Accounting and Disclosure

B. Financial Reports to AFIC

Objective

To ensure that the operations of special services providers are sufficiently free of all forms of risk, both financial and non-financial, that the likelihood of such bodies failing to meet their obligations to societies is reduced to an absolute minimum. Towards this end, to ensure that financial information provided to AFIC is complete, timely and consistent with external reporting requirements and is adequate for supervisory purposes.

General Background

Supervision of SSPs by AFIC is conducted, in part, through a review of financial data provided by the SSPs. It is appropriate that this information should be more extensive than that provided in the public financial accounts. These data should form an extension of the information contained in the annual accounts and should be consistent with them.

It is the responsibility of directors and management to oversee the internal operating procedures of the SSP. Each SSP will, for its own purposes, be expected to have adequate accounting records, registers and supporting documentation. Normal budgets, monthly financial statements and reports on loans, liquidity, capital adequacy and investments should form an integral part of any management and control process.

Much of this information, prepared for internal purposes, will provide the data for reporting to AFIC.

C. Audit

To ensure that the operations of special services providers are sufficiently free of all forms of risk, both financial and non-financial, that the likelihood of such bodies failing to meet their obligations to societies is reduced to an absolute minimum. Towards this end, to ensure that the auditors appointed by each special services provider are competent, adequately resourced and given sufficient scope to complete the duties imposed by the AFIC Code. Further, to ensure that special services providers are able to provide such certificates of audit as are required by AFIC as part of its supervisory role.

General Background

The annual accounts and group accounts of SSPs are audited. As well as the audit report attached to the published financial statements, auditors must provide to the directors and to AFIC a certificate of compliance with respect to internal controls. Auditors are also required to provide a number of certificates of compliance.

In particular, auditors are required to report on the adequacy of systems adopted by the SSP:

· to ensure compliance with the restrictions imposed by AFIC with respect to PLA accounts; and

· to monitor and manage the risks associated with its financial activities.

The intention of independent audit reviews is to lend credibility to the financial information presented in the annual report by the SSP's directors. In carrying out its supervisory responsibilities, AFIC will rely largely on information presented by the SSP. A properly planned and conducted audit should provide reasonable assurance that the financial statements are true and fair. In addition to AFIC, members and depositors should be able to place greater reliance on financial information where an audit has ascertained that the accounts are free of material misstatement and present a true and fair view of the entity.

It is important that a SSPs external auditor receives timely information concerning the prudential standing of the SSP. Accordingly, AFIC should provide to the SSPs external auditor a copy of any report following an inspection of the SSP and any other information AFIC may from time to time consider relevant to the auditors audit responsibilities in respect of the SSP. If AFIC considers the provision of the whole or part of the report or such other information is unnecessary or undesirable in the circumstances, AFIC need not provide it to the external auditor.

Audit Standards

All audit work should be carried out in compliance with Auditing Standards and Auditing Guidance Statements prepared by the Auditing Standards Board of the Australian Accounting Research Foundation issued by the Australian Accounting Research Foundation on behalf of the Australian Society of Certified Practising Accountants and the Institute of Chartered Accountants in Australia. Particular notice should be taken of the requirements within the standard for proper planning and completion of audit techniques which take account of the nature and risks of SSPs. Directors of SSPs should be satisfied that auditors have sufficient understanding of the services involved to enable them to adequately plan the audit and assess audit risks.

The operations of SSPs involve a large number of transactions. The audit approach, therefore, must emphasize the importance of transaction testing. Adequate transaction testing is regarded as critical if audits are to satisfy AFIC's requirements.

The audit approach must set out how evidence will be gathered. Since that evidence is the basis of audit opinion, sufficient audit evidence must be obtained to enable an opinion to be properly formed.

The responsibility for appointing an auditor of proper ability is the responsibility of the SSP. SSPs can expect that AFIC will communicate with their auditors annually or more frequently if it is deemed necessary. The purpose of this contact will be to establish the efficacy of audit techniques. If AFIC is not satisfied with the quality of an audit it will appoint an additional auditor as it sees fit.

Audit Committees

An Audit Committee should comprise a majority of non-executive directors to which has been assigned, amongst other functions, the oversight of the financial reporting and auditing process. The main objectives of an appropriately established and effective independent Audit Committee include enhancing the credibility and objectivity of financial reporting and assisting the Board to discharge its responsibilities. Each SSP will establish an Audit Committee. It is the responsibility of the directors to establish the Audit Committee and to develop clear guidelines for its operation, including its role, terms of reference, responsibilities and method of operation.

Internal Audit

An internal audit function will be required of each SSP as part of its system of internal control. The effectiveness of the internal audit function depends on the scope and objectives of the function, degree and independence and the technical competence of staff. In general, internal audits will be most effective where they are directed towards the review and testing of internal controls and risk management systems. SSPs should consider the standards for the professional practice of internal auditing issued by The Institute of Internal Auditors.

Prudential Standards

Public Reporting

5.3.5.a Each SSP will complete the following returns as required by notice from AFIC and in the form required from societies by SSAs (see Book 2).

(i) Monthly:

· Profit and Loss Statement

· Balance Sheet

· Cash Flow Statement

· Liquidity

· Capital adequacy

· Large exposures

· Bad and Doubtful Debts

(ii) Quarterly, in addition to monthly requirements:

· Loans to Societies Return

· Directors' Interests Return

· Assets Return

• Operations Return including subsidiaries and other activities as required by AFIC.

(iv) Other returns as required from time to time by AFIC.

5.3.5.b AFIC may, by notice, vary the reporting interval for any or all of the returns included in Clause 5.3.5.a for any or all SSPs.

5.3.5.c Any SSP which fails to comply with the notice of lodgement of returns by the due date will be in breach of the Prudential Standards.

Prudential Standards

5.3.6 Audit Standards

5.3.6.a A SSP is to be audited in accordance with Auditing Standards and Auditing Guidance Statements and any additional requirements considered necessary by the auditor in satisfying the various requirements of the FI Code.

5.3.6.b Directors are to satisfy themselves that the auditor has sufficient relevant expertise to properly audit the SSP.

5.3.6.c Directors are to satisfy themselves that the auditor has adequate computer audit support to be able to access any and every transaction within the SSP, as the auditor determines.

5.3.6.d A SSPs is to obtain from its auditor, an engagement letter which confirms acceptance of the appointment, the objectives and scope of the audit, the extent of the auditors responsibilities and the form of reports and any other matters identified in AUS204 - Terms of Audit Engagements.

5.3.6.e A SSP is to maintain an audit committee whose members comprise at least half non executive directors.

5.3.6.f An internal audit function will be implemented by each SSPs directors as part of the SSPs system of internal control.

5.3.6.g Audit reports are to be forwarded directly to the audit committee in addition to any other recipients required by the SSP.

5.3.6.h Pursuant to section 284(7) and (8) and section 285(10) of the FI Code, an external auditor is to provide to AFIC, reports on the compliance and adequacy of the following risk management systems and internal controls:

· liquidity risk management systems (annually) - Prudential Standard 5.1.1.a;

· market risk management systems (annually) - Prudential Standard 5.1.2.a;

· credit and settlement risk management systems (annually) - Prudential Standard 5.1.3.a;

· transaction and technology risk management systems (annually) - Prudential Standard 5.1.4.a;

· operations risk management systems (annually) - Prudential Standard 5.1.5.a; and

· internal controls within the above risk management systems.

5.3.6.i AFIC is to provide to a SSPs external auditor a copy of any report following an inspection of the SSP and any other information AFIC may from time to time consider relevant to the auditors audit responsibilities in respect of the SSP. If AFIC considers the provision of the whole or part of the report or such other information to be unnecessary or undesirable, the report or the information need not be provided to the external auditor.