Regulatory Duties of Statutory Auditors in CEMAC Credit Institutions

---

COMMISSION BANCAIRE DE L’AFRIQUE CENTRALE MEETING OF THE COBAC SECRETARY GENERAL WITH STATUTORY AUDITORS OF CEMAC CREDIT INSTITUTIONS (Douala, May 31, 2011) By Mr. IDRISS AHMED IDRISS Secretary General of the Central African Monetary Commission (COBAC) REGULATORY DUTIES OF STATUTORY AUDITORS IN CEMAC CREDIT INSTITUTIONS

Meeting of the COBAC Secretary General with Statutory Auditors – Douala, May 31, 2011 2 / 15 INTRODUCTION The credit supervision framework of the Economic and Monetary Community of Central Africa (CEMAC) was designed, from the early 1990s, around three concentric circles: the internal control system, financial statement review and supervisor oversight by the Central African Monetary Commission (COBAC). The Convention of October 16, 1990 establishing COBAC entrusts it with ensuring that credit institutions comply with legislative and regulatory provisions issued by national authorities, the Ministerial Committee of the Monetary Union of Central Africa (UMAC), the Bank of Central African States (BEAC) or by COBAC itself, and with sanctioning observed breaches. In particular, the Banking Commission monitors the operating conditions of credit institutions (and microfinance1), ensures the quality of their financial position as well as the integrity of the banking and financial system, and guarantees compliance with professional ethical rules. By issuing the first rules applicable to credit institutions, COBAC established in 19932 that they must have an internal control system organized around operational control and internal audit. These provisions were strengthened in 2001, notably with the requirement to implement systems for controlling operations and risks, measuring risks and results, monitoring and managing risks, reporting, as well as an information processing system supported by adequate accounting organization and written procedures. Statutory auditors must regularly review the internal control system, particularly within the framework of the reporting system provided for in Articles 44 to 48 of COBAC Regulation R-2001/07 on internal control in credit institutions. This requirement is strengthened for larger credit institutions, particularly those with two statutory auditors. Statutory auditors of credit institutions are also called upon to perform additional duties beyond those established by their professional regulatory framework. These are, essentially, contained in Regulation No. 04/03/CEMAC/UMAC/COBAC on the duties of Statutory Auditors in credit institutions, which entered into force on July 1, 2003. This Regulation provides, in Article 6, that the COBAC General Secretariat shall conduct at least once every two years an exchange of views with statutory auditors regarding the credit institutions under their supervision. This exchange 1 Since 2002 with the promulgation of Regulation No. 01/02/CEMAC/UMAC/COBAC of April 13, 2002 on the conditions for exercising and controlling microfinance activity in the Economic and Monetary Community of Central Africa. 2 COBAC Regulation R-93/08 on internal control in credit institutions, repealed and replaced by COBAC Regulation R-2001/07.

Meeting of the COBAC Secretary General with Statutory Auditors – Douala, May 31, 2011 3 / 15 has thus far taken place during on-site verification missions conducted by the COBAC General Secretariat teams. The findings from these exchanges of views and the analysis of documents produced by statutory auditors reveal that the vast majority of professionals in this field are not fully aware of the specific duties set by regulation and the particular requirements arising therefrom. This is why the COBAC General Secretariat deemed it necessary to convene all approved statutory auditors to exchange views on "the duties of statutory auditors in CEMAC credit institutions." The necessity to convene all statutory auditors of credit institutions is also justified by the absence of a common consultation and regulation framework for this profession in some zone countries, and everywhere, by the lack of a unified space bringing together actors responsible for certifying the accounts of credit institutions. This framework or space could have enabled more regular exchanges between these actors and provided a representative interlocutor for the supervisor. The choice of this meeting's theme is motivated by the sharpness of grievances observed in the application by Statutory Auditors of their duties, as well as the compatibility of certain activities with their mandate. The recurrence of disciplinary proceedings against some of them and the shortcomings noted recently in mission reports conducted by the COBAC General Secretariat testify to deficiencies in implementing these duties, particularly those recorded in Regulation No. 04/03/CEMAC/UMAC/COBAC. This document reviews the duties expected of statutory auditors in CEMAC credit institutions and lists the most frequently observed shortcomings. To this end, it is divided into three parts: a recap of the historical context that led internationally to strengthening legal audit regulation (1), the duties of statutory auditors in CEMAC credit institutions (2), and the most common non-compliances with these duties (3).

1. HISTORICAL CONTEXT OF THE STRENGTHENING OF STATUTORY AUDITORS' DUTIES Traditional accounting practices underwent a major evolution internationally following the ENRON and WorldCom cases in the United States. These cases and the subsequent lawsuits gave rise to new audit and accounting laws and rules aimed at better overseeing management, refining audit procedures, and ensuring greater transparency of financial statements. At the accounting level, international standards, notably International Financial Reporting Standards (IFRS), complementing International Accounting Standards (IAS), were developed by the International Accounting Standards Board (IASB) to restore confidence and establish reliability, transparency, and readability of accounts. In the United States, the "Sarbanes-Oxley Act (SOX)"3 of July 2002 was adopted to more strictly regulate the production of accounting and financial documents. Penalties for balance sheet falsification can reach 20 years in prison. The promulgation of this framework law was accompanied by the creation of an independent regulatory agency, the Public Company Accounting Oversight Board (PCAOB). Among other duties, the PCAOB oversees accounting audits. The Sarbanes-Oxley Act contains numerous obligations, including the prohibition for an audit firm to combine consulting and audit services for the same client, the obligation for executives and financial directors to sign accounts and financial reports, and the regulation of financial benefits (loans) granted by the company to its executives. This extraterritorial law applies to all American or non-listed companies on the New York Stock Exchange. These measures taken in the United States found echoes worldwide, particularly in Europe. Indeed, the extraterritorial role assigned to the PCAOB, the outright disappearance of one of the "big five" (Arthur Andersen), and the occurrence in Europe of several high-profile scandals such as Parmalat, France Telecom, etc., demonstrated that other countries' governments could not ignore the deliberations in the United States. Thus, Europe published a 2002 recommendation on the independence of statutory auditors, followed by a proposal to amend the Eighth Directive on statutory audit, which was replaced by the "Audit" directive of May 17, 2006. Among other major themes, this directive includes provisions on the approval of persons authorized to perform statutory audits and their supervision by independent bodies. These texts aimed at strengthening the increased independence of legal audit and the duties implemented in European states. Under the "Audit" directive, audit firms must demonstrate the same rigor vis-à-vis the financial community. Consequently, the new directive requires them to publish annual information on their governance and capital distribution, potential network affiliation, internal procedures regarding quality, training, and independence, as well as their financial situation and partners' remuneration. In Africa, following the Uniform Act on the Organization and Harmonization of Business Accounting in OHADA4 states, particularly those of CEMAC, a Community-wide Regulation on the duties of Statutory Auditors in credit institutions was adopted and entered into force on July 1, 2003. Furthermore, building on this Regulation, the clear definition of missions assigned to statutory auditors was recorded in a COBAC Instruction on the compatibility of certain activities with Statutory Auditor functions5. Moreover, to integrate OHADA accounting law into banking regulation, which entered into force on January 1, 2001 for individual accounts and January 1, 2002 for consolidated accounts, a COBAC Regulation on the Organization of Accounting in Credit Institutions was adopted on February 27, 2003 and entered into force on December 31 of the same year6. The banking accounting profession in CEMAC was thus equipped with a body of rules grouping basic texts and specific provisions applicable to credit institutions. These rules reinforced the requirements that statutory auditors must meet in exercising their missions within credit institutions.

3 The Sarbanes-Oxley Act, named after senators Paul Sarbanes and Michael G. Oxley, was adopted by the US Congress in July 2002. Also known as the Public Company Accounting Reform and Investor Protection Act of 2002 or simply SOX/Sarbox, it is the legal response to repeated accounting and financial scandals (Enron, Tyco International, WorldCom). 4 OHADA: Organisation for the Harmonisation of Business Law in Africa. 5 COBAC Instruction I-2004/01 of June 29, 2004. 6 COBAC Regulation R-2003/01.

Meeting of the COBAC Secretary General with Statutory Auditors – Douala, May 31, 2011 4 / 15

2. REQUIREMENTS TO BE MET BY STATUTORY AUDITORS OF CREDIT INSTITUTIONS ESTABLISHED IN CEMAC Regulatory provisions set specific requirements for statutory auditors regarding their appointment, cessation of functions, interventions, and certain communication procedures incumbent upon them. 2.1. Appointment and cessation of functions of statutory auditors in credit institutions Under COBAC Regulation R-92/02 of December 22, 1992 on the approval of statutory auditors in credit institutions, exercising the functions of Statutory Auditor in a credit institution subject to the Banking Commission, pursuant to Article 2 of the Annex to the Convention of October 16, 1990, is subject to prior COBAC approval. The approval is issued via a conforming opinion under the conditions defined by the aforementioned Regulation. Statutory auditor approval is pronounced by an order taken by the Monetary Authority based on a conforming opinion from the Banking Commission and published in the Official Journal of the concerned State, pursuant to Article 21 of the Annex to the Convention of January 17, 1992 on the Harmonization of Banking Regulation in Central African States. COBAC rules within one month from receipt by its General Secretariat of the complete file prescribed by Article 21. The absence of a decision upon expiration of this period constitutes a conforming opinion. In cases of urgency, the Commission President is authorized to rule on the application on behalf of the Commission. In case of rejection, the refusal to issue the conforming opinion is notified to the concerned Credit Institution, in which case the institution cannot proceed otherwise. Unless exercising the right of appeal before the CEMAC Court of Justice under Article 20 of the Annex to the Convention of October 16, 1990, it submits a new candidate for approval by the Monetary Authority and the Commission's opinion. It should be recalled that, for file processing, the certificate of residence and residence permit are exceptionally not required for statutory auditors. Pursuant to Article 19 of the Annex to the Convention of January 17, 1992, credit institution operations are controlled by at least two statutory auditors. The intervention of a single auditor is permitted when the total balance sheet is less than 50 billion. Regarding the cessation of functions of statutory auditors in credit institutions, the provisions are recorded in COBAC Regulation R-93/09 on changes in the situation of credit institutions. According to Article 11 of said regulation, credit institutions must immediately declare to the Banking Commission the cessation of functions of their approved executives under Title III and Article 49 of the Annex to the Convention of January 17, 1992 and their statutory auditors. However, in case of company dissolution, the functions of the statutory auditor do not terminate under Article 225 of the AUSCGIE. The functions of statutory auditor in a credit institution also terminate following the withdrawal of approval pronounced by the Monetary Authority, either ex officio when the concerned statutory auditor no longer meets the conditions of their approval, or at the request of the interested credit institution. The withdrawal of approval may also be pronounced, as a disciplinary sanction, by COBAC pursuant to Article 15 of the Annex to the Convention of October 16, 1990. Decisions withdrawing approval must be reasoned and notified to the concerned statutory auditor. They are published in the Official Journal of the concerned State and in at least one of the main national press outlets7.

2.2. Interventions of statutory auditors in credit institutions in CEMAC In addition to applicable legal provisions and professional standards for statutory auditors of commercial companies, their interventions in credit institutions must comply with several other obligations regarding the regularity and fairness of accounts, supervisor alert, communication with them, and financial communication in general. 2.2.1. On the regularity and fairness of accounts Pursuant to Article 19 of the 1992 Convention Annex and under conditions set by texts governing the profession, statutory auditors certify annual accounts, ensure and attest to the accuracy and fairness of information intended for the public. This provision is repeated in Article 54 of COBAC Regulation R-2003/01 on the organization of accounting in credit institutions. It stipulates that statutory auditors certify, pursuant to the provisions of the OHADA Uniform Act on commercial company law and economic interest groups regarding statutory auditor missions, as well as, where applicable, those of subsequent relevant regulations and texts issued by the Economic and Monetary Community of Central Africa or the Central African Monetary Commission, that semi-annual and annual financial statements are regular and fair and give a true and fair view of the assets, financial position, and results of the period elapsed. During semi-annual account closing, statutory auditors may limit their review to elements contributing to the formation of the interim result for the period. Article 3 of Regulation No. 04/03/CEMAC/UMAC/COBAC obliges statutory auditors of credit institutions, upon annual account closing, to ensure that data transmitted to COBAC enables the preparation of accounting statements giving a true and fair view of the period's results, financial position, and assets of the credit institution. Statutory auditors must particularly ensure compliance with COBAC Regulation R-98/03 on the accounting and provisioning of doubtful debts and commitments by signature. They also ensure the relevance of the evaluation of received guarantees. For institutions whose total balance sheet exceeds a threshold set by an instruction from the COBAC President8, statutory auditor control must extend to all aspects of management contributing to institution sustainability such as credit portfolio quality, existence of effective procedures and internal control, profitability, and the realism of forecast accounts. Regarding consolidated accounts, any institution with its registered office or main activity in CEMAC that exclusively or jointly controls one or more other companies, or exercises significant influence over them, prepares and publishes annually the consolidated financial statements of all these companies as well as an annual management report on this group. It is also required to publish semi-annual financial statements for the consolidated group within four months following the end of the first semester of the fiscal year, accompanied by a statutory auditor's report on the fairness of information provided, under the same conditions as those for individual accounts. If the closing date of a company's fiscal year included in consolidation is more than three months prior to the consolidation period closing date, consolidated accounts are prepared based on controlled interim accounts by a statutory auditor or, if none, by a professional responsible for account control.

7 Article 23 of the Annex to the Convention of January 17, 1992. 8 This threshold has not yet been expressly fixed; this extension could concern credit institutions with two statutory auditors, i.e., those whose total balance sheet exceeds 50 billion CFA francs.

Meeting of the COBAC Secretary General with Statutory Auditors – Douala, May 31, 2011 5 / 15

2.2.2. On the alert obligation Although prudential supervision falls under COBAC, regulation has provided for involving statutory auditors in preventing credit institution difficulties. Thus, statutory auditors are required to promptly alert the COBAC General Secretariat as soon as they observe during their mission: any fact likely to significantly influence the credit institution's financial situation or its administrative and accounting organization or internal control; any fact that may constitute a violation of laws and regulations likely to seriously affect the liability of the institution or its executives; any fact likely to lead to refusal or serious reservations in account certification; any fact likely to jeopardize the going concern of the credit institution. Furthermore, statutory auditors are required to inform the COBAC General Secretariat when they trigger an alert procedure under Articles 150 to 156 of the OHADA Uniform Act of April 17, 1997 on commercial company law and economic interest groups. In this case, all correspondence and other documents related to this procedure are communicated to the COBAC General Secretariat. The implementation of this duty should be facilitated by the fact that professional secrecy is not opposable to COBAC. Consequently, pursuant to Article 6 of Regulation No. 04/03/CEMAC/UMAC/COBAC, the liability of statutory auditors cannot be engaged for information and fact disclosures they make in execution of the alert obligation.

2.2.3. On communication with the banking supervisor Communication between statutory auditors and COBAC provides for a dynamic and permanent information exchange. In addition to the alert obligation mentioned in the previous paragraph, statutory auditors must communicate to the COBAC General Secretariat any report addressed to the Executive (general management) or Deliberating (board of directors) bodies of the credit institution whose accounts they certify. They must also be able to keep their work program and verification file available to the COBAC General Secretariat. Conversely, statutory auditors may access, upon request, COBAC verification reports concerning credit institutions under their supervision. Exchange of views (at least once every two years) is provided between the COBAC General Secretariat and statutory auditors regarding credit institutions whose accounts they certify. These exchanges take place