Report No. AAA 29-LAC Organization of Eastern Carribbean States Report on the Observance of Standards and Codes June 21, 2008 Financial Management Unit, Operations Services Department Caribbean Country Management Unit Latin America and the Caribbean Region Document of the World Bank OECSROSC. of Contents Table iii Organizationof EasternCaribbean States (OECS') REPORT ON THE OBSERVANCE OF STANDARD AND CODES (ROSC) ACCOUNTING AND AUDITING I INTRODUCTION.................................................................................................... 9 I1 .. REPORTING AND AUDITING ................................................................................... INSTITUTIONAL FRAMEWORK FOR CORPORATE FINANCIAL 13 A. STATUTORY FRAMEWORK...................................................................................................... 13 B 21 C. . PROFESSIONALEDUCATIONAND TRAINING ..................................................................... THE ACCOUNTING AND AUDIT PROFESSION..................................................................... 25 D. SETTINGACCOUNTING AND AUDITING STANDARDS ...................................................... 26 E. I11 ACCOUNTING AND AUDITING STANDARDS AS ADOPTED AND AS . ENSURINGCOMPLIANCE WITH ACCOUNTING AND AUDITING STANDARDS ...........-26 I V PERCEPTIONS ONTHE QUALITY OF FINANCIAL REPORTING..........30 PRACTICED................................................................................................................... 33 V V I ANNEX ................................................................................................................... ..RECOMMENDATIONS....................................................................................... 34 43 OECSROSC-Executive Summarv 4 EXECUTIVESUMMARY This report provides an assessment o f accounting, financial reporting and auditingrequirements and practices within the enterprise and financial sectors in the OECS. The report uses International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) as benchmarks and draws on internationalexperience and good practices in the field of accounting and audit regulation. High-quality financial information supports relevant strategic objectives for the OECS, including(1) an investor-friendlybusiness climate, (2) sub-regionaland regionalharmonization, (3) better managementand increasedtransparency of public-interestenterprises and (4) improved SME access to credit as an outgrowth of a shift toward lendingbasedon the borrower's financial performanceand cashflow. Small size, constrained human capacity and vulnerability to external shocks define everyday realityinthe OECS countriesand significantly affect their developmentstrategies Due to their small size (total population about 560,000) and their tropical island geography, OECS countries face special development challenges, including limited human and institutional capacity, high per capita costs of basic social and infrastructure services, and vulnerability to naturaldisasters and other external shocks. High levels of indebtedness and fiscal imbalance are additional factors affecting growth and crowding out private investment. These constraints significantly affect the strategic planning and decision-makingprocesses in both the public and privatesectors andmakecapacity issuesmore significantthan in larger countries. Sub-regional integration and private sector development - Two major drivers of competitivenessand sustainable growth One of the growing challenges of the OECS countries is to adapt to an increasinglycompetitive and liberalizedworld economy. To meetthis challenge, governmentshavepursueda sub-regional integration strategy, to pool scarce resources and take advantage of economies of scale. Since 2000, OECS countries have been working together toward the establishment of an OECS Economic Union. They already share a number of public sector agencies, including a Supreme Court, a Central Bank and a Securities Commission, in additionto a stock exchange. Inaddition, they are in the process o f establishinga number of sub-regional professionalbodies. Predictably, the changing political-economiclandscape requires significant changes in the underlying legal, statutory and institutionalframeworks and puts increasedstrain on availablehumanresources. Small and mediumenterprises (SMEs) make up most of the private sector in the OECS. As their businesses grow, so too does their demand for financing and credit. Improvedaccess to finance requires reliable, high-qualityfinancial information;the lack of such information, its poor quality and lack of reliability ultimately diminish the pace and extent of OECS economic growth. The OECS's accounting and auditing practices need to be strengthened and modernized to serve adequately the emergingneedsof the market and support sustainableeconomic development. The OECS includes Antigua and Barbuda, Dominica, Grenada, St. Kitts andNevis, St. Lucia and St. Vincent and the Grenadines, all members of the World Bank Group. There is a seventh, full member (Montserrat) and two associate members (Anguilla and the British Virgin Islands); these are overseasterritoriesofthe UnitedKingdom. OECS ROSC- Executive Summaw 5 The challenges posed to the accounting and auditing profession in the OECS are similar to those facing the rest of the economy Limitedhumanresources, challenges in attaininginternationallyrecognizedqualifications, and an on-going brain drain are three main factors affecting the growth and development of the profession. Inthe absence of nationalaccounting and auditing standards, IFRS and IAS are often used as a benchmark for preparation of financial reports. As such, knowledge and understanding of these standards remain a prized possession. While a number of local professionals are members of internationally recognized accounting bodies (ACCA, CGA, CICA and CPA (US) beingthe mostcommonqualifications),there are many others, who still lackthe ability to do so. There is no single legislativeAct regulating the accounting and auditing profession among the OECS countries. Instead, a number of different Acts (e.g., Companies Act, Securities Act and BankingAct) include sections that deal with the matters of accounting, financial reportingand auditing. Implementation and enforcement of these requirements is a responsibility of the respective regulators. While professional capacity o f these regulators varies, the involved personnelappearto be uniformlysensitivewith regardsto the importance of their mission. As part of a broader professionalinstitutionalizationeffort, an Instituteof CharteredAccountants of the Eastern Caribbean (ICAEC) has been formed in recent years. Although its growth and development have been very slow, it could with effort be transformed into a well-functioning institution,providingan opportunity for OECS-wideknowledgesharing andtraining. Such a sub- regionalcenter of accounting and auditingexpertise would be a key counterpart for governments, the private sector and donor institutionswho seek a stronger, more skilledaccountingprofession. Regulatoryand InstitutionalReformsinthe Area of Accounting and FinancialReporting Historically, the OECS regulatory framework has been respectful of the role of accounting, auditing and financial reporting in informing the shareholders, directors, regulators and other external stakeholders. However, as any other legal and institutional framework, it is inherently static and needs to be updated to take account of changes and constraints. Much progress has already beenmade inthe OECS over the past few years. To bringexisting legislationto par with good internationalpractices, a harmonizedBankingAct and Securities Act have been passedby the various governments. Updated and harmonized Insurance and Co-operative Societies Acts, which will set new standards for the development and regulationof the non-banking financial services sector, are currentlybeingdrafted. The ongoing legislativereform has been accompanied by restructuringand consolidationof the underlying institutions. In addition to the already functioning sub-regional Central Bank and Securities Commission, the individual member-countriesof the OECS are currently establishing Single Regulatory Units, responsible for the regulation and oversight of non-banking financial services. Once these units are established and functioning, it is envisionedthat they will jointly comprisethe OECSRegulatoryOversight Committee. Recommendations While much has already been done, a lot remains to be achieved. Accordingly, this A&A ROSC report makes recommendations to guide the next stages of reform. These recommendations have been crafted to take into consideration international experience, good practice, and local circumstances. They follow the three key guiding principles of (i) regionalization, (ii) simplification, and (iii) efficient use of the limited supply of human resources. Whereasthe reportseeks to providea holistic pictureof the neededreforms, the suggestedactions OECS ROSC- Executive Summaw 6 cannot be implemented all at once. Instead, a proper sequencing of reforms needs to be determined, giving due regardto capacity of key institutions involvedto contributeto the reform process. An approximate timeline for their implementationis providedon page v. A condensed summary is givenhereafter. A. Improving the Statutory Framework The focus of these recommendations is to improve existing Acts and regulations to enable a higherlevelof compliance. The reportrecommendsthat: All public companies, banks and financial institutions be requiredto apply IFRS and their auditors berequiredto apply ISA. SMEs be subjected to a limited set of financial reporting requirements, appropriate to their size and nature, consistent with the proposed IFRS for SMEs currently being developed by the IASB. Non-banking financial institutions (NBFI) be required to make their audited financial statementspubliclyavailable infull and in a timely manner. Secondary regulations and application guidance be developed and extensive training be provided to regulators and preparers in support of the implementation of existing and amendedActs on financialreporting. Public accountants be subjectto clear licensingrequirements, includingprocedures relatingto appointment, dismissal and liability of auditors. 0 Government oversight of financial reporting by "statutory bodies" (i.e. state-owned enterprises) be strengthened, observance of IFRSbeingthe ultimategoal. The role ofthe various regulatoryagencies with regardto financialreportingbe clarified. B. Institutional Strengthening As the OECS economy grows and diversifies, financial reporting requirements become more sophisticated, especially in the financial sector. Recommendations in this second area focus on the ways to mitigate the increasing challenges that the OECS's existing and newly established institutionsface. The proposed recommendations emphasize a regionalapproach and the use of human resources already in place, to the extent possible. They are fully consistent with the countries' long-term objectives. The reportrecommendsthe following institutionalstrengtheningmeasures: 0 Each regulatory agency and professionalbody should develop a long-termplan includingan estimate of resourcesneededto carry out its mission.The plans are likely to includecapacity- building measures, training and in some cases recruitment of additional personnel. Their implementationwill requireadditionalfunding. The newly established SRUs should be developed with care, truly "empowered" from the outset in terms of both regulatory and supervision functions, and be supported with an adequatemandateas well as sufficientresources. 0 The ECSRC and ECSE should develop and implement risk-assessment systems and risk- based supervision processes, similar to the one already used by the ECCB. This will allow them to focus limited resources more effectively on issues of public interest. Their enforcementcapacity needsto be strengthenedaccordingly. 0 The ECSE should graduallyalign its rules, regulationsand operationalpolicieswith those of the other active stock exchangesinthe Region. 0 The ICAEC should transform itself into a sub-regionalcenter of accounting and auditing expertise, seeking further alignment with the Institute of Chartered Accountants of the Caribbean(ICAC). OECS ROSC- Executive Summary 7 C. CapacityDevelopment and Trainingfor Accountants andAuditors A genuine understanding of international accounting, financial reporting and auditing standards requires adequately educated and trained financial statement preparers, auditors, and regulators. In this regard, it is essential to enhance the capacity of existing practitioners and ensure the capacity o f the future ones. This is particularly important for those employed by local firms, which do not have the support of extensive internationalnetworks. Proposed measures include: Implementing a continuing professional development program for Eastern Caribbean practitioners, tailored to the OECS environment. ICAEC should be given primary responsibility for coordinating training program, and it should seek assistance from the other Caribbean institutions, and consider sourcing these courses from international organizations already active inthe Region. Designing and delivering sector-specific courses for target groups, including the regulators, banking sector, NBFIs, Statutory Bodies and SMEs. Seconding key operational staff at regulatory and supervisory agencies to similar internationalagencies for `on-the-job' training. From Recommendationsto Reform Proposed recommendations are aimed to enhance the quality o f corporate financial reporting and create an institutional financial reporting platform conducive to sustainable private and financial sector growth, thereby having a beneficial impact on all OECS citizens. Their successful implementation requires a holistic, multi-disciplinary approach; close cooperation among a wide range of stakeholder groups including Governments, regulators, donors and the accountancy profession; champions among the senior level o f sub-regional governments. To oversee the implementationo f the suggested reforms, a Multidisciplinary Steering Committee (MSC) should be established under the aegis of the OECS governments and regulators. The MSC should develop an OECS Action Plan for Accounting & Auditing, setting out key actions, assigning responsibilities, and providing an itemized budget with adequate resources for a successful implementation. e e e e e e -- e 0 e e Ee, e e OECSROSC-Introduction 9 I. INTRODUCTION 1. The reviewo f accounting and auditing practices inthe Organization of EasternCaribbean States (OECS) is part of a joint initiative o f the World Bank and International Monetary Fund (IMF) to prepare Reports on the Observance of Standards and Codes (ROSC'). The review focuses on the strengths and weaknesses of the accounting and auditing environment that influence the quality of corporate financial reporting and includes both a review of both mandatory requirements and actual practice. The report uses International Financial Reporting Standards (IFRS)` and International Standards on Auditing (ISA)3as benchmarks and draws on international experience and good practice in the field of accounting and auditing regulation. A decision was made to adopt a regional approach to the preparation of this report, considering the OECS countries as a group, in order to reflect properly the results o f the ongoing regionalization effort. This effort, which was spearheaded by the OECS governments and regional bodies, has had direct impact on the regional legislative framework, regulatory bodies and professional institutions. All important differences attributable to the individual countries are duly noted inthe text o f the report. 2. The OECS includes the following six independent countries: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines, all members of the World Bank Group. There is a seventh, full member (Montserrat) and two associate members (Anguilla and the British Virgin Islands), all of which are overseas territories of the United Kingdom. The OECS was created on June 18, 1981 by the Treaty of Basseterre, which was named after the capital city o f St. Kitts and Nevis. The Organization's six independent members form a chain of small-island states in the Eastern Caribbean. Together they occupy a land mass of about 2,810 square kilometers with a total population of approximately 560,000 (2007 e~timate).~Gross Domestic Product (GDP) per capita ranged from EC$11,900 (US$4,450) for Dominica to EC$31,200 (US$11,700) for Antigua and Barbuda in 2006. The Eastern Caribbean region has experienced a decline in growth since the 1980s, mainly due to contraction in its two major exports, bananas and sugar. Nonetheless, growth has recovered from the low levels of the early 2000s, with an estimated average growth of 5.7% in 2005,5 mainly driven by construction, tourism, and foreign direct investments (FDI). The I See www.worldbank.org/ifa.rosc aa.htm1. 2 International Financial Reporting Standards are issued by the International Accounting Standards Board, an independent accounting standard-setterbased in London, United Kingdom. In April 2001, the IASB announcedthat it would adopt all of the InternationalAccounting Standards issued by the International Accounting Standards Committee. For simplicity's sake the term IFRS will mean both IFRS and IAS inthis report. 3 International Standards on Auditing are the standards issued by the International Auditing and Assurance StandardsBoardofthe InternationalFederationof Accountants. 4 The smallest beingSt. Kitts andNevis with apopulationof approximately43,000 and the largest being St. Lucia with a populationof approximately 166,000. 5 "Organization of EasternCaribbean States (OECS)," Preliminary Overview of the Economies of Latin America and the Caribbean. Economic Commission for Latin America and the Caribbean (ECLAC). Washington, DC: 2006, pp. 129-130. OECS countries are highly indebted with high fiscal imbalances-OECS total debt stood at 107% o f the area's GDP in 2005, reaching as high as 180.5% o f GDP in St. Kitts and Nevis in 2006.6 The fiscal situation i s a significant factor dampening growth and crowding out private investment. Inan environment o f growing poverty and risingunemployment, the OECS economies are highly challenged by their extreme vulnerability to external shocks, due to the predominantly import- based structure o f their economies, limited human resources and their susceptibility to natural disasters. 3. One of the growing challenges facing the OECS countriesis their ability to adapt to an increasingly competitive and liberalized world economy. One o f the strategies they have adopted to pursue greater competitiveness is regional integration, allowing them to pool scarce financial and human resources and take advantage o f economies o f scale.7 In addition to sharing certain regulatory agencies (aviation, telecommunications), a Supreme Court and a stock exchange, the OECS states are also members o f the Eastern Caribbean Currency Union-sharing a common currency and a common central bank: the Eastern Caribbean Central Bank (ECCB). The ECCB is at the apex o f the financial system, with overall responsibility for promoting and maintaining financial stability in the Union. Since early 2000, the OECS member countries have been working together towards the establishment o f the OECS Economic Union. This process has now reached an advanced stage, with the draft Economic Union Treaty currently undergoing a public consultations process. 4. Stimulating private sector competitiveness and growth is high on the OECS development agenda. OECS policymakers, with the support o f donors, have taken initiatives to facilitate private sector development, such as the EU-funded Private Sector Development Program, as well as fiscal incentives and technical assistance. Limited access to credit is one of the main constraints facing the private sector, particularly small and medium enterprises (SME).' The OECS countries fall in the bottom half o f the global ranking on the ease o f getting credit, according to the 2006 Doing Business report. For S M E to have easier access to financing, banks and other lenders should be able to rely on businesses' financial data, as opposed to requiring asset-based sureties from these businesses. Improved accounting and reporting practices in the private sector would provide the reliable and transparent information necessary to help businesses gain access to the credit they need to grow. 5. Another focus of the OECS governments has been to improve the efficiency of public sector enterprises, commonly referred to as statutory bodies, which in some of the OECS countries cover such key sectors of the economy as transportation, utilities (e.g., electricity and water) and some of the financial services. The 2003 CFAA emphasized the lack o f oversight and effective scrutiny o f these bodies, which in many ways fall into a `no-man's- land' between the public and private sector. Proper oversight o f these institutions i s necessary given their social and economic significance and their use o f government-guaranteed debt. The 2007 OECS Public Fiduciary Management Policy Note indicated that the shortage o f adequately trained professional accountants and auditors in the public sector is one o f the main obstacles standing in the way o f effective oversight. Therefore, efforts to enhance the capacity of the accountingprofession will benefit the public sector inaddition to local businesses. 6 "IMF Executive Board Concludes 2006 Regional Discussions with Eastern Caribbean Currency Union," Public Information Notice (PIN) No. 07/13. International Monetary Fund, February 6, 2007. 7 The OECS Development Charter, signedin2002, states "the strengtheningof our regional architecture [for integration] will facilitate the achievementofthe developmentobjectives outlined inthis Charter." 8 Demirguc-Kunt, Beck and Honohan, Finance For All? Policies and Pitfalls in Expanding Access. World Bank Policy ResearchReport (Washington, DC: 2008), p. x. OECSROSC-Introduction I1 6. The OECS commercial banking sector comprises 39 banks (20 foreign and 19 domestic) with total assets o f approximately EC$19 billion (approximately US$7 billion) as o f October 2006. Notwithstanding the stability o f the system, a joint IMF-World Bank FSAP done in 2003 identified some emerging risks to the system.' The ECCB, which has responsibility for the supervision o f domestic banks in the region, has taken remedial steps such as revising the Uniform Banking Act, strengthening its prudential regulations on capital adequacy, and corporate governance standards. While recognizing this progress, the ECCB acknowledges the further need to strengthen accounting and auditing practices o f banking financial institutions, especially as they are transitioningto IFRS. 7. In addition to commercialbanking, the regionalfinancial sector includes a variety of non-banking financial services and institutions. These include insurance companies, cooperative credit unions, financial companies and offshore financial institutions (which are excluded from the scope o f this report). Each country has a national insurance system whose investments are dominated by short-term assets in banks, and exposure to local government and statutory bodies. The private insurance sector, which is dominated by branches o f foreign companies, is also present and growing in each o f the OECS countries. Another important grouping within the non-banking financial services industry i s the cooperative credit unions, which serve a wide spectrum o f the population. These institutions have gained great significance in the OECS countries, as their clients include many people with limited access to commercial bank loans. 8. While the banking sector is supervised by the regional regulatory body (ECCB), other non-banking financial institutions are regulated at the individual countries level. Nonetheless, with the OECS's greater focus on regional integration, there has been a consistent move towards a single integrated financial space within the ECCU, governed by uniform legislation. A number o f uniform acts regulating the financial services industry have been enacted (Banking Act) or drafted (Insurance and Co-operative Societies Acts) on this basis. As part o f a move toward regulatory reform o f the non-banking financial sector, the ECCB has been spearheading an initiative to establish stand-alone Single Regulatory Units, which would regulate and supervise all non-banking financial institutions in each o f the member countries. This effort stands at varying stages o f progress in the member countries and their completion is a high priority for the ECCB. 9. The continued development of the region's money and capital markets is an important aspect of the region's development strategy. In 2001 a regional securities market, the Eastern Caribbean Stock Exchange (ECSE), was established. However, the securities markets remain semi-liquid and lack depth owin to the size o f the economy and persistent historical preference for privately held investments.` Inaddition, it faces competition from other Caribbean stock exchanges in Trinidad and Tobago, Jamaica and Barbados. If the ECSE is to develop, it must seek alliances with the other regional players, deepen investor confidence and increase market transparency. An improved corporate financial reporting regime would contribute 9 Inthe domesticbanking sector the FSAP noted inter alia arelatively highlevel of unprovisioned, non- performing loans, the practice of some banks o f taking accruedinterest on government loans inarrears into income, and the need to strengthen data integrity, especially with respect to capturing all on- and off-balance-sheet exposure in prudential returns. The study also noted the exposure of the financial system, especially indigenous banks, to the highpublic debt of member governments. lo There are currently 11domestic equity listings onthe ECSE. OECSROSC -Introduction 12 considerably to this goal. The Eastern Caribbean Securities Regulatory Commission (ECSRC) regulates the securities market. 10. Although each of the independent OECS countries retains its own unique history and tradition, the erosion of trade preferences and other globalizingforces have pushed all of them to work together and continueto integratetheir economies. Business and government leaders agree that they must pool scarce human and other resources in order to remain competitive. Sound, universal financial reporting standards such as IFRS are a key piece of the puzzle. Increased levels o f both foreign direct investment (FDI) and domestic investment require higher quality financial information consistent with international standards. In this context, this report sets out policy recommendations to enhance the quality o f corporate financial reporting and foster a financial reporting platform conducive to sustainable private and financial sector growth, thus increasing access to global financial markets and other tools of the market economy. OECSROSC-Institutional Framework for Coruorate Financial ReuortinPandAuditina 13 11. INSTITUTIONAL FRAMEWORK FOR CORPORATE FINANCIAL REPORTING AND AUDITING" A. STATUTORY FRAMEWORK 11. Since gaining independence," the OECS countries have adopted a legal system based on British common law. Under this system, establishment and operation o f business enterprises is guided by the Companies Acts. Inthe mid-l990s, the OECS countries adopted new, harmonized Companies Acts, which replaced the ones put in place by the colonial admini~tration.'~These current Companies Acts draw a clear distinction between public companies (as defined by these acts) and all other business entities, with respect to governance arrangements, financial reporting, accounting and auditing requirement^.'^ 12. In all companiesincorporatedor continued under the Companies Act, directorsare responsiblefor overseeingthe conduct of the company's affairs.Every company is requiredto have at least one director, but a public company must have no fewer than three directors, at least two o f whom cannot be officers or employees o f the ~ornpany.'~ As part o f their responsibilities, company directors are required to approve the corporative financial statements and place them before the shareholders at every annual meeting. 13. Public companies must, and any other company may, elect an audit committee, which must be composed of not less than three directorsof the company.16The shareholders' meeting i s responsible for the appointment o f external auditors, whenever such appointment i s mandated by the Companies Act (see Section A.2. for further details). The company's directors and audit committee must then review and approve the annual audit reports produced by the external auditors and present the reports to the shareholders meeting. 11 This report outlines the legal principles applicable to accounting and auditing. This report is not meant to be an exhaustiverendition ofthe law nor is it legal advice to those reading it. 12 Antigua and Barbuda became independent in 1981, Dominica in 1978, Grenada in 1974, St. Kitts and Nevis in 1983, St. Lucia in 1979, St. Vincent and the Grenadinesin 1979. 13 It is important to notice that, of the six countries constituting the OECS, the St. Kitts and Nevis Companies Act, which was adopted in 1996, is somewhat different fiom the other, virtually identical, Acts. All exceptions important in the context of this report will be hrther noted in the relevant sections. 14 Five out of the six Companies Acts have similar definitions of the public company as a company any of whose issuedshares or debentures are or were part of a distribution to the public. St. KittsandNevis defines public company as a company the memorandumo f which states, or is deemedto state, that it i s a public company. Furthermore, all companies, which have more than 50 members, are deemed to be public companies. 15 The directors of the company may designate the officers of the company and delegate to them powers to manage the day-to-day business and affairs ofthe company. 16 The St. Kitts and Nevis Companies Act does not specifically require establishment of an Audit Committee. In all other matters dealing with the appointment of the external auditors and preparation andpresentationo fthe audit reports it i s consistentwith the other OECS CompaniesActs. OECSROSC-Institutional Framework for Coruorate Financial ReuortingandAuditing 14 A.1. Accountingand Financial ReportingRequirements 14. Special provisions of the Companies Acts set the general requirements for accounting and financial reporting that OECS incorporated companies must prepare. The Acts do not specify accounting standards for companies to apply while preparing their financial information; however, they set special requirements with regard to the preparation, presentation and publication o f financial information produced by public companies. Other legislative acts regulating requirements for accounting and financial reporting in a number o f specialized areas include: Securities Act - harmonized acts regulating the OECS' securities market, including financial reporting and information disclosure requirements Banking Act - harmonized acts regulating the banking industry, including financial reporting and information disclosure requirements Insurance Act (under preparation) - harmonized acts, which will regulate the insurance industry, including financial reportingand information disclosure requirements Co-operative Societies Act (under preparation), which will regulate co-operative societies and credit unions, including financial reporting and information disclosure requirements 15. The CompaniesActs requiredirectors to present comparativeconsolidated financial statements at every shareholders meeting, accompanied by the report of the external auditor (in cases when audit is required by the legislation, for further details see section A 2), as well as any further information regarding the financial position o f the company and the results o f its operations as required by the articles o f the company, its by-laws, or any unanimous shareholder agreement. This information should be sent out to the shareholders not later than 21 days before the annual meeting. Publicly listed companies may instead use summary financial statements derived from the company's annual accounts and the directors' report. 16. Public companies and companies whose annual gross consolidated revenues exceed EC$ 4,000,000 (US$ 1,490,000), or whose consolidated assets exceed EC$ 2,000,000 (US$ 740,000), are required to file their annual audited (when required) financial information with the local Companies Registrar not later than 21 days before the annual shareholders meeting. In case these companies are also required to file interim financial statements with a public authority or recognized stock exchange, or are expected to distribute such statements to their shareholders, they should also send copies o f such interim financial information to the local Companies Registrar. 17. All other companies are required to file with the local Companies Registrar a certificate of solvency, stating the total value o f company's assets and liabilities, signed at least by one director and when applicable by the external auditors. In addition, this certificate is required to state whether, in the opinion o f the company's auditor or director, the company was able or unable to pay its debts and liabilities as they fell due, and as indicated at the balance sheet date. Ifthe auditor o f a company refuses to give or sign such certificate, a note o f refusal should be enclosed in the file. All information filed with the local Companies Registrar becomes automatically available to the public, unless otherwise stated by the law. 18. There is no further interpretationor guidancewith regardto the generalaccounting and financial reportingrequirements at the individualcountries level. The Companies Act o f St. Kitts and Nevis requires that companies prepare their financial accounts according to "generally accepted accounting standards," but it does not provide any further clarification. Therefore, puttingthe legislation's requirements into practice is entirely left to the management OECSROSC-Institutional Framework for CoruorateFinancial RevortinpandAuditing 15 o f the individual companies, whose actions are very often limited by their available human and financial capacity and existing market incentives (or lack thereof). 19. The Eastern Caribbean Securities Regulatory Commission (ECSRC), physically located in Basseterre, St. Kitts, regulates and supervises the securities market in the OECS countries. The harmonized Securities Act, adopted in 2001, governs the placement and circulation o f securities and the exercise o f professional activities on the stock market.I7 Many parts of this Act are based on U.S. securities regulations and comprehensively cover financial reporting requirements for the regulated entities. The Act's provisions are further explained in the supporting Regulations and Rules issued by the ECSRC, which provide detailed instructions on, among other things, the initial placement, registration and continuing disclosure requirements for regulated entities. 20. While the Securities Act does not explicitly prescribe accounting standards to be used by public companies, supporting rules refer to "international accounting standards," which must be used for the preparation of financial statements." Reporting issuers are required to submit to the ECSRC their annual report with their consolidated audited financial ~taternents,'~as well as semi-annual and quarterly reports with unaudited financial statements.2021 A reporting issuer is also required to disclose major shareholdings and insider information, and file with the Commission a notification o f material change within seven days of the occurrence o f such change. Some o f the material changes, as defined by the regulations, include: changes in control o fthe reporting issuer; acquisition or disposal o f assets o fthe reporting issuer; bankruptcy o f the reporting issuer; change o f the reporting issuer's Auditor, Attorney or Banker; change in the directors o f the reporting issuer. 21. The Securities Act requires each issuer to send an annual audited financial statement to each holder of its securitieswithin one hundred and twenty days after the end of its financial year. Annual financial information submitted by the listed companies is made publicly available on the Eastern Caribbean Stock Exchange website. In addition, the ECSRC is currently putting together a database containing information received from all reporting issuers. At the individual country level, financial information produced by the public companies is supposed to be accessible through the local Companies Registrars. 22. The Securities Act also sets out requirements for the ECSRC to review and approve prospectuses prepared by the entities issuing securities. The approved prospectus then has to be published and made available to the public. However, by approving the document, the ECSRC 17 Provisions of the Securities Act are applied to all issuers of securities, debentures and bearer bonds as well as investmentcompanies. Pensionfunds are specifically excluded from its scope. 18 Securities (Accounting and Financial Reports) Rules # 1 of 2002, and Securities (Registration Statements) Rules #2 of2002. 19 While Rule #1 requires annual financial statements to be submitted within 120 days following the end of the fiscal year, Securities (Continuing Disclosure Obligations of Issuers) Regulation 2001 stipulates that this information must be submitted not less than 21 days before the date of the issuer's annual generalmeeting andnot more than 3 months after the end of the fiscal year. 20 Semi-annual and quarterly information must be submitted within 30 days following the end of the reporting period. 21 While according to the currently existing rules/regulations reporting issuers include both traded and - non-traded companies, the ECSRC is currently considering whether the periodical financial reporting requirements could be somewhat relaxed for non-trading companies. In particular, changes under consideration include discontinuing requirement to submit interim financial statements and allowing more flexibility while definingfocus ofthe management discussionand analysis. OECSROSC-Institutional Framework for CoruorateFinancial ReuortinPandAuditing 16 does not accept responsibility for the potential damage suffered by investors as a result of any prospectus. Instead, such responsibilityexplicitly stays with every offeror, issuer, and/or director of an offeror or issuer. Retentionof responsibility by the offerors or issuers is evidence of the general requirement for companies and directors to be responsible at all times for financial informationissuedby a company. 23. The Eastern Caribbean Securities Exchange (ECSE) was established in 2001 with the purpose to serve the sub-regional securities market.22While it has grown somewhat its development has been at a disadvantage in competition with the other sub-regional security exchanges, includingthose locatedinBarbados, Jamaica and TrinidadandTobago. 24. The ECSE listing rules identify four tiers in which securities may be li~ted.2~There i s no differentiation in terms of the listing rules and listing maintenance requirements between the tiers. For the initial listing the issuer is requiredto provide three copies (in hard copy and electronic form) of its annual report and audited financial statements for the past three years and three copies of any interim financial reports that have been prepared since the end of the last financialyear. To maintainits listing, the issuer is requiredto make public disclosure (on a timely basis) of all pertinentinformation.This includesbut is not limitedto annual, semi-annual and quarterly earnings reports, interest payments, dividend declarations, mergers, acquisitions, rights to subscribe to new or additional securities, tender offers, stock splits, redemption payments and senior management changes. The normal method for the release of information is by means of a press release. In practice, the same set of periodic financial information is simultaneously submittedby the listedcompaniesto the ECSRC andto the ECSE. 25. Overall, the regulatory framework put in place by the joint effort of the ECSRC and ECSE is adequate and provides for the majority of needed accountabilitymechanisms, checks and balances. However, the effectiveness of these arrangements is constrained due to limitedcoverage (fewer than 60 public companies and 20 traded companies for the entire OECS) as well as capacity limitationsexistingwithin the regulatorybodiesthemselves. 26. The Eastern Caribbean Central Bank (ECCB) is responsible for the development and implementation of accounting and financial reporting requirementsapplicable to the bankingsector. The new BankingAct (passed between 2005 and 2007) is uniformly in force in the eight members of the Eastern Caribbean Currency Union. Amendments to the new Act were in part based on the 25 Core Principles for Effective Banking Supervisionissued by the Base1 Committee on Banking Supervision, and legislative gaps identified by the ECCB. In particular, financial globalization, the complexitiesof large conglomerates and the diversity of the products and services offered by financial institutions,have compelledregulators to adopt a risk-focused approach to supervision. The Act also refined the overall regulatory regime and enhanced the powers ofthe ECCB. 22 The ECSEwas establishedby the ECCBto serve the eightmember territories of Anguilla, Antiguaand Barbuda, Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the grenadines.Itsheadquartersare locatedinthe city ofBasseterre,onthe islandof St. Kitts. 23 ListingRequirementsand Proceduresfor Corporate Securities identify the following four listing tiers: (a) Entry-LevelEquityTier for equity securities; (b) LargeCapitalisationTier for equity securities; (c) Corporate Debt Lower Tier for Corporate Debt Securities; and (d) Corporate Debt Upper Tier for Corporate Debt Securities. OECSROSC-Institutional Framework for Coruorate Financial Reuortina and AuditinP 17 27. Neither the BankingAct nor other instructions issued by the ECCB explicitly refer to accountingstandards that are requiredto be used by bankinginstitutions. The Guidelines on Corporate Governance for Institutions Licensed to Conduct Banking Business Under the Banking Act (2005), under the Transparency in Governance section, require that the level of disclosure be at least the minimum required by IFRS. In addition, the ECCB has developed detailed instructionswith regard to the prudentialreports required for banking institutions, and put in place regulations mandating disclosure of the key areas of banking activity, including liquidity risk management and relatedparty transactions. As was expected, ongoingtransitionto IFRS provideda number o f challenges, some of which are still being addressed. The ECCB has made every effort to smooth this process, by organizing trainings and providing ad hoc explanations. However, as with so many other areas in the Eastern Caribbean, limited human capacity amongbothregulatorand regulatedremainsan inherent impediment. 28. Banks are required to submit to the ECCB their annual audited consolidated and stand alone financial statements, together with additional reports and information, within four months following the end of the fiscal year. Annual audited financial statements of local banks must be published in the gazette and in a local newspaper; and must be exhibited in a conspicuous place in each of their offices. The banks are also requiredto submit to the ECCB their balance sheets and selected financial information on a monthly basis, and their income statements on a quarterlybasis. The branchesofthe foreignbanksrepresent a significant share of the local banking business. Under the current practice, the ECCB receives annual consolidated financial statements from the headquarters of such banks, along with the unaudited stand-alone financialstatements of the local branches. The ECCB is makingan effort to change this practice, andto ensure that localbranchesstart submittingtheir audited stand-alonefinancial statements. 29. As was mentioned in the Section I,paragraph 7, the OECS countries are currently reformingtheir non-banking financialinstitutions(NBFIs) regulatory and oversight model. It is envisioned that, in the near future, fragmented departments (normally located under the auspices of each country's MOF) that are currently responsible for the registration and supervision of insurance companies, co-operatives, credit unions and other non-bankingfinancial services will be merged to form stand-alone Single RegulatoryUnits (SRUs). Almost all OECS countries have already initiatedthe reform process, and in some (e.g., Grenada) reform is well underway. Annex 1 provides additional informationon this matter. It is anticipatedthat once all such units are formally established and functioning, together with the ECCB and ECSRC they will form the OECS Regulatory Oversight Committee. Such an organizational structure would enhance the sharing of scarce knowledge and ex ertise across the sub-region as well as the leveragingof scarce professionalhumanresources.2 9 30. In parallelto the institutionalreform describedinthe previous paragraph,the OECS regional authorities are currently spearheading a key initiative focused on the major overhaul and harmonization of the legislative acts regulating the NBFI sector. 25 Two main legislativeacts that are currentlybeingprepared include: 0 Harmonized Insurance Act, which is intended to replace currently enacted insurance legislation,datingbackto the 1960s-1990s and 0 Harmonized Co-operative Societies Act, which is intendedto provide significant updates to the existingCo-operative Societies Acts, datingbackto the late 1990s. 24 Exact arrangementspertainingto the establishment of the RegulatoryOversight Committee are yet to be defmed. 25 Among those standing at the helm of this initiative are: the ECCB, the Caribbean Confederation o f Credit Unions, CARTAC. OECSROSC-Institutional Framework for Coruorate Financial Reaortinp and Auditing 18 This initiative, if adequately undertaken, would equip the OECS countries with a modern, comprehensive legislative framework, compatible with international best practices. It would provide a set of powerful tools, which could be effectively used in these countries pursuit of global competitiveness, the creation of the CARICOM Single Market and Economy, and the deepeningofthe OECS Economic Union. 31. In the area of accounting and financial reporting, in addition to reconfirming already existing periodic filing requirementsz6new legislation will address the following critical areas: Accounting and prudential (when applicable) standards to guide the preparation of financial reports; Content of periodic accounting and financial reports; Publicationo f periodic financial reports; 0 Introduction o f "fit and criteria with regard to the NBFIs' management, including the Chief Financial Officer and ChiefAccountants; 0 Selection, Appointment and Dismissal of external auditors; Role of the Audit/Supervisory committees. 32. When the proposed Acts are passed, the newly created SRUs will have to play a pivotal role to ensure their successfulimplementation.One of the major challenges facing the sector's accounting professionals is the lack of a comprehensive, sector-specific accounting and financial reporting methodology. In particular, this is an important issue for the local firms, which, unlike the local branches of the foreign conglomerates, have nowhere else to go for assistance. It is thus essential to ensure that the newly created SRUs would be adequately positioned to assume the eventual role of sub-regional centers of excellence, responsible for the development and dissemination of sector-specific accounting and financial reporting methodology, organization o f trainings and awareness campaign. Due to very limited capacity available inthe OECS countries inthis area, external assistancewill be particularly important. 33. The OECS economy includes a significant number of so-called statutory bodies, covering a variety of sectors such as transportation, utilities and financial services." As a rule, these entities are established by Acts of the various Parliaments, prescribing their modus operandi and stipulating requirements for their financial reporting.29 Being part o f the government, the statutory bodies are requiredto have their financial statements audited and tabled with the Parliament within a specified period.30The Statutory Acts frequently do not specify the accounting standards to be applied when preparing financial reports. Day-to-day management of the statutory bodies is supposed to be supervised by the board of directors, comprised of the representatives of various stakeholders' groups, such as the government, the employees, the trade unions, the private sector, etc. 26 Under currently existing practices and legislative acts, NBFIs are normally required to submit their annual financial statements to the designated regulatory univdepartment, usually located under the auspices ofthe MOF. 27 These essentially represent a set o f professional requirements based on standards o f education, experience andprobity. 28 Statutory bodies are different from government-ownedcompanies, which fall under the jurisdiction of the Companies Act. 29 In some countries, e.g. in St. Kitts andNevis, the FinanceAdministration Act can also make reference to the accounting and financial reportingrequirements applicable to the statutory bodies. 30 While the Supreme Audit Institutions (SAIs) have a mandateto audit the statutory bodies, inpractice, this is almostnever acase. Dueto the SAIs capacity andtime limitation, suchaudits are normally outsourced to the privatesector. OECSROSC-Institutional Framework for CoruorateFinancial ReportingandAuditing 19 34. In practice, compliance with the existing requirementsis almost entirely left to the discretion of the acting management. While private sector accounting standards are normally applied, final results vary significantly in timing and quality among the individual entities. Additional financial reporting challenges often arise from doing business with other Statutory Bodies(e.g. preparingaccounts reconciliationswhen the two entities owe each other outstanding payments). With a limited supply of qualified accountants available on the market, and very limited supervision and assistance from governments that are already overburdened by other tasks, financial statements produced by the statutory bodies are often delayed, incomplete or ~nreliable.~~ 35. Small and Medium Enterprises (SMEs) operating in the OECS follow the requirementsof the Companies Act, as described in paragraphs 14-18. As noted above, in most cases, such entities are only required to submit to the Companies' Registrartheir annual solvency statements, containing condensed financial information. However, for many SMEs compliance with even reduced financial reporting requirements is a significant challenge. Very few SMEs fall under the definition of public companies, and thus external demand for their financial information is very limited. Moreover, with concentrated ownership and perceived difficulties in getting access to external financing, the requirement to produce comprehensive financial informationis often perceived as unnecessarilyburdensome.As a result, SMEs are left virtually without guidance on accounting and financial reportingmatters.It is thus not surprising that their financialreports are often fragmented and inconsistent.These reports are often of little value to potentialusers, such as banks, who as a result rely heavily on collateral to secure loans. To address this gap, the OECS should consider the example of the recently issued exposure draft of IFRS for SMEs, with further simplificationfor the smaller entities. A.2. Statutory Audit Requirements 36. There is no one separate, stand-alone law in the OECS countries regulatingaudits and the auditing profession. The Companies Acts stipulate requirements for statutory audits, which are obligatoryfor all publiccompanies as definedinparagraph9, andfor companieswhose gross revenue exceed EC$2 million (US$740,000) or the asset of which exceed EC$1 million (US$3 70,000).32 The Companies Acts then set ground rules pertaining to the selection, appointment andeligibility ofthe external auditors.Inparticular, it states that: The auditor must be appointedbythe shareholders meeting; A person is eligible for appointment as auditor of a company only if he/she is a practicingmember of a recognizedsupervisory body; A person is ineligible for appointment as auditor of a company if he/she is an officer or employee of the company, or if there is any connection between him/her and the company. The externalauditor's opinionmust be presentedto the shareholders meeting along with the financial statements of the company, reviewedby the audit committee and signed by the directorsof the company (Para. 15). The Companies Acts do not specifythe auditing standards to be usedduringthe external audit. 31 It is important to note that there are some exceptionsto this rule. For example, some o f the statutory bodies operating in St. Lucia serve as flagships, which not only prepare their financial information accurately and on time, but also were pioneers as one of the first entities in this country in adopting IFRS. 32 One exception is the St. Kitts and Nevis Companies Act, which states that all public companies or companieswhose articles or resolutionofthe generalmeetingso require shouldbeaudited. OECSROSC-Institutional Framework for CoruorateFinancial ReuortinP and AuditinP 20 37. Rules and regulations published by the ECSRC stipulate the requirement for regulatedcompaniesto produce annual audited financial statements. There are, however, no further instructionseither with regard to the auditor selection and appointment process, or with regard to the auditing standards to be appliedb the external auditors. One exception applies to the `licensees' as defined by the SecuritiesAct.`YThe Act explicitly specifiesthat: Within one month after becoming licensed under this Act, a licensee shall appoint an auditor who is acceptableto the Commission. No person shall be qualified for appointment as an auditor, unless he/she is an accountant; 0 An auditor shall notbe eligiblefor appointment ifhe/she is a director, officer, employee, shareholderor partner ofthe licensee; and 0 A licensee is required to submit to the Commission, within 90 days after the end of the financial year, audited financial statements prepared in accordance with international accountingstandards. 38. The Banking Act requires all banks operating in the OECS to have an annual independent audit of their financial statements carried out by a qualified auditor pre- approved by the ECCB. To assist the commercialbanks, the ECCB has issued Guidelinesfor External Auditing of Institutions Licensed under the Banking Act. These Guidelines focus on such issues as the auditors' independence, expertise and professionaleducation. The Guidelines also lay down the framework for the conduct of the external audit and require the audits to be performedin accordancewith ISA. However the ECCB says that it may extendthe scope of the auditors' reportbeyondwhat is specifiedby ISA, ifthe ECCB considers it necessary. 39. As discussed in Para. 29, the NBFI sector in the OECS is currently undergoing significant institutional and legislative reform. As the new institutional units are being established, and the new legislativeacts are being drafted and adopted, it is essential to ensure that the following issues are adequately addressed with respect to the auditing framework and standards applied inthe NBFIssector: 0 The new Acts should clearly stipulatethe use of ISA inthe audit ofthe NBFIs; 0 They shouldclearly establishcriteria for the external auditors' selection andhiring; and 0 They shouldclarifythe SRUs' involvementinthe pre-approvalofthe NBFIs' auditors. 40. Existing legislation is silent on contractual liabilities that may be incurred by auditors. It also does not include any requirement for auditors to have mandatory professional indemnity insurance. The only exception is the Guidelinesfor External Auditing of Institutions Licensedunder the Banking Act, which requiresthe financial institutionto verify that the selected auditor or audit firm has adequate indemnityinsurance. A.3. Summary of theInstitutional andLegislativeFramework 41. I t appears that the OECS statutory framework historically has been respectful of the role played by accounting and auditing in informing the shareholders, directors, regulators and other external stakeholders. However, as with any legal and institutional framework, it has beenand is inherentlystatic and needsto be updatedto take account of changes and constraints.Legalstructures put in place inthe OECS countries followingtheir independence (or in some cases inheritedfrom the colonialperiod) were rather fragmented; they differedamong 33 Licensees are defined as the following: a broker dealer; a limited service broker; an investment advisor; or their representative. OECSROSC-Institutional Framework for Coruorate Financial Reuortinp and Auditing 21 countries, and often did not take account o f the region's increasingly severe human resources limitations. Over time it has become clear that these legal structures need to be modernized, simplified, and harmonized; legal reform aimed at achieving these objectives has already begun, and the recommendations o f this report mainly provide guidance for a process that is already under way. Similarly, regulatory functions need to be centralized to the degree possible, thus optimizing the productivity o f the limited available human resources and enabling the realization o f economies o f scale. OECS Governments are aware o f this issue, and this reform process has also already begun. Application of corporate financial reporting requirements to different enterprises i s summarized in Table 1below. Table 1: Overview of Accountingand Auditing Requirementsin the OECS Law and Accounting Audit Publication Regulator Standards Requirement Banks Banking Act and The Guidelines on - External auditor 0Annual FS must be CompaniesAct. Corporate must be pre- published in the Gazette. Governancerequire approvedby the 0FS should be filed with the Supervisedby adherenceto the ECCB. Companies Registrar. ECCB. IFRS. -- External ISA required. Public Securities Act and ECSRC rules require audit is FSmustbe sent to each Companies CompaniesAct. public companiesto required. holder of securities. use "international - Audit standards Published on ECSE accounting are not specified. website standards". EnteredinECSRC database. 0FS should be filed with the Companies Registrar. NBFIs InsuranceAct, Currently not - New Acts will 0No publication is required. Cooperative specified. reconfirm FS should be filed with the SocietiesAct requirementfor the regulator. (under audit. Ifmeetscriteria set inPara. preparation). externalstandards - Audit 14- F/S must be filed with CompaniesAct. are not specified. the CompaniesRegistrar. Statutory Relevant As specified in - External audit is 0 FS should be presentedto Bodies ParliamentActs. individual Parliament required. the Parliament. Acts. - Audit standards as 0Additional publication specified in requirementsmay be individualActs. specified inindividual Acts. B. THEACCOUNTINGAND AUDIT PROFESSION 42. While the number of internationally qualified accountants in the OECS is not precisely known, it is known that the accounting and auditing sectors suffers from the same problems as the rest of the OECS economy: limited availability of human resources that is shrinkingas a result of a brain drain, and difficultiesin attaining internationally recognized qualifications. As a result, internationally qualified accountants (ACCA, CGA, CICA, US CPA or being the most common degrees) remain prized, and subject to fierce competition among employers. Most o f the internationally qualified accountants work in a few top-tier private companies or open their own accounting and auditing practices. The next level o f the accounting profession is represented by those who are still pursuingtheir qualification, and thus are willing OECSROSC-Institutional Framework for CoruorateFinancial RevortinPandAuditinP 22 to work in lower-paid government structures or smaller companies. Outside o f the holders o f overseas qualifications, accountants who prepare financial statements in the majority o f the OECS SMEs have in generally received only some training in modern, internationally recognized accounting and financial reporting techniques. As a result, bookkeeping and financial reporting in such entities are often conducted according to the tax rules, and can not be used for any other external purposes, such as solicitation o f additional investments or applications for a bank loan. 43. The sub-regional Institute of Chartered Accountants of the Eastern Caribbean (ICAEC) was formed in 2001, as part of a broader sub-regional harmonization and institutionalization with the goal of bringingtogether professionalorganizations of accountantsand auditorsexisting in the different OECS countries. The three initial members o f the institute were the Institute o f Chartered Accountants o f Antigua and Barbuda, the St. Kitts- Nevis Association o f Chartered Accountants and the Institute o f Chartered Accountants o f St. Lucia, which continue functioning as separate branches. These were later joined by Dominica. Membership for the Grenada and St. Vincent and the Grenadines accounting professional bodies is still pending. ICAEC's Articles o f Agreement include the following objectives: To promote, foster and maintain the highest standards o f accounting in public practice, the public service and the commercial and industrial spheres; To promote and increase the knowledge, skill and proficiency o f its members and students o f accountancy; To provide facilities for the study o f accountancy and to make provisions for examinations o f persons pursuingcourses in accountancy; To regulate the etiquette, ethics, discipline, professional conduct and standards o f its members and students o f accountancy; To conduct directly, through other agencies or in conjunction with other agencies, courses o f study in all aspects o f the accounting profession. 44. Although a few years have passed since its establishment, the ICAEC still does not have permanent office space and a permanent staff. While some o f its basic functions (Le., collection o f membership fees and issuance o f the certificate) are performed on apro bono basis by its members, the absence o f a dedicated space and resources remains a significant impediment to its growth and eventual assumption o f the role envisioned at the Institute's inception.35While the ICAEC's legislative mandate is rather comprehensive and well-defined, it lacks the people and funding to perform its functions adequately. 45. The ICAEC Articles of Agreement prescribe that no person shall offer him/herself in publicpracticeor use the title of CharteredAccountant unless he/she has been registered as a member of the Instituteand possesses a valid certificateissued by the ICAEC Council, which entitles him/her to be in public practice. The ICAEC rules further specify conditions o f admission to the Institute membership, including the age limit, examination and experience requirement^.^^ A list of all members o f the Institute who have been granted valid practicing certificates must be published annually in a newspaper circulated in each member state. In 34 As have many other sub-regional initiatives,this effort has beenspearheadedby the ECCB. As part of the same initiative, the Bankers Associationandthe InsuranceAssociationhave also beenestablished. 35 The Preamble of the Agreement establishing the ICAEC states as one of its objectives the following: toprovide greater coherenceand clarity in thestructure and organization of the accountingprofession in the states that areparties to the Treaty establishingthe OECSmember states. 36 The ICAEC rules, however, allow it to forgo the specified admission requirements on the grounds of educational qualifications, expertise, experience or standing. Such decision requires a special resolutiono fthe ICAEC Council. OECSROSC-Institutional Framework for Corvorate Financial Reuortinrr andAuditing 23 practice, the Institute'sactivitiesare limitedto issuingcertificatesto the applicants and receiving the membershipfees. 46. The ICAEC is a member of the Instituteof CharteredAccountants of the Caribbean (ICAC), which is locatedin Kingston, Jamaica, and includes seven sub-regional institutions. Because of the ICAEC semi-dormant status, its membership in the ICAC is currently nominal. However, as the ICAEC grows and develops, it should to the extent possible draw on the resources and possibilitiesfor collaborationofferedby the ICAC, seeking further harmonization and simplificationamongthe member institutions. 47. The ICAEC mandate, defined in its Articles of Agreement, allows it to take upon itselfan active role in the areas of continuingprofessionaldevelopment (CPD) and quality assurance. The former represents a particularly challenging and important topic. Most OECS accountants are desperate for high-qualitycourses and training opportunities-educatingthem is key to improvingthe quality of the financialreportingproducedin the sub-region. While some o f the more active branches periodically organize ad hoc trainings and seminars, planning and implementationoftrainingprograms shouldbecomea full-time responsibilityofthe ICAEC.The Instituteshould also be able to provide CPD opportunitiesto its members holding international accounting qualifications, and thus relieve them from the need to seek solutions outside the OECS. In sum, a long-termobjectivefor ICAEC should be to transform itself into a sub-regional center o f excellence in the area of accounting and auditing, providingan opportunity for OECS- wide knowledge-sharingandtraining. While this is a realistic goal, its achievement will take a lot of effort and dedicationonthe part ofthe OECS governments, regulatoryinstitutionsanddonors. 48. Part of the problemhinderingICAEC's developmenthas beenthe consistent lackof funding. To overcome this obstacle, the Institutemusttry to support its operations from a variety of sources such as membership fees, government contributions and development partners' assistance.Once established, its educationprogramcouldbecome an importantsource of income. To survive in the long term, the Institutemust diversify its sources of financing, while seeking twinning opportunitieswith other Caribbean and internationalaccounting bodies and seeking to work with development partnerswhere appropriate. 49. The OECS audit profession can be dividedin two main categories: localbranches of the four largest global international networks of audit firms ("Big 4 9 , and local firms.37 Besides the fact that "Big 4" firms are generally muchbetter positionedto handpick and hirethe best and brightestaccounting graduates, another major differenceis that, while the "Big 4" firms are able to draw on their internal international network and resources for capacity development and training needs, the local firms are left on their own, and can only rely on what the local market has to offer. Present structure of the OECS economy provides sufficient markets for both groups of firms. The "Big 4" firms do a lot of referral work and are very active in some specialized sectors, (e.g. banking), while local audit firms pick up significant share of smaller jobs. For many of the SMEs inthe OECSthe only practicalsolution, due to the differenceinfees, would be to hire a local firm. Thus, it is very important to ensure that the quality of work performed by the entire audit sector was adequate and in compliance with the international auditingstandards. 37 Those couldbe further subdividedintotwo groups: "the secondtier" firms, representedby two or three biggest local firms, andoften staffedbytheex-employeesofthe "Big 4", andother, smaller, firms. OECSROSC-Institutional Framework for Coruorate Financial ReuortinpandAuditinp 24 50. Giventhe general lack of human resourcesin the OECS countries and the relatively small size of the regulated market, it appears reasonable for the ICAEC to assume full responsibilitiesover the regulationof audit profession. Some o fthese responsibilitiesinclude: Performing professional certification of the auditors; Setting audit standards and assisting intheir implementation; Approving auditors' training curricula; Maintaining a registry o f audit firms and individual auditors; Organizing quality control of audit services; and Taking measures to ensure auditors' independence. 51. As described in Section A2, there is no single legal source prescribing which auditing standards must be applied in OECS countries. While the majority o f the audit firms claim to use ISAs, many local firms are struggling to implement these standards in practice. Particular problems arise with regard to the audit o f specialized sectors o f the economy, such as insurance, banking and non-banking financial services. Once again, this gap could be narrowed if the ICAEC assumed a more active role as educator and promulgator o f the latest professional developments, methodologies and innovations, primarily focusing on the local representatives o f the audit profession. However, the lack o f capacity, in particular in the specialized areas described above, remains an acute problem. 52. Establishment and enforcement of rigorous certification (licensing) requirements for all practicing auditors is another area requiring attention. As part o f quality-at-entry controls, comprehensive certification criteria should consistently be applied to all local audit firms. While holders o f internationally recognized qualifications such as ACCA could benefit from simplified certification procedures, all others should be required to undergo a rigorous evaluation'focused on education, experience and practical auditing skills, prior to being issued a practice certificate. While some o f these requirements are already part o f the ICAEC rules, they need to be clarified, adapted to the specifics o f the auditing profession and enforced in practice. Successful candidates should be registered inthe Auditors Registry maintained by the ICAEC. As part o f their education program, the ICAEC could conduct a specialized training course to prepare candidates for the examination. 53. There was consistent anecdotal evidence of a problem with the perceived quality and value of audit, resultingis a wide-spread perception that only few localaudit firms are capable of performing ISA-compliant audits. The low price paid for some o f the audits confirms this perception. Large differences in the technical proficiency, level o f experience and level o f resources across audit firms contribute to significant variations in audit quality. While the local member firms o f international audit firm networks have the benefit o f firm-wide internal quality control procedures, many local firms have to rely solely on their own limited resources and experience. This problem is worsened by the absence o f quality control mechanisms. While some o f the local ICAEC branches have been tryingto put in place systems to monitor the quality o f auditors based on peer review, this effort has had very limited success. Quality control o f auditors is covered in more detail in Section E below. 54. With the accounting and auditingprofessiongrowingand diversifying,and financial reportingand auditing requirementsgradually becoming more sophisticated, it is essential to ensure that practitioners get guidance and support `close to home'. In this context, establishment o f the OECS-wide Institution o f Chartered Accountants, consolidating separate chapters previously existing at the individual countries level, was a timely and sensible measure, enabling enhancement o f the productivity o f limited complement o f human resources. As a next OECSROSC-Institutional Framework for CoruorateFinancial Reuortina andAuditing 25 step, the governments, regional institutions and members of the profession need to mobilize their political will and available resources to `jump-start' the Institution, transforming it into an operational body able to assume its stipulated responsibilities. This task is smaller than it might seem. The most important success factors - a critical mass o f professionals interested in establishment of an effective professional body, market demand, and buy-in on the part of most of the national governments are already there. It thus would require a focused, but relatively modest incremental effort (that should be supported by regional donors) to transform the institution into an effective professional organization. c. PROFESSIONALEDUCATION TRAINING AND 55. OECS businesses, government agencies, financial institutions, and accounting & auditing firms reported an acute shortage of qualified accountants, as well as stiff competition for those on the market. A 2007 World Bank Report on education in the Eastern Caribbean States identifies four main causes of a lack of professional and highly skilled workers in the sub-region: "(a) a low enrollment rate into post-secondary education; (b) a high out- migration of highly skilled labor; (c) a needto link the career programs o f the OECS community colleges to demand; and (d) the relatively small size of the individual Eastern Caribbean labor market^."^' These factors affect the supply o f qualified accountants as well. 56. OECS students who are interested in pursuing post-secondary education in accounting and auditing must travel overseas, because community colleges on each island offer only A-level courses, as well as vocationally oriented crafts and technical training. While some students choose to attend universities in the United States, Canada, or the United Kingdom, the closest alternatives for post-secondary accounting and auditing education are the University o f the West Indies (with campuses in Barbados, Jamaica, and Trinidad and Tobago) and the University o f the Virgin Islands (with campuses in St. Thomas and St. Croix). Both of these institutions offer accounting majors and minors. The University o f the Virgin Islands prepares students to sit for the US CPA examination, while the University o f the West Indies emphasizes the ACCA (British) and Canadian credential^.^' 57. There is some cooperation between professional organizations and university-level education providers. Students at WI are offered a comprehensive CPA review course that prepares them to sit for the exam. At UWI, accounting majors may be exempted from the first year of ACCA or CA requirements. The Big Four accounting firms offer scholarships and prizes to the top students, but do not have direct input into the curriculum. While the University o f the West Indies has an agreement with the InternationalAssociation o f Certified Fraud Examiners to offer continuing professional education courses, they have no similar agreement with any of the Caribbean accounting bodies. 58. Neither ICAEC nor any of its local chapters administers accounting qualification exams or offers exam preparation classes, so students seeking to attend preparation courses allowing them to obtain an internationally recognized professional qualification must travel either to Trinidad (where ACCA has an office) or to the US, Canada, or the UK. It is possible for students to self-study for the exams and travel overseas only to take the tests. Graduates from 3 8 Andreas Blom and Cynthia Hobbs, School and Work: Does the Eastern Caribbean Education System Adequately Prepare Youth for the Global Economy?, Phase IReport: Skills Challenges in the Caribbean, LatinAmerica andthe CaribbeanRegion, World BankReport 38555, May 2007. 3 9 However, The Dean of the UWI-Cave Hill (Barbados) School of Management noted increasing demand for education in the CPA credential due to the growing importance of the offshore banking sector, which rewards familiarity with U S accounting rules. universityaccounting programs oftenfind work with an internationalaccounting firm, which will pay for the trainingandexaminationfees once studentshave completedthe program. 59. Fulfillment of IFAC's continuing professional development (CPD) requirements remains a challenge for qualified accountants-members of the internationally recognized bodies-practicing in the OECS. The requirement for accountantsand auditors to maintaintheir technicalcompetenceis crucialto the quality of their work. CPD is one ofthe key ways by which certifiedaccountants and auditors can maintaintheir technicalcompetence. Yet, as was discussed in paragraph 47, currentlyICAEC does not offer CPD courses to its members, and only some of its local chapters (such as the St. Lucia chapter) offer these programs. For the most part, accountants and auditors must complete their CPD requirements online, at a larger island in the Caribbeansuch as Trinidador Jamaica, or further field inthe UK, Canada, or the US. D. SETTING ACCOUNTINGAND AUDITING STANDARDS 60. As mentioned in Section Al, application of IFRS/ISA in the OECS is currently required for public entities and is also expected from banking institutions.Other large non- public entities may voluntarily choose to apply international standards. There are no National Accounting Standards proper in the OECS. The ECCB issues additional accounting regulations and instructions, which must be applied by the banking institutions. These regulations and instructionsare primarilybasedon IFRS. 61. Currently, there are no specific regulations governing accounting and auditing standards for insurance companies and NBFIs.It is thus important to ensure that, as the new Lnsurance and Co-operative Societies Acts are passed, they mandate the use of the applicable international standards, and that those mandates be supplemented with explanatory rules and regulations, following the best internationalpracticeswhile providingguidance in sector-specific areas.40 62. As discussed in Section A2, application of ISA is only explicitly required from auditors of banking institutions in the OECS countries. However,the majority of practicing audit firms claimto apply ISA in their work, by default. There are no nationalauditingstandards or methodological recommendations supplementing ISA, which could be used by the local auditors to amplify their own resources. E. ENSURING COMPLIANCE WITH ACCOUNTING AND AUDITING STANDARDS E.1 CompliancewithAccounting (Financial Reporting)Standards 63. A proper and rigorous regime ensuring compliance with the accounting and financial reporting requirements is key to establishing and maintaining the quality of financial reportingand to underpinninginvestors' confidence infinancialmarkets. Ensuring compliance with the proper application of financial reporting standards in the OECS countries is the responsibilityof regulators-primarily the ECSRC and ECSE(for companies with securities), the ECCB (for banks) and, oncethey are fully formed, the SRUs (for NBFIs). 40 Examples o f such sector-specific areas include accounting for insurance reserves, calculation of unearnedpremiumreserves,capitalizationlevel ofcredit unions, etc. OECSROSC-Institutional Framework for Corporate Financial Revortinp and Auditing 27 64. While the existing legislation provides the ECSRC, ECSE and ECCB sufficient authority to monitor compliancewith legaland financial reportingrequirements,there are a number of significant challengeswhich must be overcome if the regulatorsare to become effective enforcers of high-quality financial reporting. Some o f the most notable concerns include the following: All three regulators face the problem o f limited resourcesand the needto use those finite resources effectively and efficiently. The regulators must direct work to those areas where the risk is greatest. Risk (in a regulatory sense) is the combination of impact and probability, where impact is the impact that a misstatement o f those financial statements would have on the confidence in the accounting and financial system and probability is the risk that those financial statements are misstated. The ECCB has already moved in this direction, by establishing a risk-assessment system and transitioning to risk-based ~upervision.~' It is essentialthat the ECSE and ECSRC follow inthe same direction. The oversight work of the ECSRC is currently primarily focused on enforcing timeliness of filings, and revealing incomplete statements and inconsistencies between narrative and numerical information. There is little or no monitoring of compliance of the statements with the relevant accounting framework. The extension of the ECSRC's role to monitor compliance with the applicable reporting framework and take appropriate measures inthe case of infraction, is essential if the Securities Commission is to operate in a manner similar to accounting enforcers inthe OECD countries. There remains a shortage of internationally recognised expertise operating in the enforcement departments of each regulator. This is partly a result o f the effects o f low civil service wages and high staff turnover; it also reflects a significant training need and overall capacity shortage. In particular, if the application of IFRS were to become compulsory in financial reporting o f regulated entities, additional training would be neededfor the supervision staff, as few have IFRS expertise at present. 65. As the individual countries pass the required legislation and establish SRUs, it will be important to ensure that (a) such legislation provides the SRUs with sufficient authority to monitor compliance with legal and financial reporting requirements and (b) every effort is made to take into account lessons learned and challenges faced by other regulators, and find ways to address those in a timely manner. It is however expected that skills and capacity issues will become particularly challenging for the SRUs, due to the specificity of their mandate and the specialization of the covered sectors. 66. While SAIs are nominally responsible for the external audit of statutory bodies, in practice, this part of their mandate is almost never fulfilled. Due to the existing time and capacity limitations, the SAIs normally delegate responsibilities for the external audit o f the statutory bodies to private sector auditors. Another complication arises due to the fact that, unlike the rest of the government, statutory bodies normally use private sector accounting and financial reporting standards. As such, it becomes particularly difficult for the SAIs, which are usedto deal with the government accounts and accounting standards, to provide any kind o f meaningful oversight or assistance. As the Statutory Bodies represent a special type o f corporate organization, lingeringbetween the private and public sector, their effective supervision would 41 The Banking Supervision department of the ECCB has been instrumental in developing a comprehensiverisk-based supervision model. This model is based on the input and analysis of a wide variety of risk factors and latest available information. The risk-based approachis complementedby a base-line requirement to have on-site supervisionfor all larger banks at least once every 12 months, and for all smaller banksat least once every 18 months. OECSROSC-Institutional Framework for Coruorate Financial Reuortinp andAuditing 28 require a special approach and close collaboration between the institutions and regulators otherwise independentlyresponsiblefor these two sides ofthe OECS economy. 67. Finally, it is important to mention the role of the Companies Registrars,which are supposed to serve as the main repositories of information (including financial information) in the individual countries.42While the existing legal system (the Companies Act) lays a very solid foundation to support this mandate, including a number of enforcement mechanisms, the Companies Registrars' ability to serve the general public effectively is sometimes hindered by two mainfactors: The Registrar's insufficientpersonnel significantlylimitsthe follow-upactivitiesthat can be undertaken in case ofnon-compliance with requirements; The lack of awareness about (i)the legislativerequirementsonthe part ofthe Companies, and (ii)about the availableinformation. While the issue of limited capacity represents an inherent obstacle that will be difficult to overcome, the general public level of awareness about the registrars' functions and requirements couldbe raisedby conductinga focused public informationcampaign. E.2 Compliance withAuditing Standards 68. Enforcing auditing standards contributes to ensuring audit quality, which in turn can add credibilityto publishedfinancialinformationand provideimportant protectionfor shareholders, investors, creditors and other stakeholders. As such, it is critical to have a designated institution, which will be responsible for monitoring and enforcing compliance with auditing standards by the statutory auditors it supervises. Inthe OECS, ICAEC could potentially assumethis role. 69. One of the broad objectives included in the ICAEC Articles of Agreement states that it is expected to "regulate the etiquette, ethics, discipline, professional conduct and standards of its members and students of accountancy". This broad statement should be put into practice and extended to include the audit profession. The audit firms and individual auditors should be requiredto submit their annual returns to the ICAEC. The ICAEC should be provided with a range of adequate disciplinary measures which can be applied in cases o f infractions, includingthe cancelingof an auditor's license and removal of the audit firm or auditor from the official register. 70. As the ICAEC grows and develops, it should put in place a centralized sub-regional program of quality control reviews of the auditorsit supervises.This program couldbe based on peer reviews of one audit firm by another or any other modelthat may be deemed adequate. As such, it would have to ensure that peer reviewers have sufficient incentivesto performtheir work in an adequate andtimely manner. Giventhe resourceslimitationfactor, it would be critical to calibrate the review mechanismin such a way, that while achievingits mainobjectivesit does not put unbearable strain on the involvedprofessionals. Ifthe peer review system is chosen, the ICAEC could seek to learn from the OECD audit regulators who operate similar system such as in France and Germany. The quality review exercise could also be conducted with the participation of similar bodies from within the region (e.g. the Barbados Institute of Chartered Accountants). A key priority for the program would be to promote the general sense of 42 Given the small size o f the individual states and respective economies, the role o f the Companies Registrars as an easily available and accessible centralized information database becomes particularly important. OECSROSC-Institutional Frameworkfor CoruorateFinancial Reuortinp andAuditing 29 accountability among the local professionals, and to ensure that all registered auditors are inspected within a target period. 73. Once the quality control program is chosen and put in place, the format, work program and scope of the inspectionsheviews should be standardized and, to the extent possible, aligned with the similar practices adopted by the other ICAC members. The outcomes o f inspection visits must lead to appropriate action. Where significant deficiencies are found, licenses should be removed or suspended conditional on improvements and re-training. Where less significant deficiencies are found, ICAEC should develop a range o f measures such as requiring targeted training, the adoption and application by the auditor o f a standard audit methodology and other remedial action. Where such improvements are not confirmed by subsequent inspection, the auditor's license should be removed. Removal from the register o f auditors who are not able to perform audits to the required standard, and the improvement in the standard of work o f those that remain, will help improve quality-actual and perceived-over time, o f statutory audits inthe OECS. OECSROSC-Accounting and AuditinP Standards As AdoDted and As Practiced 30 111. ACCOUNTING AND AUDITING STANDARDS AS ADOPTED AND AS PRACTICED 74. As already noted in Chapter 11,the statutes do not always specify which accounting standards should be applied in the OECS. As discussed inPara. 18, the Companies Acts inthe individualjurisdictions are silent on the issue of which specific accounting standards apply, in favor of the traditional notion of "generally accepted accounting principles." Only for public companies and banks are there explicit specifications of which accounting standards should be applied(see Table 1). 75. ICAEC has not formally endorsed IFRS.As it gradually assumes its responsibilities, such an endorsement would be fully consistent with its mandate to "promote, foster and maintain the highest standards of accounting" as noted in Para. 43." Moreover, ICAEC's affiliation with ICAC, the umbrella organization for the accounting profession for the whole English-speakingCaribbean, which is itself a member of IFAC (Para. 46), implies that ICAEC should "use [its] best endeavors to incorporateIFRS into [the] nationalaccounting requirements (...)."43 76. Nonetheless, IFRS appears to be the de facto standard of reference, at least for public interest entities (e.g., banks and listed companies). In the bankingsector, the existence of ECCB-issued prudentialrules do not appear to preclude these banks from applying IFRS, as evidencedby the fact that publishedbanks' financialstatementsare all IFRs-ba~ed.~~ 77. As regards auditingstandards, ISA also appear to be the defacto benchmark in the OECS, includingthe ECCB requirementfor the ISA to be applied for any audit of banking institutions. ICAEC has the power to require observance of ISA by all its membership, which includesall licensedauditors. In addition, similarly the adoption of IFRS, the adoptionof ISA is recommendedpracticefor all IFAC members(SMO no. 3), which indirectlyapplies to ICAEC as an ICAC affiliate. 78. Based on the evidence obtained by the ROSC team, IFRSseem to be reasonablywell known and applied among the larger OECS business entities and audit firms. As part of this ROSC, a review was conducted of nine sets of corporate financial statements of sizeable entities in a variety of sectors (banking, insurance, trading and development, infrastructure and utility). These financialstatementswere auditedby either a Big4 or "second tier" local firm. Eventhough the sample used for the review appears relatively small, because the companies reviewed are large andhave a highcorporate profile, the ROSC team is ofthe opinionthat it can provideuseful indicationson current levels of use of IFRS inthe EasternCaribbeancorporate sector. 43 IFAC Statement ofMembershipObligations (SMO) no. 7. 44 The financial statements o f East Caribbean Financial Holding Company, Eastern Caribbean Home Mortgage Bank, and St KittsNevis AnguillaNational Bank as published on the ECSE's website or on the respectivecompanywebsite, state that they conformto IFRS. Inthe case ofthe Bank ofNevis,the "Audited FinancialStatements" as of June 30,2007 makenomention ofIFRS. OECSROSC-Accountinp and Auditing Standards As Adouted and As Practiced 31 79. The review did identify a number of departures from IFRS, however, mainly with regards to missing disclosures. The identifieddisclosure problems relatedto (a) the incomplete description of methods used to account for revenue and for the valuation of various types of assets and liabilities; (b) missing details of key items o f the financial statements or off-balance sheet commitments; and (c) the fact that the date of authorizationof the financial statements was not provided for four of these sets of financials. These disclosures are essential to shed light on key as'pectsof the financial statements and to allow their intended users to use them effectively. Other issues involved the way certain sensitive and material items of the balance sheet were valued, such as property, plant and equipment and liabilities relatingto employee benefits.The table below gives an indicationofthe extent and distributionof the problems identifiedwithin the sample of financialstatementsreviewed:45 80. There are indications that in some cases financial statements are prepared by the auditors rather than by the companies themselves. This practiceis not uncommon in countries where relativelyfew accountants in business(i.e. not in public practice)are well versed inthe use of IFRS.Inthe case of the OECS, this couldalso be explained by the fact that transitioningto the IFRS is still an ongoingprocess.As such, many accountants employed by the companies are still learning how to deal with the new requirements, often with the help of the auditors. However, havingthe auditors preparethe financialstatements does tendto limit the company's concerns for the quality of its financial statements and leads to a lower level of assurance on the quality of these statements, sincethe auditorpreparesratherthanreviews them. 8 1. Three of the reviewed audit reportsomitted important information pertainingto the audit process and content of the examined financial statements, pointing to the need for more rigorous application of the ISAs stipulating the form and content of the auditor's report. In one case, the report was issued more than 18 months after the date of the financial statements. Such an unusually long time span should have been explained, especially since the reportingentity recorded significant losses for both reportingperiods with no explanationbeing provided in the notes. In another case, the audit opinion was qualified due to the failure to depreciate some propertyand the failure to recognizedeferred taxes, but the corresponding effect was not mentioned in the audit report. Finally, in the third case, the text o f the audit report omitted references to (i)the statement of changes in equity (in the scope paragraph); (ii) significant accounting policies and notes; (iii)management's responsibility with regard to the financial statements; and (iv) ethical and planningrequirements and internal controlwork, all of 45 The review also notedthat two of the auditreportshad a qualifiedopinion, which i s cause for concern since qualifiedopinionsmeanthat the auditors are unable to concludethat the financial statementsare free ofmaterialerror or irregularity. OECSROSC-Accounting andAuditingStandardsAs Adouted andAs Practiced 32 which are requiredby ISA 700, TheIndependentAuditor's Report on a CompleteSet of General Purpose Financial Statements. Additionally, in this last case, the audit report mentioned work done on certain supplementary information but did not give any kind of assurance on that information, OECSROSC-Perceutions on the Oualitv of Financial Reporting 33 IV. PERCEPTIONS ONTHE QUALITY OF FINANCIAL REPORTING 82. There is a general perception that statutory financial statements prepared in the OECS vary significantly in quality. There is a perception that the financial statements purporting to comply with IFRS prepared by banks and voluntarily by certain other large companies are more reliable and of higher quality, though even banks struggle to apply certain standards, such as I A S 39, accurately. The market attributesthe higher perceived quality of the financial statements to the closer monitoring and enforcement from the ECCB, the banks' and larger companies' abilityto attract professionalswith a better understandingof IFRS, andthe fact that virtually all main banks and large companies are audited by local member firms o f internationalaudit firm networks.On the other hand, the market attributesthe poorer perceived quality of statutory financial statements prepared by the medium and small companies to the limited demand for financial information from third parties, dominance of tax reporting in the absence of other demand, limitedor no enforcement of quality by the appropriate authorities, and limitedcapacity dueto the generallack ofhumanresources and limitedtrainingopportunities. 83. In general, commercial banks rarely rely on the financial statements presented by potentialborrowersin determiningwhether to extend credit. There is a perception amongthe banks that, with the exception of financial statements purportingto comply with IFRSaudited by internationalaudit firms, the financial statements of companies in the OECS are of a low quality and do not provide a sufficient basis for assessingthe financial positionof a potentialborrower. Although entities are often required to submit their financial statements as part of the loan applicationprocess, banks base their lendingdecisions on other factors includingthe amount o f collateral, businessforecasts and site visits. 84. Auditors' reports issued by the local audit firms have less perceived value, as compared to the audit reports issued by the local brunches of international firms, because there is a strong perception that such audit reports are prepared by auditors with lesser experience and qualifications, and without proper compliance with appropriate auditing standards. This view was heldby various regulators, commercialbanks, educators, accountants, and even some auditors themselves. As discussed in Section ILE, the ineffectiveness of the existingquality controlandenforcement mechanismscontributesto the problem. OECSROSC -Recommendations 34 V. RECOMMENDATIONS 85. The principal objective of this ROSC assessment is to assist the regional and country authorities and other stakeholders to strengthen the financial and non-financial sectors' accounting, financial reporting and auditing practices. This assessment supports several relevantstrategic objectives for the OECS as follows: Enhancing the business climate, as a means of contributing to improved growth and competitiveness, and bolsteringdomestic and foreign direct and portfolio investment in the privatesector; Promotingthe OECS's regionalizationagenda, by strengthening the sub-regionalregulatory and professionalbodies, pooling scarce resources, and harmonizingthe normative and legal frameworks inthe area of financialreporting,accountingandauditing; Encouraginggreater transparency inbothStateandprivately-ownedenterprises, thus allowing shareholders andthe publicat largeto assess managementperformanceand influencetheir behavior; Facilitating SME access to credit by encouraging a shift from collateral-based lending decisions to lendingbasedon the financial performance ofthe prospective borrower, thereby supportinggrowth inthe SME sector; and Helpingto ensure that the financial reportingand auditingrules applicableto different types and sizes ofentity are appropriateto the needsofthose entities andthe users of their financial statements. Without attempting to provide a detailed tactical design for reforms, this report sketches the policy recommendations to support the implementation of accounting reform and ultimately enhancethe quality of corporatefinancial reporting. 86. The policy recommendations outlined in this report are based on the assumption that the countries' long-term objectives include continuing sub-regional integration, upgradingand modernizationof the accounting and auditingprofessions, and developinga business environment conducive to preparation of transparent financial information compliantwith international standards. Achievement of these objectives should be supported by the implementationof a carefully designed strategy, taking into account the OECS-specific circumstances and following the three key guiding principles of regionalization, simplijkation and leveraging of the limited supply of human andj?nancial resources. 87. This ROSC provides a set of holistic and mutually supportive recommendations, collectively designed to improve the financial reporting environment in the OECS. While majority of such recommendations draws on the initiatives and proposals already approved or consideredby the OECS governments,they should not be enactedwithout givingadequateregard to the OECS countries' ability to carry out proposedactions, especially in view ofthe constrained capacity of limited human resources, which is the single, most important constraint influencing the decision-makingprocess in the sub-region. A relatively lenient rule that is robustly and consistently enforced is preferable to a good, rigorous one that is unenforceable. The policy recommendations below, while challenging, can be carried out in the short-to medium-termand are conduciveto OECS's long-termobjectives.They fall into three key areas: OECSROSC -Recommendations 35 Harmonization of the sub-regional statutory framework - these recommendations address relevant Acts, the normativebasis supporting those Acts and measures to assist implementationof eachAct, inturn (Para. 90-99); Institutional Strengthening (Para. 100-109);and e Training and capacity development for the accountingand auditingprofession(Para. 110-111). 88. T o carry the planned program forward, the OECS countries should establish a Multidisciplinary Steering Committee (MSC) to champion and coordinate the accounting and auditing reforms. The MSC should advise policymakers and regulators regarding the implementationof the recommendations. Based on the successful experience of other countries, this report recommends that the MSC develop a Regional Strategy and a detailed Action Plan, which clearly set out the key actions andallocates responsibilitiesfor implementingthe necessary reforms. Since certain important data related to individual and institutional capacity within the accounting and auditingprofession(e.g. exact number of qualifiedpracticingpublic accountants) was not deemed to be available within the OECS during the preparationof this report, this data should be gathered, analyzed and taken in consideration during the preparation of the Action Plan. This effort should be driven by the countries themselves, as part of their effort to assume ownership of the reform effort. The final Plan should include an itemized budget, indicatingthe resources necessary for successful implementation; and, the government, external stakeholders and development partners should work together to secure the needed financial resources so as to achieve the commongoal of enhancingthe quality and availability of financial informationin the OECS. 89. Donors support remains important for the sub-regional development agenda. A few major donors have active and diversified programs in the OECS countries, affectinga number of areas, directly or indirectly related to the subject of this study. Such support could be very important for the successful implementation of the recommendations proposed in this report, especially in the areas of institutionalstrengthening, capacity building, training and professional development. To maximize its potentialimpact, various donors should be working together from the inception of the program, to the extent possible coordinatingand aligning their individual projects and initiatives. Specific cases which would allow for such coordinationare discussed in the followingsections. V A. Statutoryand LegalFramework 90. In the past few years, the OECS legal framework has been significantly updated, including the introduction of harmonized Banking Acts and Securities Acts. However, the reform is not complete without a finished harmonizedInsuranceActs and Co-operativeSocieties Acts. In addition, some amendments to the existing legislation are needed if the statutory framework for accounting and auditing is to conformto internationalbest practice.Accordingly, this reportrecommendsthat the MSC take the lead inworkingwith the countries parliaments and key regulatory institutions to pass amendments to the various Acts and regulations, as appropriate. 91. While in general the new harmonizedBankingActs provide a comprehensive legal framework, supporting operations of banking institutions, this report recommends the following amendmentsto be introducedto the Act: OECSROSC -Recommendations 36 Require the banking institutions to use IFRS in preparing their periodic financial inf~rmation.~~As this requirement is being introduced, supporting regulations and instructions issued by the ECCB should be reviewed to ensure their consistency with IFRS. Whenever necessary, additional instructions should be prepared and published to assistbankinginstitutionsduringthe transitionprocess. Clearly define in which cases banking institutions are requiredto prepare and submit to the ECCBbothconsolidatedand stand-alonefinancialstatements. 92. The ECSRC should continue its efforts to support the implementationof financial reportingrequirementsintroducedby the new SecuritiesActs: In addition to already existing rules and regulations, the ECSRC should prepare and publishupdatedregulationsand rules focused on the applicationof IFRS and preparation of the requireddisclosures (e.g., related-parties disclosures). The ECSRC could consider creating a joint working group with the ECCB and ECSE, when preparing these guidelines.It could use as a startingpoint similar guidelines already publishedby other regionaland internationalregulators. The rules and regulationsissued by the ECSRC should be explicitly amended to require the auditors o fthe publiccompaniesto use I A S while performingaudit work. The ECSRC should prepare and publish guidelines for the external auditing of public companies, similar to the ones issued by the ECCB for banking institutions. These Guidelinescould address such areas as: selection and hiring of externalauditors, auditor independence and suitability, auditor rotation and liability, and reportable transactions and conditions. 93. The CompaniesActs should be amended to: Update the procedures governing auditors' appointment, selection, dismissal and resignationas defined by the best internationalpractices. Clarify the extent of the auditor's potential liability in the event of malpractice or negligence. Inthis clarification,it shouldbe made clear that the auditor's mainliability is to the company's shareholders, notto the managemento fthe company. Require that auditors hold professional indemnity insurance sufficient to meet a reasonablelevelof potentialclaims arisingfromtheir work. 94. While the Insurance and Co-operative Societies Acts regulating the NBFIs are - currentlybeingdrafted or finalized, it isimportant to ensure that they: Require that internationallyacceptable accounting and financial reporting (full IFRS or IFRS for SMEs) standards be followedby the preparersofthe financial information. Require all NBFIs to have their financial statements audited by statutory auditors in accordancewith ISA. Require all NBFIs to make their audited financial statements publicly available in a timely manner. Put in place basic provisions regarding the selection, hiring, rotation and dismissal of external auditors. 46 Strictly speaking, this requirement is already in place, as it was introduces in the Corporate Governance Guidelines, issued by the ECCB in 2005. Thus, this recommendation is just `formalizing' somethingthat is alreadyhappening. OECSROSC-Recommendations 37 Include legal provision formally establishing competence and probity requirements for owners and directors (including finance directors and chief accountants) for NBFIs (commonly referred to as "fit and Ensure that the legal constitution o f NBFIs gives representation to and protects major stakeholders (i.e., depositors or pension contributors). 95. Once these Acts are introduced, their implementation should be aided by development and publication of the supporting methodologies, rules and regulations. Particular attention should be paid to the following areas: Content o f periodic accounting and financial reports, including required disclosures and benchmark criteria to be included inquarterly and annual financial statements. Methodological guidance with regard to the application o f IAS/IFRS and preparation o f the required disclosures (e.g., related-parties disclosures). Minimumcompliance requirements for NBFIs(covering adequacy o f books and records, completeness o f financial statements and regulatory returns [including notes to the same], provision o f an auditor's report, compliance with regulations regarding investment portfolio management, deposit, investment and capital analysis, etc.). Prudentialreporting and application o f prudential standards (whenever applicable). Selection and pre-approval o f NBFI auditors. In this regard it could be useful to prepare and publish guidelines for the external auditing o f NBFIs, similar to the ones issued by the ECCB for banking institutions. These Guidelines could address such areas as: selection and hiring of external auditors, auditor independence and suitability, auditor rotation and liability, and reportable transactions and condition^.^^ Practical application o f the `fit and proper' requirements. 96. The parliamentary acts regulating Statutory Bodies should be amended, whenever necessary, to specify the applicable accounting standards to be used by them in preparing their financial reports, and the auditing standards to be used by external auditors while conducting the audit. Eventual adoption o f full IFRS should be an ultimate goal o f this reform. Ifa private sector audit firm is hired to conduct the external audit o f a statutory body: The SA1o f the respective country should participate inthe selection process; Upon the completion o f the audit process, the audit report along with the management letters should be submitted to the SAI. 97. ICAEC rules should be amended to explicitlyaddress the followingissues: Specify membership and practice licensing requirements, in parts related to the professional qualification, examination and education criteria. Exempt current members 47 "Fitness" requires that a personappointed as a Director or Manager have the necessary qualifications, skills and experienceto perfom the duties ofthat position. "Probity" requiresthat a personbe honest, fair and ethical. As the owners and directors are taking custody of other peoples' savings and pension funds it is reasonableto expectthat they be requiredto demonstratethat they meetthese requirements. 48 The Regulator should consider establishing legal criteria that require auditors of NBFIs to make specific reporting statements concerning: a) a report on specific regulatory reporting matters (e.g., completeness of records and returns, and adequacy of capital) basedon objective criteria. b) a report on the existence and operation of a system of internal control and asset segregation (betweenbusinessassets and stakeholdersfunds and assets). c) Make direct report to the Regulator when they believe the interests of depositors or contributors are at risk, or ifthey feel the owners or managers o f the NBFIare inbreach o f legal requirements or duties. OECSROSC-Recommendations 38 of the major internationallyrecognizedbodies (e.g. ACCA, CPA, CGA) from some or all ofthese requirements. Separate the audit function from any other services that may be providedto a client by firms that conduct audits. Require the practicingauditors to prepare and submit to the ICAEC an annual report and disclosures (includingdisclosure ofstatutory auditfees andnon-auditservices fees). 98. Small and medium-sized enterprises (SMEs) should be required to follow accounting requirements appropriate to their size and scope of operations, as is envisaged by the IASB's SME international financial reporting standards, recently issued as an exposure draft. The ICAEC should eventuallytake a responsibility for the adaptation of these standards to the needsof the localmarket, their dissemination and the trainingof practitioners.In doingso, it shouldjoin forces with the other sub-regionalinstitutions,membersofthe ICAC. 99. If and when the Regulatory Oversight Committee, referred to in paragraph 29, is established, the participating bodies should prepare and sign a Memorandum of Understanding, clarifying their roles and responsibilities with regards to the oversight, monitoringand enforcement of the financial and regulatory reporting requirements, as specified by a variety ofregionalActs. V B. InstitutionalStrengthening 100. All the regulators and institutionsresponsible for the financial reportingprocess- includingthe ECCB, ECSRC, ICAEC and the nascentSRUs-face increasing challenges as the demand for highquality financialreportinggrows and requirementsfor accounting and auditing become more sophisticated. There is a consistent need for institutional and capacity- building measures at each institution. As a starting point, this report recommends that each institution, if it has not already done so, develop a long-term business plan setting out the revenues and resources required to carry out its responsibilities and options for ways to fulfill these needs.The plans are likely to requirethe implementationof a coordinated capacity-building program, including staff internships in leading regional and international professional associations and regulators, as well as the recruitment of personnel with appropriate accounting and auditing qualificationsand experience. The funding requiredfor this should where possible be covered through subscriptiodregistration fees from regulated entities, charged to reflect the entities' size and profitability. However, it is likely that additional financial assistance will be needed, possiblyfrom development partners. 101. The ECCB, which has firmly established itself as a flagship of innovation and change in the area of accounting and financial reporting, could assume an even broader coordinating role as the new regulatory structures (SRUs) are established and the Regulatory Oversight Committee is set up. While the ECCB is able to attract and retain some of the best and brightestprofessionals in the OECS, it nevertheless is not immune to the limited capacity issue. As its mandate broadens, and as the sub-regional banking industry gradually movestowardfull adoption of IFRS, the ECCB will needto make sure that it has sufficient staff, capacity andresourcesto enable it to adequately address new challenges andneeds. 102. The ECSRC has done a commendable job, providing the registrantswith needed instructions and guidance. While it should continueits work in this direction, it should also focus on strengthening its supervision function, whenever possible by relying on and sharing tools and methodologiesalready developed by the ECCB. The ECSRC should develop and implement a risk-assessment system and adopt a risk- based supervision process. This will enable the ECSRC to focus its limited resourceson those areas where the effect of its effort will be greatest, such as economicallysignificant or listedcompanies. Introductionof a risk-basedsystemshouldbe accompaniedby the shift of oversight work away from being primarily focused on enforcingthe timeliness of filings and revealing inconsistenciesbetweennarrativeandnumericalinformation.Greater emphasis shouldbe placed on the monitoring of statements' compliance with the relevant accounting framework. Reform of the oversight system and extension of the ECSRC role would require additionalresources and skills.Hopefully, the ECSRCcouldbenefit from its closenessto the ECCB (in terms of both physical proximity and their shared interest in financial sector stability). The two organizations could consider leveraging their scarce human resources through the creation of joint task forces, and sharing of methodologies and know-how.The ECSRC personnel could also benefit from study tours and secondments to similar institutions within or outside of the region. However, to address the capacity gap fully, additionalexternal helpmaybe required. 103. Recommendationsprovided to the ECSRC in paragraph 102 could be extended to the ECSE. In addition, the ECSE should consider gradually streamlining its rules, regulations and operating policies with those of the other stock exchanges acting in the sub-regions. The Caribbean Exchange Network, connecting the exchanges of Barbados, Jamaica and Trinidad & Tobago, has been launched in April 2008. One of the options for the ECSEwould be to join this Network. 104. As the SRUs regulating the NBFIs are established, their true empowerment, in terms of both regulatory and oversight functions, becomes pivotal for the overall success of Non-Banking Financial Sector reform. While putting such units in place, respective governments should take into consideration lessons learned and challenges faced by other regulators.It is, however, expectedthat lack of the adequate skills and capacity will become one main issue facing new regulatory bodies, due to the specificity o f their mandate and the breadth and specializationofthe coveredsectors. 105. While making decisions with regard to the required staffing and resources, the respective governments should keep in mind that, to become effective regulators,the SRUs should be able to fulfil at least the following functions: 0 Provide methodological recommendations and guidance with regard to financial and prudentialreportingrequirements; 0 Review submitted information and conduct necessary follow-up, including enforcement actions, whenever necessary; 0 Maintaina registryofthe reportingNBFIs; 0 Maintaincompliance with the `fit andproper' requirementsamongthe registrants; 0 Pre-approveexternalauditors; 0 Providead hoc assistance whenever necessary. 106. As can be seen, the challenges facing the newly established SRUs are plenty. To overcome them, the OECS countries would need to mobilize all available resources, including external help and technical assistance. CARTAC is perhaps one of the better positionedregionalplayers to provideneededsupport. Fundedby a number of regionaldonors, it has needed in-houseexpertise and access to an internationalnetworkof experts, which enables it OECSROSC-Recommendations 40 to become a sub-regionalcentre for knowledge sharing and training coordination in the area of non-bankingfinancial services.It already has started preparinga series oftrainingmodules in the area of insurance and, with the help of other donors, could potentially scale it up to address additionalneeds.Last, but not least, the new bodies could significantlybenefit from an awareness campaignto explaintheir role and significanceto the registrants andthe generalpublic. 107. The ICAEC should work with the sub-regional governments, donors, (e.g. World Bank, CIDA and the EU),and regulatory bodiesto be able to fulfil adequately its mandate: to regulate, oversee and support the accounting and auditing profession. The long-term objectiveof the ICAEC should eventuallybe to becomea sub-regionalcenter o fexcellence inthe area of accounting and auditing,providingan opportunityfor OECS-wide knowledge-sharingand training. One indispensable issue, which has to be addressed prior to any further actions being undertakeninthis direction, is the establishment o f a permanentoffice, with at least two or three full-time staff, which would be responsible for the day-to-day administration of the ICAEC activities. In addition, two OECS countries, which still have not officially joined the ICAEC (Grenadaand St. Vincentandthe Grenadines), shouldpassneededlegislationas soon as possible. 108. Once the office space and basic staffing needs are addressed, and providedthat the adequate technical assistanceand financial support are made available by the governments and donors, the ICAEC should focus on advancing its agenda inthe followingareas: Effectively implementing the membership and licensing requirements, especially with regard to the local practitioners, who are non-members of any other international organizations; 0 Whenever necessary, set the requirementsfor the accounting and auditingstandards to be used by the local practitioners. This would be particularly important for the non- specialized sectors, which are not covered by other Acts and regulationsdealingwith the financial reportingandaccounting requirements(e.g. SMEs). 0 Developgeneral and sector-specific auditing guidance fully compliant with current ISA. As a starting point the IFAC Guide to Using InternationalStandards on Auditing in the Audits of Small- and Medium-sized Entities should be adopted and introduced to the local practitioners.To achieve better results, the ICAEC could act in coordination with the majorregulators (ECCB, ECSRC, SRUs) andpractitioners. 0 Adopt and explicitly require its members to follow internationalethical standards, the "Ethics Code", introducedby the InternationalEthics Standards Board for Accountants (IESBA) of IFAC. 0 Design and introduce a comprehensive quality assurance system for audit; all statutory auditors and audit firms should be subjectedto the quality assurance procedureswithin a defined timeframe. The procedures should be standardized and align to the extent possible with the similar practices adopted by the other ICAC members, to ensure consistency of the visit outcomes. The results of a quality assurance review should be instrumentalin the ICAEC's decision as to whether or not to continue the licensingof a given auditfirm, or issuea license subject to restrictionsor conditions. 0 Establish an effective system of investigations, conflict resolution and sanctions for potentially serious misconduct relating to statutory audit. Serious disciplinary measures taken or sanctions imposedon statutory auditors and audit firms should be appropriately disclosedto the public. 0 Developand implement a comprehensivetraining and CPD program, coveringthe needs ofthe localprofessionals. OECS ROSC -Recommendations 41 0 While designing and implementing its overall development strategy, the ICAEC should work in close coordinationwith the other regionalprofessionalbodies and ICAC, seeking maximumpossibleharmonizationandresource sharing. 109. While the InstitutionalStrengthening component proposes a significant number of actions, its objectives can largely be accomplished within existing human resources and budgetary constraints, as in many cases their implementation is based on the consolidation, reorganizationand optimization of already existing structures and resources. This statement is particularly true with regards to the already functioning institutions, such as the ECCB, ECSRC andthe ECSE. While the establishmenthtrengtheningof the SRUs and especially the ICAECwill be more challenging, and would require additional efforts, this too could be overcome if supportedwith the adequate technical and financial help. The sub-regionaldonors should play a special role in the process, by working together and providinga coordinated assistanceto jump- start and supportthe planned institutionalstrengtheningprogram. V C. Training and CapacityDevelopment of the Accounting and AuditingProfession 110. In parallelto improvingthe statutory and institutionalframework, there is a strong need for the continuous training and development of the accounting and auditing profession. The genuine understanding and adoption of international accounting, financial reporting, and auditingstandards requires relevant education and training for financial statement preparers, auditors and regulators.Inthis regard, it is essentialto enhancethe capacity of existing accountants as well as to ensure the capacity of future accountants. This is particularlyimportant for the practitioners employed by the local firms, which do not have support offered by the extensive international network, and can only rely on what the local market has to offer. Measuresshould include: Implementing CPD programs and general training courses for practicing accountants. Preparers of financial statements in the OECS companies should be encouraged to improve their understanding of internationalaccounting and auditing standards and the key principlesof their applicationwithin the existingfinancialreportingframework.It is important to make sure that offered courses will be tailored to the needs of OECS companies. In many companies, especially the SMEs, much of the finer detail of IFRS will be irrelevant,so the topics for the courses shouldbe carefullychosen. Oneway to addressthis needat the entry level, wouldbeby addinga bookkeeperscourse to the curriculum of the existing vocational training centers, such as the National Skills DevelopmentCentre in St. Lucia.Another option is to outsource preparationanddelivery of training courses to well-established international organizations active in this area. Whichever optionis chosen, long-termsustainabilityofthe proposedsolutionshould be a criticaldecision-makingfactor. 0 Designing and delivering of specialized courses for the identified target groups: the banking sector, NBFIs, Statutory Bodies and SMEs. Special training courses should be also prepared for regulators. While designing such courses, it is important to make sure that they count towardthe CPD requirements. 0 Key operational stafffrom the regulatoryand supervisory agencies should be secondedto similar agencies abroad for on-the-job training on best internationalpractices regarding monitoringand supervision inthe regulators'respectiveareas, as well as IFRS. 111. The Regional Technical Assistance and Development Centers, such as CARTAC and CARICAD, should play a special role in designand implementationof the professional trainingand development program. These organizations already play a very special role in the OECSROSC -Recommendations 42 sub-regional development, due to the close proximity to the client countries (both are located in Barbados), the regional donors support, and most importantly, the qualified experienced international personnel they have been able to hire. As such, their help and buy-in could be extremely important. While they already offer some courses in the area of accounting and auditing, and are preparingthe new ones, their involvement and impact on the capacity building agenda would be brought to a different level, if, working in close coordinationwith the ECCB, ECSRC, ICAEC and ICAC, they would develop and adopt a comprehensive, long-termstrategy, supporting their training and professionaldevelopment programs. In turn, the regional donors, should continue rallying behindthese organizations, providingthem with necessary support and resources. c e e rc *I c, L sze: I e e 0 ee: Q, .IE n e e G .Ic) VY 5F 0 c) m I c I C i< B I Q, M 3 e: e * e 3a C c L10 3 c) rA 3 .. 3 4P C i e e a i r: E s a e E ( MAP SECTION IBRD 33564 67° 66° 65° 64° 63° 62° 61° 60° 59° 20° THE CARIBBEAN AREA 20° ORGANIZATION OF EASTERN CARIBBEAN STATES 19° OECS PARTICIPATING MEMBERS 19° Virgin Islands (UK) AT L A N T I C Anguilla (UK) Puerto Rico (US) Virgin Islands St. Maarten (Neth), 18° 18° (US) St. Martin (Fr) St. Barthelemy (Fr) O C E A N Saba (Neth) St. Eustasius (Neth) ANTIGUA AND BARBUDA ST. KITTS and NEVIS 17° 17° Montserrat (UK) Guadeloupe (Fr) 16° 16° Area of Map DOMINICA 15° 15° Martinique (Fr) 14° 14° C a r i b b e a n ST. LUCIA S e a BARBADOS ST. VINCENT and the 13° 13° GRENADINES 0 50 100 150 GRENADA 12° MILES 12° 11° 11° TRINIDAD and TOBAGO This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and 10° any other information shown R . B . D E on this map do not imply, on the part of The World Bank V E N E Z U E L A Group, any judgment on the legal status of any territory, or any endorsement or a c c e p t a n c e o f s u c h boundaries. 67° 66° 65° 64° 63° 62° 61° AUGUST 2004