entity • Completeness:  all disclosures that should have been included in the financial statements have been included • Classification and understandability: financial information is appropriately presented and described and disclosures are clearly expressed • Accuracy and valuation: financial and other information are disclosed fairly and at appropriate amounts

36. Probing questions to ask management

37. Probing Questions to Ask Management FINANCIAL STATEMENTS • What financial reporting frame-work are the financial statements prepared under? • Has IFRS been followed in its entirety (where applicable)? • Has IFRS adoption been modified in any way as a result of custom or local practice or regulation? • What are the accounting policies adopted in preparing the financial statements? • For each balance sheet and income statement item, which standard is applicable? Has the standard been properly applied? • Have the accounting policies been consistently applied on a yearly basis?

38. Probing Questions to Ask Management FINANCIAL STATEMENTS • What are the complex accounting issues in the Company’s financial statements? • Have all assets and liabilities whose recognition is required by IFRS been recognised? Has all applicable IFRSs been applied in measuring the Company’s assets and liabilities? • Have all disclosure matters required under the following (presentation related) standards been addressed? • - IAS 1 Presentation & Disclosure (e.g. Critical accounting estimates and judgments) • - IAS 24 Related Party Disclosure • - IFRS 7 Financial instruments: Disclosure • Has revenue been duly reported within the context of IAS 18?

39. Probing Questions to Ask Management MANAGEMENT INFORMATION • Have all underlying accounts been reconciled and reconciling items duly investigated and resolved? • Have all bank accounts been reconciled and agreed with the Bank? • Have all suspense accounts been reconciled and cleared out in a timely manner? • Have all provisions and accruals been properly established within the context of IAS 37? • Has all the information in the underlying sub ledgers been reconciled to the general ledger and included in the accounts?

40. Probing Questions to Ask Management MANAGEMENT INFORMATION SYSTEMS • Have there been any issues / problems during the year with the Company’s IT systems? • Has there been any upgrades or enhancements to the Company’s IT systems ? • How has internal audit been involved with the internal control environment during the year? • Were there any weaknesses and / break-downs in internal controls that internal audit became aware of? How have these been remedied?

41. Probing Questions to Ask Management OTHER QUESTIONS • Have there been any instances of regulatory non compliance, breaches of loan covenants, litigious exposure, etc.? • Have all balances included in the financial statements that are based on expert information been supported by the expert’s report? For example, pensions based on IAS 19. • Have investment securities been included in the financial statements at fair value within the context and guidance of IAS 39? • How has fair value been determined for thinly traded equity securities? • How has the loan loss provision been derived?

42. Closing Remarks

43. Regional Governance Committees must take up the challenge posed by a more complex financial reporting environment, as the stakeholders expect more accountability and also become more sophisticated/knowledgeable.IFRS is a proactive move towards international harmonisation.Lack of Local GAAP in some territories continues to undermine regulation, monitoring and consistency in financial reporting. A frame-work must be followed for consistency, transparency and comparability to be demonstrable.A lack of knowledge and / or expertise at the senior levels of organisations can only undermine the decision usefulness of the financial statements.

44. Membership on a governance committee must be seen in a new light. This is a position of fiduciary responsibility and where one lacks the skill set, expertise, willingness, available time, etc to act in a effective and efficient manner, one should not hold such an office as such a person would generally add no value to achieving the objectives of a properly functioning Audit Committee. As a Board sub committee, the onus is on the Company’s directors to hire suitably qualified committee members!

45. OVER TO YOU!