Executive Summary

Legal Basis

Evolution of Module

AA-B.1.1

The contents of this Module – unless otherwise stated – apply to all specialised licensees. Representative Offices are exempted from this Module.

AA-B.1.2

The contents of this Module apply to both Bahraini specialised licensees and overseas specialised licensees.

AA-B.2.1

Certain requirements in this Module indirectly extend to auditors, by virtue of their appointment by specialised licensees. Auditors appointed by specialised 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

Specialised licensees must obtain prior written approval from the CBB before appointing or re-appointing their auditor.

AA-1.1.2

As the appointment of auditors normally takes place during the course of the firm's annual general meeting, specialised 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 specialised 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. Finally, the CBB will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).

AA-1.1.4

In the case of overseas specialised 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 a specialised licensee group having different auditors.

AA-1.2.1

Specialised licensees must notify the CBB as soon as they intend to remove their external auditor, with an explanation of their decision, or as soon as their auditor resign.

AA-1.2.2

Specialised 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

The external auditor of specialised licensees must inform the CBB in writing, should it resign or its 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, specialised 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

[This Paragraph was deleted in October 2012].

AA-1.3.3

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

AA-1.4.1

Article 61(d) of the CBB Law imposes conditions for the auditor to be considered independent. Before a specialised 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 a specialised 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

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

AA-2.1.2

The CBB may, as part of its on-going supervision of specialised licensees, request meetings with a licensee's auditor. 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 specialised 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 are contained in Module RM (Risk Management).

AA-3.1.1

[This paragraph was deleted in October 2016]

AA-3.1.2

[This paragraph was deleted in October 2016]

AA-3.2.1

Specialised licensees that are required to publish financial disclosures in accordance with Module PD must arrange for their external auditor to review these prior to their publication, unless otherwise exempted in writing by the CBB.

AA-3.2.2

Financing companies must arrange for their external auditor to review the annual disclosures required in Module PD, Section PD-1.3 and Chapter PD-4, prior to their submission to the CBB or their publication. This review must be in the form of an agreed-upon procedures report (see also PD-A.2.4). The report must be submitted to the CBB within 3 months of the year end of the concerned financing company (see also Paragraph BR-1.1.2).

AA-3.2.3

Financing companies must arrange for their external auditor to review the disclosures in the half-yearly financial statements required by Module PD, Paragraph PD-2.1.6 prior to their submission to the CBB or their publication. This review must be in the form of an agreed-upon procedure report. This report must be submitted to the CBB within two months of the end of the half year reporting period of the concerned financing company (see also Section BR-1.2.4).

AA-3.3.1

[This Paragraph was deleted in October 2012].

AA-3.3.2

[This Paragraph was deleted in October 2012].

AA-3.3.3

[This Paragraph was deleted in October 2012].

AA-4.1.1

Specialised licensees 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).

AA-4.1.2

Overseas specialised licensees that do not, at the parent licensee 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 Bahraini specialised licensee should contact the CBB in order to agree to a solution.

AA-4.1.3

Paragraph AA-4.1.1 requires specialised licensees that operate exclusively on a Shari'a compliant basis to apply relevant AAOIFI Financial Accounting Standards, depending on the type of Islamic finance contracts entered into. Specialised licensees that undertake both conventional finance and Shari'a compliant transactions are required by Paragraph AA-4.1.1 to apply AAOIFI Financial Accounting Standard 18, "Islamic Financial Services Offered by Conventional Financial Institutions".

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 a 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 for money changers and administrators or Module GR for representative office licensees.

[The Rules and guidance in this Section were moved to Section BR-3.5 for money changers and administrators and Module GR for Representative offices in April 2012]

AA-5.1.2

The purpose of the contents of this chapter is to set out the roles and responsibilities of Appointed Experts when appointed pursuant to Article 114 or 121 of the CBB Law (see EN-7.1.1). These Articles empower the CBB to assign some of its officials or others to inspect or conduct investigations of licensees.

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. Inspections may be carried out either by the CBB's own officials, by duly qualified "Appointed Experts" appointed for the purpose by the CBB, or a combination of the two.

AA-5.1.4

Specialised licensees must provide all relevant information and assistance to the CBB inspectors and Appointed Experts 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 Appointed Experts, 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 Module EN. 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 /Appointed Expert appointed by the CBB to conduct an inspection or investigation on the business of the licensee or the listed licensee.

AA-5.1.6

The CBB will not, as a matter of general policy, publicise the appointment of an Appointed Expert, although it reserves the right to do so where this would help achieve its supervisory objectives. Both the Appointed Expert 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, Appointed Experts should not be the same firm appointed as external auditor of the specialised licensee.

AA-5.1.8

Appointed Experts 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 Appointed Experts.

AA-5.1.9

Appointed Experts 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 specialised licensees' group structure). The report produced by the Appointed Experts is the property of the CBB (but is usually shared by the CBB with the firm concerned).

AA-5.1.10

Compliance by Appointed Experts with the contents of this Chapter will not, of itself, constitute a breach of any other duty owed by them to a particular specialised 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 Appointed Experts' team for a particular specialised licensee.

AA-5.2.1

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

AA-5.2.2

Appointed Experts will be required to form an opinion on whether, during the period examined, the specialised 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 Appointed Experts' report should follow the format set out in Appendix AA-1, in part B of the CBB Rulebook.

AA-5.2.4

Unless otherwise directed by the CBB or unless the circumstances described in Section AA-5.3 apply, the report must be discussed with the Board of directors and/or senior management in advance of its being sent to the CBB.

AA-5.2.5

Where the report is qualified by exception, the report must clearly set out the risks which the specialised licensee runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Appointed Experts 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 Appointed Experts conclude, after discussing the matter with the specialised 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 must be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the specialised licensee has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.

AA-5.3.1

Appointed Experts must 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, including the criteria for licensing a specialised licensee (see Module AU), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned specialised licensee, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a specialised licensee. Notwithstanding the above, it is primarily the specialised licensee's responsibility to report such matters to the CBB.

AA-5.3.2

The CBB recognises that Appointed Experts 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 Appointed Experts, 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 Appointed Experts 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 specialised licensee at the same time and whether an appropriate senior representative of the specialised 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 Appointed Experts to fulfil their duties. It should be noted, however, that Appointed Experts 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 specialised licensee and the Appointed Experts. This meeting will provide an opportunity to discuss the Appointed Experts' examination of, and report on, the specialised licensee.