cbsl finance co presentation_review of fs by boards

7/30/2019 CBSL Finance Co Presentation_Review of FS by Boards

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10 November 2009 Page 1

Role of an Audit Committee

The role of the Audit Committee is to: Oversee the financial reporting system of the company,

with a view to safeguarding the interest of the

shareholders and all other stakeholders.

-ICASL: Code of Best Practice on Audit Committees

A report by the Board on the finance company's internal

control mechanism that confirms that the financial

reporting system has been designed to provide a

reasonable assurance regarding the reliability of financial

reporting, and that the preparation of financial statements

has been done in accordance with relevant accounting

principles and regulatory requirements- Corporate Gov regulations for Finance Cos


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Internal Controls: Points to consider

What process has

been applied in

reviewing the

system?

Has action

been taken to

remedy any

significant

control

weakness?

Has the system ofinternal control

been reviewed by

the board?

Has the system of

internal control

been in place?

Is there anongoing risk

management

process?


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Audit Com mittees: Evaluat ing the Quali ty of Financial Information

Next Steps

Establish a process for continuing education Understand the key accounting policies used in the preparation of

Financial Statements and evaluate their appropriateness

Determine the balances that are effected by estimates, judgments,projections and assumptions. Ensure that these are reasonable

Establish policy for review and approval of all significant, complex orunusual Transactions.

Have a process to determine the compliance with applicable lawsregulations and contractual obligations

Review and approve all RPT Transactions

Establish a process for consideration of the quality of earnings andoverall financial reporting

Have a process to evaluate the internal controls over financialstatement preparation design of the system


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Appendix 1

Areas of focus on review of financial statements


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Cash

Are there any restrictions on the use of cash? If so, are they properly disclosed?Is any portion of the cash balance held under formal or informal compensating balance arrangements? Arethese facts disclosed in the financial statements? Is the presentation of the statement of cash flows consistent with previous years? Were there any significantcash transactions where management had difficulty identifying the appropriate classification (e.g., operating vs.financing activities) on the statement of cash flows?What is the Companys policy for including financial instruments within cash equivalents

Investments/Financial instruments

How does the Company invest excess funds? What are the investment policies with regard to risk and yield? Have there been significant changes during the year in the types of investments held?Has the Company invested in any exotic or unusual financial instruments? Has the Company entered into any interest rate contracts, foreign currency contracts, or other types ofoptions, futures, forwards, swap contracts, or any other types of derivatives? How are they disclosed in thefinancial statements? What is the nature and extent of use of derivatives? What are the Companys policies andprocedures related to entering into these agreements and evaluating them?

For derivatives, are related gains and losses properly classified, described, and disclosed in the financialstatements?Has the Company considered the counterpartys credit risk? How are debt and equity securities classified (i.e., held to maturity, trading, and available-for-sale)?Have other than temporary declines in value been considered? Are there any liens, pledges, or other security interests in financial instruments? If so, are they properlydisclosed? Are any contingent liabilities resulting from these transactions appropriately disclosed?

Areas of focus on review of financialstatements


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Lease and HP Receivables

What is the amount of bad debt expense this year? How does it compare to last year? What is the NPL Ratio ? How has it been computed ? Is the company in line with the industry ratio? How was the allowance for doubtful Lease and HP receivables/loss reserve determined? Has there been achange in the methodology or assumptions used in determining the allowance for doubtful Lease and HPreceivables/loss reserves? If so, why? How was its adequacy evaluated? Has the allowance changed from lastyear in proportion to changes in receivables/loans? If not, why not? Is there a high concentration of credit risk (e.g., industry, geographic area,)? What type of assets does the company lend against (e.g. motor vehicles, machinery)? What is the value of Lease/HP receivables where assets have been seized? Would their recoverable valuebe below the carrying value? What were the largest Lease and HP receivables written-off this year? Were they reserved at last year end? Ifnot, why not? Does the Company participate in loans/syndications originated by others? If so, what type of independentcredit analysis is performed? Are there any liens, pledges on Lease and HP receivables? If so, are they properly disclosed?Are any significant or unusual amounts due from related parties, including officers and employees? How dothese amounts compare to last year end?



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Property, plant, and equipment

Are the estimated useful lives and methods of depreciation reasonable? Have any of the estimated usefullives or methods changed from the prior year? Does the Company periodically take a physical inventory of fixed assets? Is this physical inventory reconciledto the financial records? Does the Company have any significant proposed leases that might require capitalization?What are the Companys policies for accounting for leasehold improvements? How does the Companyidentify the appropriate period over which to amortize the costs of leasehold improvements? Have internal-use software costs been evaluated to determine whether those amounts are being treatedproperly as either capitalized or expensed costs? Has impairment of fixed assets been considered?

Other assets

What is included in other assets? Are the carrying values of intangible assets reviewed regularly to determine whether there has been animpairment in value? How were these carrying values evaluated?

Are there any deferred charges? If so, have they been evaluated for recoverability? Have significant deferred tax assets been recognized for which the recovery is based on tax planningstrategies or expectations as to future taxable income?



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Borrowings/Noncurrent liabilities

Were there any commitments or contingent liabilities indicating possible impairment of an asset or theincurrence of a liability that were not provided for or disclosed in the financial statements? Is the Company in compliance with the provisions of its loan and debt agreements? Is the Company in dangerof not complying with such agreements during the next year? What assets are pledged to secure borrowings? Have appropriate disclosures of pledged assets been madein the financial statements? Has the Company issued guarantees of the debt of others? If so, are these guarantees properly disclosed inthe financial statements?

What is the gearing of the Company? Is the Company within the industry norms ?Does the Company consider maturity of assets when entering into borrowing arrangements? If so how doesthe maturity of assets and liabilities being monitored ? Are the assumptions being used to value the pension benefit and other post-employment benefit obligationsreasonable? Were there any changes in the assumptions this year as compared to last year? Were there anyplan amendments during the last year?

Current liabilities

What procedures were performed to determine there are no significant unrecorded liabilities? Are there any significant, unusual accruals? Have amounts due to related parties been identified and properly disclosed? Were any significant issues raised by counsel concerning litigation, contingencies, claims, or assessments?How are such matters reflected in the financial statements or footnote disclosures? Were there any other contingencies identified by management that require accrual or disclosure?



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Income taxes

Is there an unusual relationship between income before taxes and income tax expense? If so, what causedthe unusual relationship?What is the effective tax rate this year and how does it compare to last years rate? Has the Company reconciled its deferred tax accounts to supporting records?



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Finance Companies(Corporate Governance) Direction

Central Bank of Sri Lanka


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Key Features

1.

The Responsibilities of the Board of Directors Board shall strengthen the safety and soundness of the finance company Board shall appoint the chairman and the chief executive officer and define and

approve the functions and responsibilities of the chairman and the CEO

There shall be a procedure determined by the Board to enable directors, uponreasonable request, to seek independent professional advice in appropriatecircumstances, at the finance companys expense.

A director shall abstain from voting on any Board resolution in relation to a matter inwhich he or any of his relatives or a concern in which he has substantial interest, isinterested, and he shall not be counted in the quorum for the relevant agenda itemat the Board meeting.

Board shall have a formal schedule of matters specifically reserved to it for decisionto ensure that the direction and control of the finance company is firmly under itsauthority.

Board shall, if it considers that the finance company is, or is likely to be, unable to

meet its obligations or is about to become insolvent or is about to suspendpayments due to depositors and other creditors, forthwith inform the Director of theDepartment of Supervision of Non-Bank Financial Institutions

Board shall include in the finance companys Annual Report, an annual corporategovernance report setting out the compliance with this Direction.

Board shall adopt a scheme of self-assessment to be undertaken by each directorannually, and maintain records of such assessments.


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Key Features

2.

Meetings of the Board Board shall meet at least twelve times a financial year at approximately monthlyintervals. Obtaining the Boards consent through the circulation of written orelectronic resolutions/papers shall be avoided as far as possible.

Board shall ensure that arrangements are in place to enable all directors to includematters and proposals in the agenda for regular Board meetings where suchmatters and proposals relate to the promotion of business and the management ofrisks of the finance company.

A notice of at least 7 days shall be given of a regular Board meeting A director who has not attended at least two-thirds of the meetings in the period of

12 months immediately preceding or has not attended the immediately precedingthree consecutive meetings held, shall cease to be a director.

The Board shall appoint a company secretary whose primary responsibilities shallbe to handle the secretarial services to the Board and shareholder meetings and tocarry out other functions specified in the statutes and other regulations

If the chairman has delegated the company secretary shall be responsible forcarrying out such function.

All directors shall have access to advice and services of the company secretarywith a view to ensuring that Board procedures and all applicable laws, directions,rules and regulations are followed.

The company secretary shall maintain the minutes of Board meetings


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Key Features

3.

Composition of the Board number of directors on the Board shall not be less than 5 and not more than 13, subject totransitional provisions

total period of service of a director other than a director who holds the position of chiefexecutive officer or executive director shall not exceed nine years.

The total period in office of a non executive director shall be inclusive of the total period ofservice served by such director up to the date of this Direction.

an employee of a finance company may be appointed, elected or nominated as a director of thefinance company

number of independent non-executive directors of the Board shall be at least one fourth of thetotal numbers of directors.

Non-executive directors shall have necessary skills and experience to bring an objectivejudgment to bear on issues of strategy, performance and resources.

With effect from three years from the date of this Direction, a meeting of the Board shall not beduly constituted, although the number of directors required to constitute the quorum at suchmeeting is present, unless at least one half of the number of directors that constitute thequorum at such meeting are non-executive directors.

The independent non-executive directors shall be expressly identified as such in all corporatecommunications that disclose the names of directors of the finance company.

There shall be a formal, considered and transparent procedure for the appointment of newdirectors to the Board.

All directors appointed to fill a casual vacancy shall be subject If a director resigns or isremoved from office, the Board shall announce to the shareholders and notify the Director ofthe Department of Supervision of Non- Bank Financial Institutions


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Key Features

4. Criteria to assess the fitness and propriety of directors a person over the age of 70 years shall not serve as a director of a finance company

A director of a finance company shall not hold office as a director or any other equivalentposition in more than 20 companies/societies / bodies corporate, including associate companiesand subsidiaries of the finance company.

director shall not hold office of a director or any other equivalent position in more than 10companies that are classified as Specified Business Entities in terms of the Sri LankaAccounting and Auditing Standards Act No. 15 of 1995.


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Key Features

5. Delegation of Functions Board shall not delegate any matters to a board committee, chief executive officer, executive

directors or key management personnel, to an extent that such delegation would significantlyhinder or reduce the ability of the Board as a whole to discharge its functions

Board shall review the delegation processes in place on a periodic basis to ensure that theyremain relevant to the needs of the finance company

6. The Chairman and the Chief Executive Officer The roles of chairman and chief executive officer shall be separated and shall not be performed

by the one and the same person after 3 years commencing from January 1, 2009.

chairman shall be a non-executive director Board shall disclose in its corporate governance report, which shall be an integral part of its

Annual Report, the name of the chairman and the chief executive officer and the nature of anyrelationship [including financial, business, family or other material/relevant relationship(s)], ifany, between the chairman and the chief executive officer and the relationships amongmembers of the Board.

The chairman shall: (a) provide leadership to the Board; (b) ensure that the Board workseffectively and discharges its responsibilities; and (c) ensure that all key issues are discussedby the Board in a timely manner.

The chairman shall be primarily responsible for the preparation of the agenda for each Boardmeeting.

The chairman shall ensure that all directors are informed adequately and in a timely manner ofthe issues arising at each Board meeting

the chairman, shall not engage in activities involving direct supervision of key managementpersonnel or any other executive duties whatsoever.

(


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Key Features

7. Board Appointed Committees Every finance company shall have at least the two Board committees:

Audit Committee

Integrated Risk Management Committee

8. Related party transactions Board shall take the necessary steps to avoid any conflicts of interest that may arise from any

transaction of the finance company with any person, and particularly with the followingcategories of persons who shall be considered as related parties for the purposes of this

Direction a) A subsidiary of the finance company;

b) Any associate company of the finance company;

c) A director of the finance company;

d) A key management personnel of the finance company;

e) A relative of a director or a key management personnel of the finance

company ;

f) A shareholder who owns shares exceeding 10 % of the paid up capital of the finance company;

g) A concern in which a director of the finance company or a relative of a director or a shareholder who

owns shares exceeding 10 % of the paid up capital of the finance company, has substantial interest. Board shall ensure that the finance company does not engage in transactions with a related

party in a manner that would grant such party more favourable treatment than that is accordedto other similar constituents of the finance company.


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Key Features

10. Disclosures (a) annual audited financial statements and periodical financial statements are prepared and

published in accordance with the formats prescribed by the regulatory and supervisoryauthorities and applicable accounting standards, and that

(b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil andEnglish.

A statement to the effect that the annual audited financial statements have been prepared inline with applicable accounting standards and regulatory requirements, inclusive of specificdisclosures

A report by the Board on the finance company's internal control mechanism that confirms thatthe financial reporting system has been designed to provide a reasonable assurance regardingthe reliability of financial reporting, and that the preparation of financial statements has beendone in accordance with relevant accounting principles and regulatory requirements

The external auditors certification on the effectiveness of the internal control mechanism inrespect of any statements prepared or published after March 31, 2010.

Details of directors, including names, transactions with the finance company.

Fees/remuneration paid by the finance company to the directors in aggregate, in the AnnualReports published after January 1, 2010.

Total net accommodation in respect of each category of related parties and the netaccommodation outstanding in respect of each category of related parties as a percentage ofthe finance companys capital funds.

A report setting out details of the compliance with prudential requirements, regulations, lawsand internal controls and measures taken to rectify any noncompliances.


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Key Features

10. Disclosures (contd) A statement of the regulatory and supervisory concerns on lapses in the finance companys risk

management, or non compliance with the Act, and rules and directions that have beencommunicated by the Director of the Department of Supervision of Non-Bank FinancialInstitutions, if so directed

The external auditors certification of the compliance with the Act and rules and directionsissued by the Monetary Board in the annual corporate governance reports published afterJanuary 1, 2011.

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