Overview of the auditor and supervisor relationship

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Overview of the auditor and supervisor relationship Zowie Murray CA, Senior Policy Advisor, Chartered Accountants ANZ Introduction The Financial Market Conduct (FMC) Regulations 2014 came into force

1 Overview of the auditor and supervisor relationship Zowie Murray CA, Senior Policy Advisor, Chartered Accountants ANZ Introduction The Financial Market Conduct (FMC) Regulations 2014 came into force on 1 December 2014 and replace the Securities Regulations These regulations bring about changes to the framework for the issuer, auditor and supervisor relationship and seek to ensure participants are held accountable for performing their roles. This paper provides a simple summary of the regulations in relation to the relationship between the supervisor and auditor. Background Under the regulations, regulated financial products (such as managed investment schemes) must, depending on the type of product, have a trust deed or governance document, have supervisors and keep records or registers. Certain issuers must also prepare annual financial statements and appoint an auditor in relation to these financial statements. Who are supervisors? Under the FMC Act 2014 supervisors include: Trustees of unit trusts, KiwiSaver schemes, superannuation schemes, workplace savings schemes, and other managed investment schemes. Trustees of debt securities. Statutory supervisors of participatory securities that are managed investment schemes. Supervisor's responsibilities For managed investment schemes (MIS), supervisors must supervise the manager s performance of its functions and issuer obligations, and the financial position of the manager and the scheme. This role is undertaken on behalf of scheme participants. The Financial Markets Authority s (FMA) licensing of MIS managers does not detract from their need to fulfil these requirements.

Different MIS products will have different documentation and compliance obligations, therefore the supervision approach needs to be fit for purpose and meet the specific needs of the scheme.

2 Different MIS products will have different documentation and compliance obligations, therefore the supervision approach needs to be fit for purpose and meet the specific needs of the scheme. For debt issuers, supervisors must supervise the issuer s performance of its issuer obligations and must satisfy themselves that the issuer s assets are sufficient to discharge the amounts of the debt securities as they become due. Again this is overlaid with the responsibility to act on behalf of the debt security holders. Since debt securities are fundamentally different products with different risks, and with governing documents that serve a number of purposes, the supervisory approach to debt issuers is likely to be different to that of MIS. All supervisors however are required to oversee the issuer s preparation of financial statements (where required). Who are auditors? The regulations require the annual financial statements of certain issuers to be audited, and the half-yearly financial statements to be audited or reviewed (see table 1). Auditors are required to be appointed by participants or security holders to form an opinion in relation to the financial statements. Auditor's responsibilities The role of the auditor is to express an opinion about whether the issuer s financial statements are free from material misstatement. This opinion is prepared for and provided to the scheme participants or security holders. What has changed in the regulations? One notable difference in the new regulation relates to the interaction between the supervisors and auditors. In the Securities Regulations 2009 auditors were required to confirm their statutory audit opinion on the issuer s financial statements for the benefit of supervisors. This clause created problems in practice as the audit was to report an opinion on whether the financial statements were free from material misstatement, and not to address supervisors requirements in relation to compliance. Also there was concern that the provision was in direct conflict with the auditors obligations under the auditing and assurance standards. The new regulations require the issuer to consult with the supervisor on the appointment of an auditor and give the supervisor an opportunity to be a party to a specified engagement. This enables the supervisor to obtain assurance over matters of relevance to their responsibility separately to the financial statement audit. Practical application: Tripartite agreements If supervisors require reporting for their purposes they need to directly engage an auditor. The work and subsequent report will be designed around each supervisor s needs. A number of firms have developed a tripartite agreement between the issuer, auditor and supervisor to facilitate this engagement. This contractual arrangement, together with the associated open dialogue, supports the necessary co-operation between the auditor and supervisor.

3 Under a tripartite engagement, supervisors may engage auditors to report on the issuer s compliance with the trust deed. Much of the work could be based on information obtained in the course of the statutory audit of the issuer s financial statements. Agreeing the additional work during the planning for the financial statement audit may allow an efficient approach to the service with associated cost benefits. Practical application: Trust deeds Many trust deeds have not been updated for the current legislative environment, so they can be in direct conflict with auditors obligations under the auditing and assurance standards or the regulations. The auditing and assurance standards have force of law, with sanctions for breaches. It is important that issuers, supervisors and auditors do not undermine the supervisory framework or specific regulations.

4 Table 1: Comparison of certain audit related regulations Appointment of auditors: No substantial change Old Regulations for NBDTs Securities Regulations 2009: Schedule 15 New Regulations for governing documents of registered schemes FMC Regulations 2014: Schedules 10 & 13 Clause 8 Clause 1 The issuer / manager must, before recommending the appointment or reappointment of a person as an auditor of the financial statements of the manager or the scheme (or both) (a) consult with the supervisor on the appointment or reappointment; and (b) ensure that any comments of the supervisor concerning the proposed auditor are brought to the attention of the person or persons appointing or reappointing the auditor The manager must notify the supervisor if an auditor resigns from appointment, or declines to accept appointment or reappointment, and must pass on to the supervisor any explanation provided by the auditor for resigning from appointment or declining to accept appointment or reappointment. The manager must not attempt to prevent a person who has resigned from appointment as an auditor, or declined to accept appointment or reappointment as an auditor, from offering an explanation, or disclosing to the supervisor the reason, for resigning or declining appointment or reappointment. Terms of appointment: Change to clarify separate engagement needed for reporting to supervisor Clause 9 Clause 2 The issuer must, before recommending the appointment or reappointment of a person as an auditor of the issuer (a) give the supervisor an opportunity to be a party to a specified engagement for the purpose of the supervisor obtaining assurance of matters relevant to the exercise or performance of the powers or duties of the supervisor; and (b) consult with the supervisor on the nature and scope of the specified engagement (if any). In this clause, specified engagement means an assurance engagement carried out by an auditor in relation to the issuer s compliance with the trust deed. Terms of appointment: Change to remove requirement for auditor to report directly to the trustee Clause 3 Clause 3 (1) The issuer / manager must ensure that the terms set out in subclause (2) are included in the terms of appointment of an auditor in its capacity as an auditor, whether the auditor is conducting an audit, a review, or any other engagement. (2) The terms are as follows: (a) that the auditor will, at the beginning of the audit, review, or engagement, give the supervisor an opportunity to meet with the auditor, without any representative of the issuer being present, in order to allow the supervisor an opportunity to raise any issues or concerns relevant to the exercise or performance of the powers or duties of the supervisor; and (b) that the auditor will give the supervisor an opportunity to meet with the auditor, without any representative of the issuer being present, to discuss matters arising in the performance of the audit, review, or engagement, and to answer any questions the supervisor may have concerning the audit, review, or engagement

5 Audit or review of half-year accounts: No change Old Regulations for NBDTs Securities Regulations 2009: Schedule 15 New Regulations for governing documents of registered schemes FMC Regulations 2014: Schedules 10 & 13 Clause 6 Clause 4 The issuer must have the half-yearly financial statements of the issuing group audited by a qualified auditor, unless the supervisor expressly waives this requirement. If the supervisor waives the requirement for half-yearly audits, the issuer must instead have the half-yearly financial statements of the issuing group reviewed by a qualified auditor. Providing supervisor with accounts: Changed from 3 months to 4 months for annual financial statements Clause 7 Clause 5 The issuer must provide the supervisor with copies of (a) the annual financial statements of the issuing group within 4 months after the end of the relevant accounting period; and (b) the half-yearly financial statements of the issuing group within 3 months after the end of the relevant half-year. The financial statements given to the supervisor must be signed by at least 2 directors on behalf of the board of the issuer or, if there is only 1 director, by that director.

Milford KiwiSaver Plan. Who is Involved & Other Important Information. Who is Involved & Other Important. Information

Milford KiwiSaver Plan. Who is Involved & Other Important Information. Who is Involved & Other Important. Information Who is Involved & Other Important Information Who is Involved & Other Important Information Milford Funds Limited 16 March 2018 General information In this Document This document contains information about