Executive Summary

Legal Basis

Evolution of Module

Superseded Requirements

AA-B.1.1

The contents of this Module — unless otherwise stated — apply to all investment firm licensees.

AA-B.1.2

The contents of Chapters AA-1 to AA-4 apply to both Bahraini investment firm licensees and overseas investment firm licensees.

AA-B.2.1

Certain requirements in this Module indirectly extend to auditors, by virtue of their appointment by investment firm licensees. Auditors appointed by investment firm licensees must be independent (cf. Sections AA-1.4 and AA-1.5). Auditors who resign or are otherwise removed from office are required to inform the CBB in writing of the reasons for the termination of their appointment (cf. Sections AA-1.2). Other requirements are contained in Sections AA-1.3 (Audit partner rotation) and AA-3.1 (Auditor reports).

AA-1.1.1

Investment firm licensees must obtain prior written approval from the CBB before appointing or re-appointing their auditors.

AA-1.1.1A

Where an investment firm licensee fails to appoint an external auditor within four months from the beginning of the financial year, Article 61 (b) of the CBB Law provides the CBB with the power to appoint the external auditor.

AA-1.1.2

As the appointment of auditors normally takes place during the course of the firm's annual general meeting, investment firm licensees should notify the CBB of the proposed agenda for the annual general meeting in advance of it being circulated to shareholders. The CBB's approval of the proposed auditors does not limit in any way shareholders' rights to subsequently reject the Board's choice.

AA-1.1.3

The CBB, in considering the proposed (re-) appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the licensee. The CBB will also take into account the track record of the audit firm in auditing investment firm licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters.

AA-1.1.4

In the case of overseas investment firm licensees, the CBB will also take into account who act as the auditors of the parent firm. As a general rule, the CBB does not favour different parts of an investment group having different auditors.

AA-1.2.1

Investment firm licensees must notify the CBB as soon as they intend to remove their auditors, with an explanation of their decision, or as soon as their auditors resign.

AA-1.2.2

Investment firm licensees must ensure that a replacement auditor is appointed (subject to CBB approval as per Section AA-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.

AA-1.2.3

In accordance with the powers granted to CBB under Article 63 of the CBB Law, auditors of investment firm licensees must inform the CBB in writing, should they resign or their appointment as auditor be terminated, within 30 calendar days, of the event occurring, setting out the reasons for the resignation or termination.

AA-1.3.1

Unless otherwise exempted by the CBB, investment firm licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.

AA-1.3.2

Investment firm licensees must notify the CBB of any change in audit partner.

AA-1.4.1

Before an investment firm licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of the licensee.

AA-1.4.2

For an auditor to be considered independent, it must, among things, comply with the restrictions in Section AA-1.5.

AA-1.4.3

If an investment firm licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the CBB of the fact.

AA-1.4.4

If in the opinion of the CBB, independence has not been achieved within a reasonable timeframe, then the CBB may require the appointment of a new auditor.

Financial Transactions with Auditors

Outsourcing to Auditors

Other Relationships

Definition of 'Auditor'

AA-2.1.1

Investment firm licensees must waive any duty of confidentiality on the part of their auditors, such that their auditors may report to the CBB any concerns held regarding material failures by the investment firm licensee to comply with CBB requirements.

AA-2.1.2

The CBB may, as part of its on-going supervision of investment firm licensees, request meetings with a licensee's auditors. If necessary, the CBB may direct that the meeting be held without the presence of the licensee's management or Directors.

AA-2.2.1

Outsourcing agreements between investment firm licensees and outsourcing providers must ensure that the licensee's internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.

AA-2.2.2

Further Rules and Guidance on outsourcing will be contained in Module RM (Risk Management), to be issued later in 2007.

AA-3.1.1

In accordance with Paragraph BR-1.1.8, Category 1 and Category 2 investment firm licensees must arrange for their auditors to review the licensee's Quarterly Prudential Return for the quarter ending 30 June (or semi-annually depending on the licensee's financial year-end) prior to its submission to the CBB, unless otherwise exempted in writing by CBB. Auditors must complete the prescribed form attesting to their review, which must be attached to the Quarterly Prudential Return.

AA-3.1.2

Investment firm licensees are required to submit a Quarterly Prudential Return (QPR). Category 1 and Category 2 investment firm licensees may apply in writing to CBB for an exemption from the requirement that the QPR be reviewed by the licensee's external auditors: this exemption would normally only be given where the licensee had established a track record of accurate and timely reporting, and there were no other supervisory issues of concern. Further details on the CBB's reporting and related requirements, including the precise scope of the auditor's review and attestation, will be contained in Module BR (CBB Reporting).

AA-3.2.1

Investment firm licensees that hold or control client assets must arrange for their external auditors to report on the licensee's compliance with the requirements contained in Module CL (Client Assets), at least once a year. Investment firm licensees Category 1 and Investment firm licensees category 2 which do not hold or control Client Assets are obligated to confirm the same annually.

AA-3.2.2

The report must be in the form agreed by CBB, and must be submitted to the CBB within three months of the licensee's financial year-end.

AA-3.2.3

Further information on the above can be found in Section CL-1.5.

AA-3.3.1

[This paragraph was deleted in January 2012]

AA-3.3.2

[This paragraph was deleted in January 2012]

AA-3.3.3

[This paragraph was deleted in January 2012]

AA-4.1.1

Investment firm licensees which deal only in conventional financial instruments must comply with International Financial Reporting Standards / International Accounting Standards.

AA-4.1.1A

Investment firm licensees that undertake both conventional finance and Shari'a compliant transactions must comply with International Financial Reporting Standards / International Accounting Standards and, to the extent that they undertake Shari'a compliant activities, relevant standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Such firms must also apply AAOIFI Financial Accounting Standard 18, "Islamic Financial Services Offered by Conventional Financial Institutions".

AA-4.1.2

Overseas investment firm licensees that do not, at the parent company level, apply IFRS/IAS are still required under Paragraph AA-4.1.1 to produce pro-forma accounts for the Bahrain branch in conformity with these standards. Where this requirement is difficult to implement, the overseas investment firm licensee should contact the CBB in order to agree to a solution.

AA-4.1.3

Investment firm licensees that operate exclusively on a Shari'a compliant basis must comply with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS) must be followed.

AA-5.1.1

In accordance with Articles 114 and 121 of the CBB Law, the CBB may appoint appointed experts to undertake on-site examinations or report by way of investigations on specific aspects of an investment firm licensee's business. External auditors may be called upon to be appointed experts and should be aware of their role in that capacity by referring to Section BR-3.5.

[The Rules and guidance in this Section were moved to Section BR-3.5 in October 2011]

AA-5.1.2

The purpose of the contents of this chapter is to set out the roles and responsibilities of reporting accountants when appointed pursuant to Article 114 of the CBB Law (see EN-2). This Article empowers the CBB to assign some of its officials or others to inspect licensees' or listed companies' businesses.

AA-5.1.3

The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission reports on matters relating to the business of licensees in order to help it assess their compliance with CBB requirements, as contained in Article 114 of the CBB Law. Such inspections may be carried out either by the CBB's own officials, by duly qualified “Reporting Accountants” appointed for the purpose by the CBB, or a combination of the two. Article 111 requires licensees to make available to the CBB's inspectors, their books and other records, and to provide all relevant information within the time limits deemed reasonable.

AA-5.1.4

Investment firm licensees must provide all relevant information and assistance to reporting accountants on demand as required by Articles 111 and 114 of the CBB Law. Failure by licensees to cooperate fully with the CBB's inspectors or reporting accountants, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in EN Module. This rule is supported by Article 114(a) of the CBB Law.

AA-5.1.5

Article 163 of the CBB Law provides for criminal sanctions where false or misleading statements are made to the CBB or any person/reporting accountant appointed by the CBB to conduct an inspection on the business of the licensee or the listed company.

AA-5.1.6

The CBB will not, as a matter of general policy, publicise the appointment of reporting accountants, although it reserves the right to do so where this would help achieve its supervisory objectives. Both the reporting accountants and the CBB are bound to confidentiality provisions restricting the disclosure of confidential information with regards to any such information obtained in the course of the investigation.

AA-5.1.7

Unless the CBB otherwise permits, reporting accountants should not be the same firm appointed as external auditors of the licensee.

AA-5.1.8

Reporting accountants will be appointed in writing, through an appointment letter, by the CBB. In each case, the CBB will decide on the range, scope and frequency of work to be carried out by reporting accountants.

AA-5.1.9

Reporting accountants will report directly to and be responsible to the CBB in this context and will specify in their report any limitations placed on them in completing their work (for example due to the relevant licensee's group structure). The report produced by the reporting accountants is the property of the CBB (but is usually shared by the CBB with the firm concerned).

AA-5.1.10

Compliance by reporting accountants with the contents of this chapter will not, of itself, constitute a breach of any other duty owed by them to a particular licensee (i.e. create a conflict of interest).

AA-5.1.11

The CBB may appoint one or more of its officials to work on the reporting accountants' team for a particular licensee.

AA-5.2.1

Commissioned reporting accountants would normally be required to report on one or more of the following aspects of a licensee's business:

AA-5.2.2

Reporting accountants will be required to form an opinion on whether, during the period examined, the licensee is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.

AA-5.2.3

The reporting accountants' report should follow the format set out in Appendix EN 1.

AA-5.2.4

Unless otherwise directed by the CBB or unless the circumstances described in section AA-5.3 apply, the report should be discussed with the board of directors and/or senior management in advance of it being sent to the CBB.

AA-5.2.5

Where the report is qualified by exception, the report should clearly set out the risks which the licensee runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Reporting accountants will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.

AA-5.2.6

If the reporting accountants conclude, after discussing the matter with the licensee, that they will give a negative opinion (as opposed to one qualified by exception) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.

AA-5.2.7

The report should be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the licensee has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.

AA-5.3.1

Reporting accountants should communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, are not or have not been fulfilled. These may include:

Notwithstanding the above, it is primarily the licensee's responsibility to report such matters to the CBB.

AA-5.3.2

The CBB recognises that reporting accountants cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only when reporting accountants, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.

AA-5.3.3

If reporting accountants decide to communicate directly with the CBB in the circumstances set out in paragraph AA 5.3.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the licensee at the same time and whether an appropriate senior representative of the licensee should be invited to attend the meeting with the CBB.

AA-5.4.1

Information which is confidential and has been obtained under, or for the purposes of, this chapter or the CBB Law may only be disclosed by the CBB in the circumstances permitted under the Law. This will allow the CBB to disclose information to reporting accountants to fulfil their duties. It should be noted, however, that reporting accountants must keep this information confidential and not divulge it to a third party except with the CBB's permission and/or unless required by Bahrain Law.

AA-5.5.1

The CBB may, at its discretion, call for a trilateral meeting(s) to be held between the CBB and representatives of the relevant licensee and the reporting accountants. This meeting will provide an opportunity to discuss the reporting accountants' examination of, and report on, the licensee.