RESOLUTION NO. JPRM-2022-006-G

THE MONETARY POLICY AND REGULATION BOARD

CONSIDERING:

That, Article 226 of the Constitution of the Republic of Ecuador prescribes that public servants and persons acting by virtue of state authority shall exercise only the competencies and powers attributed to them in the Constitution and the Law;

That, Article 227 ibidem states that Public Administration constitutes a service to the community governed by the principles of effectiveness, efficiency, quality, hierarchy, coordination, planning, among others;

That, Article 27.1 of the Organic Monetary and Financial Code, as amended, states: "In achieving its objectives and performing its functions, the Central Bank of Ecuador will be an autonomous and responsible entity as provided in this Code and the Constitution of the Republic, without prejudice to its duty to coordinate necessary actions with other State bodies to fulfill its purposes. At all times, the institutional autonomy of the Central Bank of Ecuador will be respected, and its decisions will respond to exclusively technical motivations that lead to the fulfillment of its functions and attributes."

That, Article 37 of the same Code indicates: "The contracting of services required by the Central Bank of Ecuador that contribute to the investment of reserves, the management of external asset and liability positions, monetary and non-monetary gold, and the sustainability of the monetary system, shall be subject to the special regime determined in Article 2 numeral 10 of the Organic Law of the National Public Contracting System."

That Article 47.1 of the same Code, as amended, created the Monetary Policy and Regulation Board as part of the Executive Function, responsible for formulating monetary policy, as the highest governing body of the Central Bank of Ecuador, and determines its composition;

That, Article 47.6 numeral 20 of the same Code, regarding the functions of the Monetary Policy and Regulation Board, among others, establishes: "20. Approve the policy for the selection and rotation of external auditors and appoint the external auditor of the Central Bank of Ecuador, upon proposal of the Audit Committee; (...)";

---

That, Article 57.1 of the same Code, regarding external audit states: "The financial statements of the Central Bank of Ecuador shall be audited at least once a year, in accordance with International Standards on Auditing by independent external auditors, who must have recognized international experience. The Monetary Policy and Regulation Board will appoint the external auditors upon proposal of the Audit Committee. The external auditor will be appointed for the period determined by the Monetary Policy and Regulation Board, which shall have a duration of no less than three (3) years. The Monetary Policy and Regulation Board, prior to a report from the Audit Committee, may remove the external auditors of the Central Bank of Ecuador for justified cause."

That, Article 57.2 of the same Code establishes that: "The Monetary Policy and Regulation Board will appoint and determine the functions of the Audit Committee that will assist it in the oversight of financial reports, internal audit, external audit, and internal control systems. It shall be composed of three members. The members shall be appointed by the Monetary Policy and Regulation Board, two (2) of whom shall have relevant experience in accounting or auditing. By invitation of the Audit Committee, other members of the Monetary Policy and Regulation Board or employees of the Central Bank of Ecuador may attend committee meetings without voting rights. The Monetary Policy and Regulation Board will approve the Audit Committee regulations detailing its attributes and functions. The Audit Committee will periodically report the results of its management to the Monetary Policy and Regulation Board."

That, Transitory Provision Fifty-Fourth of the aforementioned Code prescribes: "Resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies will remain in effect until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what is appropriate, within their respective competencies."

That, Section I: "Norms for the Hiring of External Auditors of the Central Bank of Ecuador", of Chapter V: "General and Accounting Norms Applicable in the Central Bank of Ecuador", of Title II: "Of the Central Bank of Ecuador", of the Preliminary Book: "Administrative and General Provisions", of the Codification of Monetary, Financial, Securities, and Insurance Resolutions issued by the former Monetary and Financial Policy and Regulation Board, establishes the norms for the hiring of external auditors of the Central Bank of Ecuador;

---

That, by Resolution No. JPRM-202-001-A, of January 10, 2022, the Monetary Policy and Regulation Board appointed the members of the Audit Committee of the Central Bank of Ecuador;

That, by Memorandum No. BCE-DNAIB-2022-0059-M, of February 9, 2022, the National Directorate of Bank Internal Audit, forwarded to the General Manager of the Central Bank of Ecuador, the report BCE-DNAIB-2022-017, of February 9, 2022, which as part of its conclusions states: "(...) Due to the changes mandated by the Organic Reforming Law to the Organic Monetary and Financial Code for the Defense of Dollarization, by the Resolutions issued by the Monetary Policy and Regulation Board, and with the purpose that the Central Bank of Ecuador complies with what is established in articles 26.1, 27, 27.1, 31, and 57.1 of the Organic Monetary and Financial Code, it is necessary to present to the Monetary Policy and Regulation Board the proposal for the 'REGULATION FOR THE HIRING OF EXTERNAL AUDITORS OF THE CENTRAL BANK OF ECUADOR' (...)";

That, it is the faculty of the Monetary Policy and Regulation Board to resolve on the norms contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, issued by the former Monetary and Financial Policy and Regulation Board, within the scope of its attributes and competencies, with the aim of incorporating such provisions into the own regulations of the Monetary Policy and Regulation Board, prior to the analysis of the pertinence of each norm and provision, in a disaggregated manner;

That, the members of the Monetary Policy and Regulation Board were sworn in by the National Assembly of Ecuador on October 12, 2021;

That, the Monetary Policy and Regulation Board, in an extraordinary session with mixed modality, on February 11, 2022, reviewed the proposal sent via Memorandum No. BCE-BCE-2022-0029-M, of February 10, 2022, by the General Manager of the Central Bank of Ecuador; as well as, the legal report No. BCE-CGJ-0019-2022, of February 9, 2022, and the technical report No. BCE-DNAIB-2022-017 of the same date; and,

In exercise of its functions and in attention to Article 47.7 of the Organic Monetary and Financial Code, the Monetary Policy and Regulation Board resolves to issue the:

---

REGULATION FOR THE HIRING OF EXTERNAL AUDITORS OF THE CENTRAL BANK OF ECUADOR

Art. 1.- EXTERNAL AUDIT SERVICE. - The Central Bank of Ecuador, in accordance with the Organic Monetary and Financial Code, must have an external auditor appointed by the Monetary Policy and Regulation Board upon proposal of the Audit Committee.

External auditors will be legal entities that will perform their functions, subject to the confidentiality and reserve of information; the provision of their services will be carried out under the conditions and with the scope defined in the provisions of this regulation.

In the evaluation and selection process for hiring the external audit service, the technical proposal must be scored with a percentage higher than the economic proposal, considering the quality and cost specifications detailed in said proposal.

Art. 2.- OBJECTIVE OF EXTERNAL AUDIT. - In accordance with Article 303 of the Constitution of the Republic of Ecuador, in concordance with Article 27 of the Organic Monetary and Financial Code, it corresponds to the Central Bank of Ecuador to implement the monetary policy, formulated by the Monetary Policy and Regulation Board, aimed at fostering and maintaining a stable monetary system, contributing to financial stability, and managing its balance sheet to preserve the integrity of dollarization, including the safe, solid, and efficient functioning of payment systems and means.

Under the aforementioned provision, the objective of the external audit of the Central Bank of Ecuador will be to pronounce on the integrity of the financial statements, the investment of reserves, the management of assets, liabilities, and equity, the management of monetary and non-monetary gold, the results derived from the management of monetary policy and non-operational results, risk management, internal control management, especially of payment systems and means, regulatory compliance, information technology, information security, and other aspects related to the competencies of the Central Bank of Ecuador.

Art. 3.- SCOPE OF EXTERNAL AUDIT SERVICES. - The scope of external audit services will be as follows:

1. Based on International Standards on Auditing (ISA), observe the Central Bank of Ecuador's compliance with International Financial Reporting Standards (IFRS), insofar as applicable to the Central Bank of Ecuador, compliance with legal provisions, regulations issued by the Monetary Policy and Regulation Board, and provisions issued by the Central Bank of Ecuador.

2. The financial statements to be audited will include:
   a) The statement of financial position; b) The statement of comprehensive income; c) The statement of changes in equity; d) The statement of cash flows; and, e) The statement of changes in equity.

These financial statements will correspond to the period from January 1 to December 31 of each year, with their respective notes.

Art. 4.- REQUIREMENTS FOR HIRING THE EXTERNAL AUDIT SERVICE. - The external audit company must be hired by the Central Bank of Ecuador for a period of three (3) years, which may be renewed on one occasion, and must meet at least the following requirements:

a) Comply with international audit standards; b) Maintain valid qualification with the Superintendency of Banks; c) Have at least ten (10) years of experience in executing external audits in financial institutions; d) Have a quality engagement partner or team leader for the external audit process with recognized minimum experience of ten (10) years in the application of International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA); e) That the personnel forming part of the work team executing the audit demonstrate at least five (5) years of experience in auditing financial entities; f) Be an audit firm correspondent or representative of audit companies with international presence and recognized local prestige; and, g) Have specialists in their work team, according to the requirements the Central Bank of Ecuador makes at the start of the selection process.

Art. 5.- RESTRICTIONS FOR HIRING THE EXTERNAL AUDIT SERVICE. - In order to ensure the necessary independence that external auditors must have with respect to their auditee, the Central Bank of Ecuador will refrain from hiring the external audit company in the following cases:

a) The legal entity that has provided services other than external audit to the Central Bank of Ecuador in the immediately preceding year cannot be an external auditor; b) When the external audit company, its legal representative, partners, or personnel forming part of the work team executing the audit, maintain economic or contractual interests with the Monetary Policy and Regulation Board, the Audit Committee, and the Central Bank of Ecuador; c) When the external audit company, its legal representative, partners, or personnel forming part of the work team executing the audit, maintain credit operations or other direct or indirect obligations overdue for more than one hundred eighty (180) days or written off with entities of the national financial system; d) When the external audit company, its legal representative, partners, or personnel forming part of the work team executing the audit, maintain direct or indirect conflicts of interest with the Monetary Policy and Regulation Board, the Audit Committee, and the Central Bank of Ecuador; e) When, in the last five (5) years, the external audit company or its legal representative have been sanctioned by any control authority in the financial or tax scope; and, f) When the external audit company has been declared a non-compliant contractor or failed bidder with the State, for the time it is suspended as a State supplier, in accordance with the Law.

Art. 6.- CONTRACTING PROCESS FOR EXTERNAL AUDIT. - The selection and contracting process for the external auditor must be carried out considering the following:

a) Within the first quarter of the year to be audited, the Audit Committee, based on recommendations from the Bank Internal Auditor / Director of Bank Audit of the Central Bank of Ecuador and prior knowledge of the Monetary Policy and Regulation Board, will send to the Central Bank of Ecuador the objective and scope of the external audit service, considering the provisions set forth in this regulation; b) The Central Bank of Ecuador will publish on its website and through direct invitations, the requirement for external audit services; c) The Central Bank of Ecuador will attend to inquiries sent by candidate external audit companies; d) External auditors must send their technical and economic offers as indicated by the requirement of the Central Bank of Ecuador; e) The Central Bank of Ecuador will make the received technical and economic offers known to the Audit Committee; f) The Audit Committee may request clarifications or expansions from audit companies, which, if applicable, must be attached to the original offer; g) The Audit Committee will analyze the received technical and economic offers, using the Criteria Matrix for the Evaluation of External Audit Contracting, which may consider, among other aspects, the type and duration of experience of the partner, team leader, and members forming the audit work team; participation in the work team of auditors with prior experience in central banking; participation in the work team of senior audit specialists. The aforementioned matrix will award a score of eighty percent (80%) to technical strength and affinity; and twenty percent (20%) regarding the economic factor; h) Through a motivated report, which must contain the Criteria Matrix for the Evaluation of External Audit Contracting, the Audit Committee will send to the Monetary Policy and Regulation Board the list of participating and eligible independent external auditors, from which it will propose the best-positioned audit firm; i) The Monetary Policy and Regulation Board will appoint the external audit company for a period of three (3) years, which may be renewed on one occasion; j) The Central Bank of Ecuador will hire the selected external audit company by August 15 of the year subject to audit; and, k) The contracting of the external audit company for the Central Bank of Ecuador will be carried out under the modality of a professional service contract, under the institutional, administrative, budgetary, and technical autonomy, established in Articles 26.1 and 27.1 of the Organic Monetary and Financial Code.

Art. 7.- CALL FOR BIDS. - The call for bids for the hiring of the external auditor of the Central Bank of Ecuador must contain at least the following:

a) Objective and scope of the service to be contracted; b) Requirements; c) Process deadlines; d) Selection criteria; e) Documents or information to be delivered, delivery method, physical or virtual contact addresses, and the information delivery protocol; f) Question and clarification procedure; and, g) Contact data for handling requirements.

Art. 8.- EXTERNAL AUDIT REPORTS. - External auditors will issue the following reports:

1. Preliminary internal control report as of September 30 of each year.
   In order to plan their work effectively, in accordance with International Standards on Auditing (ISA), the external auditor must evaluate the internal control system, which includes the control environment, risk assessment, control activities, information and communication, monitoring activities; as well as processes, policies, procedures, information technology systems, information security measures, compliance with Monetary Policy and Regulation Board policies, safeguarding of assets, prevention and detection of fraud or errors, anti-money laundering prevention management, anti-bribery policy management, accuracy and integrity of accounting records, and timely preparation of reliable financial information.

In this context, the corresponding report will contain the disclosure of weaknesses detected by the external auditor regarding internal controls, accounting and administrative controls, management administration systems, and information systems established in the Central Bank of Ecuador, including the existence of procedures and policies. Likewise, they will reveal deficiencies in the audit function in internal review processes.

Also, under the title "Recommendations to improve tax aspects," all observations regarding compliance with tax obligations will be included.

Important aspects included in this report must be those that external auditors have reviewed within the scope of their work and on which it is necessary for administration to adopt corrective measures.

2. Preliminary letter on relevant matters arising during the exercise as of September 30 of each year.
   This letter will contain information on relevant aspects, which will include, at least, the following information:
   a) Cut-off date; b) Amount and origin of losses incurred in the audited exercise; c) Amount of deficiencies in provisions and asset items or contingencies that originate them; d) Excesses in limits of active and contingent operations; e) Important facts that may represent risks; f) Summary of non-compliance with legal, regulatory, and administrative provisions issued by competent authority; g) Causes and effects of legal and regulatory non-compliance; h) Limitations on scope due to lack of information delivery by the Central Bank of Ecuador; i) Brief summary of facts that could result in qualified opinions or qualifications; j) Failures or deviations from best practices and international norms; k) Relevant topics in technical and administrative aspects; l) Differences in accounting policies applied in relation to International Financial Reporting Standards (IFRS); and, m) Others.

3. Opinion on the reasonableness of financial statements for the period from January 1 to December 31 of each year, with their respective notes.

In order to standardize external audit reports, individual financial statements will include, at a minimum, the following explanatory notes:

a) Main accounting criteria used and accounting changes: These constitute disclosures about financial statements and contain a brief description of the main accounting criteria used in their preparation. When applicable, a note will be added describing changes in the policy for the presentation of financial statements, the Central Bank of Ecuador's account catalog, and the methodology for distributing assets and liabilities of the four systems for measuring the reserve backing rule approved by the Monetary Policy and Regulation Board, that have existed in relation to those applied in the immediately preceding economic exercise; b) Relevant events: This note must include information about events that occurred during the economic period, or between the closing date and the preparation date of the financial statements, that have had, or may have in the future, a significant influence or effect on the development of the Central Bank of Ecuador's operations or on its financial statements; c) Investments in shares or participations: This note must reflect the ownership that the Central Bank of Ecuador possesses in financial or non-financial institutions, and also indicate the individual amount recorded in the assets of each of them, the percentage of participation; d) Provisions: This note must inform about the composition and movement of mandatory provisions to cover asset risks, and those voluntary; e) Equity: This note must reveal information about capital, the general reserve fund, other reserve accounts, surplus, and accounts for the results of the management of the Central Bank of Ecuador; f) Investments: This note will inform about the composition of the following investment balances:
i. Monetary gold held by the Central Bank of Ecuador.
ii. Banknotes and coins denominated in freely convertible currencies in the Central Bank of Ecuador.
iii. Net deposits in financial institutions and international financial organizations, short-term.
iv. Negotiable and liquid debt securities denominated in freely convertible currencies and issued by, or backed by, foreign governments, central banks, or international financial organizations.
v. Claims against international financial organizations.
vi. Special Drawing Rights (SDRs) held in the account of the Republic of Ecuador in the International Monetary Fund, belonging to the Central Bank of Ecuador.
vii. The reserve position of the Republic of Ecuador in the International Monetary Fund.
viii. Any other financial asset, as determined by the Monetary Policy and Regulation Board.
g) Maturity of assets and liabilities: This note will reveal the distribution of main assets and liabilities according to their remaining terms from the closing date of the exercise, including accrued interest up to that date; h) Properties and equipment: This note will reveal the composition of this asset item, summarizing the debit movements ---