Standard on External Audit of Savings and Credit Cooperatives

Banque de la République d’Haïti (BRH) 42 STANDARD ON EXTERNAL AUDIT OF SAVINGS AND CREDIT COOPERATIVES In accordance with Article 94 and following of the law of June 26, 2002 on Savings and Credit Cooperatives (SCCs), SCCs and external auditors are required to comply with the following provisions regarding external audit. Annual financial statements must be duly audited by an accounting firm or a certified accountant whose name appears on the list of certified accountants published by the Order of Certified Professional Accountants of Haiti (OCPAH). Every SCC is required to communicate to the BRH, no later than 45 days after the general meeting, the name of the firm or accountant retained to audit its financial statements. The BRH reserves the right to object to the SCC's choice, by reasoned notice, within a period not exceeding thirty (30) days from the date of receipt of the firm's or accountant's name. External auditors are required to comply with the provisions of this circular in the course of their audit of SCC accounts. The BRH may, if necessary, require a copy of the audit file.

1. General Aspects The accounting firm must establish a quality control system to enable it to obtain reasonable assurance that professional standards as well as regulatory and legal provisions are respected. In the event that the audit of financial statements is entrusted to an accountant, his/her work must be capable of providing the same level of quality assurance as a firm. The quality control system must include policies and procedures taking into account each of the following elements: • the responsibilities of management regarding quality within the firm; • ethical obligations; • acceptance and renewal of client relationships and specific certification engagements; • human resources; • performance of the engagement; • documentation related to the engagement; • monitoring. a. Objective of the Audit The objective of the external audit of financial statements is to enable the expression of a professional opinion on the reliability of the SCC's financial position. b. Scope of External Audit Ø The external audit must be conducted in accordance with International Standards on Auditing (IFAC), and must include tests and controls that the auditor deems necessary according to the circumstances; Ø The auditor must pay particular attention to major account balances, notably loan balances and provisions for doubtful debts, liquidity and similar accounts, and financing balances; Ø The auditor will use statistical sampling methods to conduct controls;

Banque de la République d’Haïti (BRH) 43 Ø The auditor, where applicable, must visit a representative number of branches or service points each year; Ø The auditor must, for testing purposes, visit a representative number of members or clients. c. Financial Statements and Other Information The financial statements certified by the auditor will include: Ø Balance Sheet Ø Statement of Income Ø Statement of Overpayments Ø Statement of Distribution/Allocation Ø Statement of Cash Flows Ø Notes and Supplementary Information The accuracy of the information requested in this document and the relevance of the procedures used to obtain it primarily fall under the responsibility of the management of each SCC; the auditor's review and opinion will cover all information requested in this document, whether it appears in the main body of the financial statements or in the accompanying notes. d. Auditor's Opinion The external auditor must express an opinion on the SCC's financial statements in accordance with International Standards on Auditing (IFAC). e. Report to Management In addition to the financial report and the auditor's opinion, the auditor must draft a letter to the Board of Directors and the General Management of the SCC. In this letter, the auditor must: Ø Comment on the accounting records, systems, and controls examined during the audit, particularly cash management and recording systems, compliance with credit granting and disbursement policies and procedures, segregation of duties in credit and cash management activities, procedures for provisioning for doubtful debts, appropriate recording and accrual of short-term liabilities and expenses payable, etc.; Ø Comment on other specific systems and processes, such as the management system and management information system, and, where applicable, particularly at the branch (service point) level; Ø Make improvement recommendations when specific weaknesses have been identified in the systems and controls mentioned above; Ø Comment on the organizational structure of the SCC, particularly the roles of the various boards and committees; Ø Communicate any other issues identified during the audit that could significantly affect the continuation of the SCC's activities or that the auditor considers relevant; Ø Provide specific comments on the relevance and consistency of policies for provisioning for doubtful debts, debt write-offs, and, if possible, policies for stopping and cancelling accrued but uncollected interest on overdue loans; Ø Present a summary of material misstatements and their impact on the financial statements; Ø List suggested journal entries not recorded by management.

Banque de la République d’Haïti (BRH) 44 2. Presentation of Financial Statements Financial statements will be prepared in accordance with the specifications set out below as well as the SCC accounting plan. a. Prior Year Information Financial statements must include financial information for the current year and the prior year. If the prior year financial information appearing in the financial statements was audited by a third party, the external auditor must mention this in the report and include an appropriate reference to the prior year audit (auditor's name, report date, opinion expressed). If the prior year financial statements were not audited, the external auditor must pay particular attention to opening balances and reference them in the report. b. Credit Portfolio Information Financial statements must include an annex regarding provisions for doubtful debts and debt write-offs. This annex must detail on a comparative basis: the gross amount of the loan portfolio, the amount of provisions, the amount of debt write-offs, and the net loan portfolio amount. These amounts are established based on different categories of delay according to the following structure: Ø 1 to 30 days overdue Ø 31 to 90 days overdue Ø 91 to 180 days overdue Ø 181 days and over overdue Provisions must be established in accordance with the circular on credit management in force for SCCs. Furthermore, this annex, or the one regarding accounting methods, must present a clear and in-depth explanation of the policies adopted by the SCC regarding provisions for doubtful debts and debt write-offs. c. Separation of Subsidies as Non-Operating Income SCC financial statements must distinguish operating subsidies from current operating income, notably interest income on the credit portfolio, non-interest credit income, commissions received, and others. Furthermore, a distinction must be made between different sources of subsidies. A subsidy from a stabilization fund must be presented separately from a subsidy from a Non-Governmental Organization (NGO), where applicable. d. Identification of In-Kind Subsidies In addition to cash subsidies, SCCs may receive in-kind subsidies that do not always appear in their income statements. The external auditor must ensure that all such subsidies are recorded at their cost or market value when possible. The income statement must include a sufficient charge for the amortization of all equipment received as donations.

Banque de la République d’Haïti (BRH) 45 e. Detail of Liabilities SCCs are sometimes financed by loans at rates below market rates (concessional rates). In order to obtain a true and fair view of the cost of funds, the external auditor must indicate in the notes to the financial statements containing the following information for any debt representing more than 10% of total commitments: Ø Origin of the debt; Ø Terms (amount, repayment schedule including grace periods, interest rate); Ø Average amount of principal outstanding on the debt during the year, calculated on a monthly basis; Ø Total estimated amount of payments to be made in each of the next five years under the redemption and amortization clauses of the long-term debt; Ø Interest repayments actually paid during the fiscal year for the debt; Ø Total off-balance sheet commitments. f. Savings If the SCC collects both free savings and blocked savings, these amounts must be presented separately, either in the main body of the financial statements or in an annex. g. Presentation of Equity The balance sheet must present in detail the components constituting equity: Ø Share capital; Ø Capital surplus (subsidies, donations, and others); Ø Unregulated reserves and other equity, where applicable; Ø Reserve fund; Ø Operating results of the fiscal year. The sum of all these elements must equal total equity. Explanatory notes on the components of equity may be presented in the notes to the financial statements. 3. Organizational and Institutional Aspects a. Internal Control The external auditor must explicitly focus on the most important internal control procedures, notably administrative and accounting procedures, budgetary control, and information system management. Weaknesses or deficiencies identified during the evaluation of these procedures must be reported, even if they have not yet resulted in material errors. The external auditor must ensure that identified weaknesses or deficiencies are brought to the attention of the Board of Directors, the Supervisory Committee, and General Management. b. Status of Restructuring Plan Implementation When the SCC is subject to a restructuring plan, the external auditor must comment in detail on the progress made by the SCC in implementing this restructuring plan.

Banque de la République d’Haïti (BRH) 46 The auditor must explicitly express an opinion on the institution's solvency and the adequacy of its capital, taking particular account of: Ø The volume of risk assets; Ø Plans and growth prospects for the activity; Ø The maintenance of overpayments within the SCC; Ø Financial contributions from external capital providers. c. Procedures Regarding the Credit Portfolio The importance of sound and prudent management of an SCC's credit portfolio is paramount. The external auditor must comment on the following: Ø The reliability of information regarding credit management; Ø The compliance of the SCC's current credit activities with existing procedures and policies. 4. Communications The external auditor must exercise diligence in performing their work. The auditor must transmit the report to the BRH no later than five (5) months after the SCC's fiscal year-end. If the external auditor discovers irregularities, malpractices, fraud, or any violation of legal and regulatory provisions during their work, they must immediately notify the BRH as well as the appropriate persons at the SCC or the FCEC, where applicable. The external auditor must present the results of their audit to management. 5. Audit of Financial Statements In the event that an SCC fails to have its books and accounts audited or to appoint an independent auditor at its general meeting in accordance with this circular, the BRH may appoint an auditor whose remuneration will be borne by the cooperative. The provisions of this circular enter into force on __________________________2008 Port-au-Prince, on _____________________2008 Charles CASTEL Governor

Banque de la République d’Haïti (BRH) 47 ANNEX

1. Testing Procedures for the Overdue Credit Monitoring Report The objective of these procedures is to test the overdue credit monitoring report against the actual status and amount of overdue credits, and to verify how cash repayments are recorded. Preparatory Tasks: Ø Discuss with several employees to determine the degree of reliability and timeliness of the information system reports on repayment status; Ø Discuss with staff how different types of repayments (cash repayments, by checks (including third-party checks and post-dated checks), refinancing and restructuring, deposits of equipment, inventory, or other tangible guarantees) are recorded in portfolio status reports; Ø Review with the accounting department the recording method for each of the repayment types listed above. The review must apply to the accounts affected by each type of repayment, as well as to the SCC's policy and practice regarding the allocation between principal and interest of these repayments, or of overdue cash repayments. Are repayments recorded and allocated in the same way in the accounting information system as in the credit monitoring system? Ø Review with the credit department the policy for receiving different types of repayments that are not made in cash, or are made partially. This review determines what authorizations are required before recording this type of repayment. Is this policy clearly stated in the SCC's credit manual and understood by staff? Ø If the above-mentioned information has not been found, review with the management information service to what extent the delay monitoring report indicates credits whose repayments have been received, in full or in part, in cash, by check, or in kind. Ø Analyze existing policy and document in writing the important elements requiring updating or modification in the credit and operations manuals; Ø Produce, based on accounting and credit monitoring information, a preliminary report on the credit portfolio status, highlighting the effect of each type of non-cash repayment on the overall classification of the credit portfolio (loan aging) and the loan portfolio amount presented in the financial statements; Ø Select branches or service points to visit. This selection must be made on a materiality basis; Ø On a given date, at least 60 days before the start of the audit, when a complete delay monitoring report exists, select a sample of outstanding credits at the selected branches or service points, as follows: first, obtain a list of all credits classified as healthy, select a sample of at least 25% of the total number of healthy credits (by value), and document this process, drawing up a list, ensuring that all branches or service points to be visited are covered. Then, obtain a list of all credits classified as doubtful. Select the credits. Sample Testing Procedure: Ø For each selected credit, compare the repayment schedule with the statements of repayment actually received. Determine the nature and dates of the last six repayments. Classify credits by type of repayment received. Write and explain the test results;

Banque de la République d’Haïti (BRH) 48 Ø For each of these repayments, verify in the general ledger: compliance with interest and principal recording principles, and with the principles of accounting recording and treatment of non-cash repayments established by the SCC. Write and explain the test results; Ø For doubtful debts, determine the actual age of overdue repayments based on the repayment schedule, and compare it with the age of unpaid amounts established by the SCC. This can be done by comparing the member's account with the delay monitoring report. Write and explain the test results; Ø For each selected credit, determine if the client's previous credit was settled by non-cash repayments, or only partially (through restructuring, refinancing, post-dated checks, third-party checks, deposit of equipment, or other tangible guarantees). This can be done by examining the two or three most recent repayments on the member's previous credit, to determine their repayment behavior. The statement of the last repayment on this credit must be verified to determine the actual nature of the repayments. Write and explain the test results; Ø For each selected credit, verify its compliance with existing policies. 2. Testing Procedures for Compliance with Credit Policies and Procedures The objective of this review is to determine the degree of compliance with credit policies and procedures, especially regarding the main credit risk factors. Preparatory Tasks: Ø Discuss with several employees the policies and indicators governing credit decisions, paying particular attention to those that can be measured objectively. The external auditor and the credit manager must agree on a limited number (for example, five to eight) of these indicators, examining particularly the most important elements in terms of the credit portfolio's risk profile, which should normally be monitored at all times. The following types of indicators may be considered, for example: client characteristics (age, professional activity, clean criminal record); repayment capacity (method for assessing repayment capacity, minimum repayment capacity level, variations in repayment capacity, type of activity to finance); credit history if applicable; credit size and amount of regular repayments relative to key activity indicators (such as working capital, total sales, net income, previous credits and repayments, and tangible guarantees); and the credit granting methodology (granting criteria depending on whether it is a group loan or an individual loan); Ø Analyze these indicators to determine weaknesses and recommend that the most relevant ones be integrated into the credit policy; Ø Select a sample of credits using the same procedures as those used to test the delay monitoring report, and document this process. Sample Testing Procedure: Ø For each selected credit sample, request the credit files corresponding to the outstanding credit and the two previous credits, if applicable. Write and explain the test results. Ø For each selected credit, including previous credits, test compliance with the credit policy established against a limited number of key elements listed in section 4. For some indicators, compliance is based on ratios appearing in the same credit application (such as the ratio of repayment capacity to the amount to be repaid). In other cases, the indicator compares data from two successive credits (such as the growth rate of credit size or repayment amount). Write and explain the results of these tests.