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01 March 2010
Requirement to prepare accounts
Entitlement to copies of accounts
Timeframes for preparation and filing of accounts
Auditor duties and powers
It is anticipated that the Companies (Amendment No 4) (Jersey) Regulations 2010 will come into force on April 5 2010. The amendments to the rules contained in Part 16 of the Companies (Jersey) Law 1991 relating to accounts and audits effected by the regulations are being made for two reasons. The first is to respond to the impact of the EU Statutory Audit Directive (2006/43/EC) on Jersey-based auditors. The second is to improve Jersey's compliance with the international standard issued by the International Organization of Securities Commissions (IOSCO) relating to accounting and auditing matters (commonly referred to as IOSCO Principle 16). This update considers the principal accounts and audit rules contained in the regulations and highlights how they differ from their predeccessors.
The directors of a Jersey company must prepare accounts for a period of no more than 18 months beginning from the company's date of incorporation or, if the company has previously prepared accounts, beginning from the end of the period covered by the most recent accounts. Directors of a holding company will no longer be required to prepare solus accounts for that company where consolidated accounts have been prepared (unless required by the members by ordinary resolution).
The accounts of a market-traded company - that is, a Jersey company whose securities are admitted to trading on an EU regulated market (other than a company that is an open-ended collective investment fund or an issuer exclusively of debt securities admitted to trading on an EU regulated market whose denomination is at least €50,000 or other currency equivalent at the date of issue - must be prepared in accordance with prescribed generally accepted accounting principles (GAAP) which will initially be those of Canada, Japan, the United Kingdom and the United States, as well as International Financial Reporting Standards.
This new requirement has been introduced to enhance Jersey's level of compliance with IOSCO Principle 16. The latter states that a jurisdiction should apply accounting and auditing standards that are of a high and internationally acceptable quality, and applies to issuers that make "public offerings" of securities and issuers whose securities are "publicly traded". In preparing the regulations, the view was taken that initially Jersey should aim to comply with IOSCO Principle 16 only in respect of market-traded companies. Accordingly, the regulations do not fully meet the scope of issuers covered by IOSCO Principle 16. In this regard the regulations also amend the Companies Law to provide a mechanism for the enforcement of compliance with accounting and auditing standards that apply to market-traded companies.
As was the case before the introduction of the regulations, Jersey companies other than market-traded companies are required to prepare their accounts in accordance with GAAP of their choice. The accounts of a company must specify which GAAP have been adopted in their preparation.
A public company, a company whose articles of association require the appointment of an auditor and a company that resolves in general meeting to appoint an auditor must appoint an auditor to examine and report on its accounts. Failure to do so is an offence on the part of the company and its directors and liquidator (officers) which is punishable by up to two years' imprisonment and/or a fine.
The accounts of a company required to appoint an auditor must give a true and fair view, or be presented fairly in all material respects, so as to show the company's profit and loss for the accounting period and the state of its affairs at the end of the period. They must also comply with the requirements of the Companies Law. A company's accounts must be approved by the directors and signed on their behalf by one of them.
A shareholder that has not been furnished with a copy of a company's accounts may request in writing to be furnished with a copy of those accounts and any auditor's report. The company must furnish a copy of the accounts and any auditor's report to the shareholder without charge within seven days of receipt of the request.
A company's accounts for a financial period must be prepared (and audited where necessary) and laid before a general meeting of the company (together with a copy of the auditor's report, where required) within seven months of the end of the financial period covered by the accounts in case of a public company and within 10 months in case of a private company. However, the requirement to lay accounts before a general meeting is dispensed with if all shareholders of the company agree in writing to dispense with the requirement to hold an annual general meeting, unless a shareholder, no later than 11 months after the end of the financial period covered by the accounts, requires the company by written notice to do so. In such case the general meeting must be held within 28 days of the notice or approval of the accounts by the directors, whichever occurs latest.
The directors of a public company must deliver a copy of the company's accounts for a financial period (signed on behalf of the directors by one of them) and a copy of the auditor's report (along with a certified translation of such documents into English where appropriate) to the registrar of companies in Jersey within seven months of the end of such financial period and pay the relevant filing fee. This is so even if a public company becomes private during a financial period, although the requirement to deliver accounts will be satisfied if the accounts relate either to the entire financial period or only to the part of the financial period during which the company was a public company. The directors of a private company do not have to file accounts.
The timeframes stipulated for the preparation and audit of accounts, the laying of accounts before the general meeting and the delivery of accounts to the registrar of companies can be extended by the Jersey Financial Services Commission (JFSC) if it is satisfied that a special reason for doing so exists, provided that a written application for extension is made to the JFSC no later than one month before the end of the relevant timeframe.
A new requirement introduced by the regulations is that a company must not publish interim accounts (audited or not) unless they have been prepared in accordance with GAAP and, in the case of market-traded companies, the prescribed GAAP.
A Jersey company is required to keep accounting records that:
Such accounting records must be preserved for 10 years. A company's accounting records must be kept where the directors think fit and be open to inspection by the company's officers and secretary. If accounting records of a public company are maintained outside Jersey, returns with respect to the business dealt with in the records must be sent to and kept in Jersey and be open to inspection by the company's officers and secretary. The returns must be such as to disclose with reasonable accuracy the financial position of the business in question at intervals of no more than six months and enable the directors to ensure that any accounts prepared by the company comply with the requirements of Part 16 of the Companies Law.
A breach of the requirements set out above is an offence by the company and, in the case of a public company, by its officers, which is punishable by a term of imprisonment of up to two years and/or a fine.
A company that is required to appoint an auditor must appoint an auditor at each annual general meeting until the conclusion of the next annual general meeting. The directors or, failing them, the company in general meeting may at any time before the holding of the first annual general meeting appoint an auditor to hold office until conclusion of that meeting. If a company that is required to appoint an auditor has dispensed with the requirement to hold annual general meetings, any auditor then holding office shall be taken to have been reappointed for each succeeding financial period until conclusion of the next annual general meeting or until the company in general meeting resolves that the auditor's appointment be terminated. If a company that has dispensed with the requirement to hold annual general meetings becomes bound to appoint an auditor and there is no auditor in office, the directors must appoint an auditor to continue to act until the conclusion of the next annual general meeting. The directors or the company in general meeting may fill any casual vacancy in the office of auditor and fix the auditor's remuneration. A company may remove an auditor by resolution, despite anything in any agreement between it and the auditor, although this does not deprive the auditor of any right to compensation or damages for loss of office.
An auditor is entitled to receive notice of and attend any general meeting of a company and to be heard on any part of the business of the meeting that concerns him or her.
An auditor must make a report to a company's members on the accounts of the company that he or she has examined. The report must state whether, in the opinion of the auditor, the accounts have been prepared in accordance with the Companies Law and give a true and fair view or, alternatively, are presented fairly in all material respects. An auditor's report must state the name of the auditor and be signed and dated. If the auditor is an individual, the report must be signed by him or her; if the auditor is a firm, the report must be signed by the individual responsible for reporting on the accounts on behalf of the firm. The fact that an auditor's report is signed by an individual does not expose him or her to any civil liability to which he or she would not otherwise be liable.
In preparing an audit report, an auditor must carry out such investigations in order to form an opinion as to whether:
If an auditor forms the opinion that such requirements have not been met, he or she must state this in the report. An auditor has a statutory right of access to a company's records at all times and is entitled to require from the company's officers and secretary such information and explanations as are deemed necessary for the performance of his or her duties. An auditor must mention in his or her report any failure to obtain such information and explanations that were, to the best of his or her knowledge and belief, necessary for the audit. An officer or secretary of a company who makes a false or misleading statement to an auditor is guilty of an offence punishable by up to five years' imprisonment and/or a fine.
An auditor of a market-traded company must keep all working papers relating to an audit of a company in English and make them available to the JFSC, a recognized professional body (defined below) or a professional oversight body upon demand. Failure to do so is an offence by the auditor and its officers punishable by a fine.
An auditor may resign from office by depositing at a company's registered office written notice of resignation along with a statement to the effect that there are no circumstances connected with his or her resignation that he or she considers should be brought to the notice of members or creditors of the company or, if there are such circumstances, a statement setting out what they are. Failure to do so is an offence by the auditor and its officers punishable by a fine. Such notice operates to bring the auditor's term of office to an end on the date on which it is deposited or on such later date as is specified in the notice.
A company that receives notice from an auditor that there are circumstances connected with his or her resignation that should be brought to the attention of members and creditors must, within 14 days of receipt of notice, send a copy to each member of the company and to each person entitled to receive notice of a general meeting of the company. Failure to do so is an offence by the company and its officers punishable by a fine.
If a Jersey company is required to appoint an auditor, the auditor must meet certain qualification requirements that are set out below. A person who does not meet the qualification requirements must not act as an auditor and breach of this requirement is an offence punishable by up to two years' imprisonment and/or a fine. An auditor is also required to meet certain prescribed independence requirements.
For an individual to qualify as an auditor, he or she must be a member of the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants or the Institute of Chartered Accountants in Ireland (each a 'recognized professional body') who is permitted by that body to engage in public practice.
For a Jersey or foreign partnership or Jersey or foreign limited liability partnership other than one that is a body corporate (eg, a UK limited liability partnership) to qualify as an auditor, more than half its partners must be any or a combination of:
More than half of the voting rights in the partnership and in its management body (if any) must be held by individuals who are members of a recognized professional body and each of the persons who is responsible to it for reporting on accounts must be a member of a recognized professional body who is permitted by that body to engage in public practice.
For a body corporate (wherever incorporated) to qualify as an auditor, it must be controlled by any combination of the following persons or entities:
Such persons or entities must:
In the case of companies that are not market-traded companies, the JFSC can authorize individuals or firms to act as auditors of Jersey companies where they would not otherwise qualify under the requirements set out above. For these purposes, the JFSC has a policy of approving only:
A new requirement introduced by the regulations is that market-traded companies must appoint a 'recognized auditor' (and an audit of such company's accounts by any other person is of no effect). The qualification requirements for recognized auditors are considered below. A person who is not a recognized auditor must not act as the auditor of a market-traded company and breach of this requirement is an offence punishable by up to two years' imprisonment and/or a fine.
The directive introduced harmonized provisions relating to auditor eligibility and independent auditor oversight in all EU member states. Once certain transitional provisions have expired, the directive will subject auditors of market-traded companies incorporated outside the European Union (including Jersey) (third-country auditors) 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 may grant a derogation from this requirement (but is not obliged to do so) where the third-country auditor is subject to an EU equivalent system of regulation.
The regulations amend the Companies Law so that Jersey can establish an auditor oversight regime that should meet the equivalence requirements of the directive. The introduction of such a regime may avoid the need for a Jersey auditor to: (i) apply for registration in each member state in which it acts as an auditor to a Jersey market-traded company (or allow it to benefit from 'lighter-touch' registration); and (ii) be subject to the systems of regulation in each member state in which it is registered, although it will be up to each member state to determine the extent to which it recognizes the equivalence of regimes outside the European Union.
In order to introduce an auditor oversight regime that will meet the equivalence requirements of the directive, the regulations will, in summary, provide that the auditor of a Jersey company that is a market-traded company will:
In addition, to meet the equivalence requirements of the directive, the regulations amend the Companies Law to provide that an auditor monitoring work of a recognized professional body will itself be subject to oversight by an independent body. The intention is that the regulations will allow Jersey to 'piggyback' onto the United Kingdom's existing auditor oversight regime. To this end, the Institute of Chartered Accountants in England and Wales will be requested to issue the audit rules referred to above, monitor the compliance of recognized auditors with them and, if breaches occur, take disciplinary action when necessary. To meet the equivalence requirements of the directive, the JFSC, as the body responsible for maintaining the register, will also be granted powers under the Companies Law to take action against recognized auditors.
The intention is that the UK Professional Oversight Body (part of the Financial Reporting Council) will fulfil the role of the independent body overseeing the monitoring work of the Institute of Chartered Accountants in England and Wales, as it does in the United Kingdom's auditor oversight regime. To meet the equivalence requirements of the directive, the intention is that the institute will monitor each recognized auditor's compliance with audit rules governing the conduct of audit work for market-traded companies and the Professional Oversight Body will be responsible for overseeing the auditor monitoring work of the institute. In the unlikely event that the institute or the body is unable to undertake its roles in the oversight regime, the JFSC can take its place.
Based on research carried out by the JFSC, it is expected that each of the 'big four' audit firms in Jersey will need to register as a recognized auditor. Between them, they audit approximately 70 market-traded companies.
Prior to the entry into force of the regulations, audit firms auditing a Jersey market-traded company that did not qualify as an auditor could be granted discretionary authorization by the JFSC. Such discretionary authorizations are retained in respect of non-market-traded companies. Market-traded companies that do not have a recognized auditor appointed will have to appoint one. It is thought that only a small number of market-traded companies will have to appoint a recognized auditor to replace an unqualified auditor and these will probably only be cases where the company's assets and existing auditor are located in a jurisdiction outside the EEA. One solution for companies affected by this problem would be to appoint a recognized auditor and request that the existing auditor assist in the audit process. There is a 12-month transition period for market-traded companies that do not have a recognized auditor to appoint one (and their existing auditor will be deemed for the duration of the transition period to be a recognized auditor). The JFSC also has discretion to extend the transition period by a further year.
The auditor oversight regime will not affect the audit arrangements of companies that are not market-traded companies.
The changes effected by the regulations will in large part affect market-traded companies only by requiring their auditors to be recognized auditors and requiring them to adopt specified GAAP. Only a small number of existing market-traded companies will have to appoint recognized auditors to replace or work alongside their existing auditors.
Businesses located outside the EEA wishing to list on an EU regulated market (eg, the Official List of the London Stock Exchange) should bear in mind that, irrespective of where the company to be listed is incorporated, an auditor registered under the registration and oversight regime established by the member state in which the relevant regulated market is situated will have to be appointed either to replace or to work alongside existing auditors (assuming that they are not otherwise registered).
It is hoped that the introduction of an equivalent system of registration and oversight in Jersey will result in derogations being granted by member states to Jersey-based auditors of market-traded companies so that businesses seeking an EU listing will not be precluded from appointing Jersey auditors should they wish to do so. Those businesses wishing to use a Jersey company to achieve a listing on an EU regulated market that do not wish to appoint a Jersey-based recognized auditor will still have to appoint an auditor that otherwise meets the qualification requirements for auditors of Jersey companies set out above. In addition, any such auditor appointed would need to be registered under the registration and oversight regime established by the member state in which the relevant regulated market is situated. Those businesses wishing to use a Jersey company to achieve a listing on a market other than an EU regulated market will be able either to appoint an auditor that meets the qualification requirements for auditors of Jersey companies set out above or to appoint another auditor based in their own jurisdiction approved by the JFSC.
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