SASRA REQUIREMENTS AMONG THE DTS ICPAK WORKSHOP - MOMBASA

1. SASRA REQUIREMENTS AMONG THE DTSICPAK WORKSHOP - MOMBASA Presented on 6th February 2017 at Naivasha

2. Legal requirements for Auditors. • Previously not covered by the Cooperative societies Act and hence the practices differed from one sacco to another. • The sector thus lobbied for Sacco specific Act depending on where they were in Sacco development continuum (Sacco theories- Agency theory, stewardship theory, degeneration theory) • Sacco societies Act section 44 and 45 expressly provides for external Auditors roles in deposit taking Saccos. It is further strengthened by regulation 56 of Sacco Regulations. Contents are:- • Sec 44 and 45 provides that Auditors are qualified as per Companies Act (CPA, ICPAK membership, etc)

3. Legal Requirements cont…. • Approved by AGM • Appointed as such by the Authority and his role is:- To make report to the Authority stating (a) The solvency of Sacco Society’s business and any other concern with respect to financial condition of the Society’s business. (b) Violation of prudential standards and ( c) any other contravention of this Act. Regulation 56 further adds that:- • To communicate any evidence of irregularities or illegal acts that have been committed by the directors, employees or Sacco society itself • To inform the Authority if the Sacco is insolvent or that there is a significant risk to make it insolvent.

4. Legal Requirements cont…. • To provide opinion if the Sacco has significant policies and manuals to safeguard the Sacco’s assets. • Thus what is the Relationship between Sasra and Auditors ( Police,strategicpatners, bureaucratic govt officers, Indefferent professionals). • What is the Saccos Obligation to the Authority? Next Slide

5. SACCO SASRA REQUIREMENTS • Sacco to have an effective internal Auditor • Monthly returns on all important facets/ratios • Audited accounts( expected to be in harmony with returns) and inclusion of key audit matters • Management letters emphasizing on areas of Sacco system weaknesses and recommendations on how to correct them • All internal stakeholders trainings (Board, management, supervisory Board and other employees) • Keeping records and relevant policies guiding employees on all critical areas.

6. SACCO REQUIREMENTS CONT… • Declaration on insider lending on monthly basis • Auditors appointments on yearly basis and the changes after every three years. • Approval seeking on branches and satellite stations • Approval seeking on new loan products • Approval of Audited accounts among others.

7. Current Situation • Auditors doing professional work and very proud of their work – A class e.g auditors who stated all the clients weaknesses in a management letter. • Auditors who are indifferent to the Saccos situation provided they are paid (normally work to please the client) • Auditors who collude the client to provide erroneous information.

8. Sources of information on quality of Audit Offsite Surveillance Onsite Surveillance Third party evidence - Written Internal stakeholders – Employees, Board, supervisory Com and ordinary members.

9. Other Sasra Data Sources Returns: The primary source of data is from regulatory returns submitted to the Authority either on monthly or quarterly or annual basis. These include: Monthly returns: • Capital adequacy (Form 1) • Liquidity (Form 2) • Deposit Return (Form 3) • Statement of financial position (Form 6) • Statement of Comprehensive income (Form 7)

10. Other Sources of Data cont… Quarterly Returns • Loan Asset and risk classification return(form 4) • Investment return (form 5) Annual Returns Audited financial returns for other years Other disclosures (form 8)

11. 1. Introduction • The Authority is mandated to monitor financial condition of the deposit-taking Saccosthrough predefined indicators namely: • Capital adequacy • Asset quality • Earnings and • Liquidity • Data is collected on a monthly, quarterly and annual basis to carry out both financial and qualitative analysis. • The Authority also conducts onsite inspection on Sacco’s identified through offsite risk-based analysis and complemented by member complaints.

12. 2. OTHER SOURCES OF DATA CONT’D 2.2 Management reports: • Board minutes • AGM minutes • Strategic /Business plan • Product /new branch study reports • Economic reports • Audited financial statements • Supporting schedules e.g. loan listings, deposit listing etc.

13. 3. STABILITY INDICATORS

14. 3. Sacco Sub-sector Growth Indicators

15. Data Analysis - Consequences • The Trend especially in the stability • Sharp fluctuations – what caused it? Consequences • More clients to some auditors • Possibility of blacklisting auditors ? • Conflict among members of the same profession – the opinion of the previous audit vs current one? • Likelihood of a litigation?

16. 4. Challenges in monitoring Financial Stability • Resource contraint • Lack of computerized data analysis system • Financial resources for onsite inspection • Data quality: • weak internal and accounting controls • Inadequate and ineffective MIS controls • Historical financial mismanagements: • Reporting of Material unreconciled assets and liabilities • Creative accounting • Weak governance systems Lack of clear role separation between board and Management staff Management incompetency

17. Stop!