MINISTER FOR ECONOMIC DEVELOPMENT (“The Minister”)
COMPANIES (AMENDMENT NO. 4) (JERSEY) REGULATIONS 200- (“the draft Regulations”)
ISSUE AND RECOMMENDATION
- Regulations are needed to respond to the impact of the European Union’s Statutory Audit Directive. If these draft Regulations are passed by the States they will enable Jersey to establish an ‘EU equivalent’ system of auditor oversight, quality assurance, investigations and penalties and will also improve Jersey’s compliance with international standards relating to accounting and auditing matters.
- It is recommended that the Minister approves the draft Regulations and report, and that the draft Regulations be lodged au Greffe for debate by the States on the 20th October 2009.
BACKGROUND
- The draft Regulations have undergone appropriate consultation. In January 2009, the Jersey Financial Services Commission (“JFSC”) carried out a 3 month public consultation seeking comments on the draft Regulations. The consultation process, included consulting the ‘Big 4’ audit firms, the Jersey Society of Chartered and Certified Accountants (“JSCCA”) and Jersey Finance, all of whom are content with the draft Regulations being put forwards.
- The Law Officers’ Department has indicated that the amendments made by the draft Regulations do not raise any Human Rights issues and that all tariffs for new offences created are commensurate with similar existing offences.
Statutory Audit Directive
- The Statutory Audit Directive (Directive 2006/43/EC) (“the Directive”) aims to harmonise the registration and oversight of auditors in all European Union Member States. The Directive will require the auditors of all ‘third country’ companies (i.e. countries registered outside of the EU) with securities admitted to trading on an EU stock exchange to be subjected to the auditor registration and oversight provisions in the relevant Member State where the company’s securities are admitted to trading.
- However, an EU Member State will be able to waive this requirement of the Directive where the third country auditor is subject to an EU equivalent system of public oversight, quality assurance, investigations and penalties. Each Member State will have the power to determine the extent to which it recognises the equivalence of third country regimes.
- The draft Regulations will insert a new Part 16 (Accounts and Audit) into the Companies (Jersey) Law 1991 (the “Companies Law”) that will enable Jersey to establish an auditor oversight regime that will meet the equivalence requirements of the Directive. Whilst many aspects of the existing Part 16 are not being changed by the Regulations, due to the nature of the amendments being made it is more practical to substitute the whole of Part 16. References to Articles below are references to Articles of the proposed new Part 16 unless otherwise stated.
- The introduction of an equivalent auditor oversight regime will assist Jersey auditors by avoiding the need for them to:
- apply for registration in each Member State when they act as an auditor in respect of a Jersey company whose securities are admitted to trading on a regulated market in that Member State; and
- be subject to the systems of oversight, quality assurance, investigation and penalties in each Member State in which the securities are registered.
9. If the amendments are not made to Part 16 of the Companies Law, Jersey auditors will be subjected to onerous and expensive requirements. For example, a Jersey audit firm auditing a Jersey company with securities admitted to trading on stock exchanges in London, Frankfurt, Dublin and Luxembourg, would be required to register with, and follow rules set by, the competent authorities in four different Member States. It is understood that the ‘Big 4’ Jersey audit firms currently audit approximately 70 such market traded companies.
10. In order to introduce an auditor oversight regime that will meet the equivalence requirements of the Directive, the draft Regulations will provide that the auditor of a Jersey company whose securities are admitted to trading on a regulated market in the EU (a “market traded company”) will:
- Need to be entered on a Register of Recognized Auditors (the “Register”) (and once entered on the Register an auditor will be defined under the Companies Law as a “recognized auditor”) (see proposed Article 111);
- Need to meet certain criteria before being entered on the Register (see definition of ‘auditor’ in proposed Article 102 and the provisions of Article 111(2));
- Have to comply with rules (“Audit Rules”) issued by a recognized professional body (e.g. the Institute of Chartered Accountants in England and Wales) governing the conduct of the audit of market traded companies (see proposed Article 112(1)(a)); and
- Be monitored for compliance with those Audit Rules by the recognized professional body that issued them and be liable to disciplinary action where breaches occur (see proposed Article 113M(2)(a)). The auditor monitoring work of a recognized professional body will itself be subject to oversight by an independent body (see proposed Article 113M).
11. The JFSC has worked in partnership with bodies in Guernsey and the Isle of Man 1 (collectively, the “CD agencies”) with a view to implementing a common form of auditor oversight regime in the Crown Dependencies. The CD agencies agreed that, on practical and economic grounds, it would be preferable to use the expertise and infrastructure of the existing United Kingdom bodies rather than attempt to set up new agencies in each of the Crown Dependencies. Consequently, the CD agencies have come to a 5 way agreement with the existing UK bodies that will see:
- the Institute of Chartered Accountants in England and Wales (“ICAEW”) issue the Audit Rules referred to above, monitor the compliance of recognized auditors with them, and, if breaches occur, take disciplinary action when necessary; and
- the Professional Oversight Body (“POB”) (part of the Financial Reporting Council) fulfil the role of the independent body overseeing the monitoring work of the ICAEW, as it does in the UK’s auditor oversight regime.
12. Should either the ICAEW or the POB (or both) be unwilling or unable at any time in the future to undertake their intended roles in the oversight regime (which is thought unlikely), there is a fall-back position that would enable the JFSC to take their place.
13. The costs of running the auditor oversight regime will be borne by those firms that register as recognized auditors.
IOSCO Principle 16
14. Principle 16 of International Organisation of Securities Commissions (“IOSCO”) states that a jurisdiction should apply accounting and auditing standards that are of a high and internationally acceptable quality. Principle 16 applies to issuers that make “public offerings” of securities and issuers whose securities are “publicly traded”.
15. To enhance Jersey’s level of compliance with IOSCO Principle 16 the draft Regulations will amend the Companies Law to:
- provide for statutorily prescribed accounting standards to be adopted by market traded companies (rather than “generally accepted accounting principles”) (see proposed Article 105(2)(a)); and
- provide a mechanism for enforcing compliance with accounting standards and auditing standards that will apply to market traded companies (see proposed Article 113Q).
16. In preparing the draft Regulations, the view was taken that Jersey should aim to comply with IOSCO Principle 16 in respect of the same constituency of companies as that covered by third country provisions in the Statutory Audit Directive i.e. companies that have securities admitted to trading on an EU regulated market. This approach was supported by respondents to the consultation exercise on the draft Regulations.
RECOMMENDATION
17. It is recommended that the Minister approves the draft Regulations, and that the draft Regulations be lodged au Greffe for debate by the States on the 20th October 2009.
FINANCE INDUSTRY DEVELOPMENT EXECUTIVE
1 the States of Guernsey Commerce and Employment Department and the Isle of Man Financial Supervision Commission, respectively
gov.je