"The Regulations Governing the Trusted Auditing Firms. of the Securities and Exchange Organization"

Transcription

1 The approval of the Securities and Exchange High Council: for the purpose of protecting the rights and interests of investors and managing and developing the securities market and considering the necessity of high supervision of affairs with the aim of applying the provisions of paragraph I of article 4 and paragraphs 8, 11, 12, 18, 19 of article 7 of the Securities Market Act it was prescribed that: The Securities and Exchange Organization would appoint certain firms from among the auditing firms as the "Trusted Auditing Firms" to provide services to legal entities. "The Regulations Governing the Trusted Auditing Firms of the Securities and Exchange Organization" In pursuance of the 24 th approval of the Securities and Exchange Organization on Feb 12, 2007, the present regulations entitled the "the Regulations Governing the Trusted Auditing Firms of the Securities and Exchange Organization", hereinafter referred to as the "Regulations" were approved on July 30, 2007 by the Securities and Exchange High Council. Chapter One: Definitions of Terms Article 1: The definitions given shall apply for the purposes of the terms and phrases used herein: 1. Organization means the Securities and Exchange Organization that was established by virtue of article 5 of the Securities Market Act enacted in 2005 and is hereinafter named the "Organization" 2. Association means the Iranian Association of Certified Accountants that founded by virtue of the single article of the Law for Utilization of Specialized and Professional Services of Competent Accountants as the certified accountant passed in 1993, and is hereinafter named the "Association". 1

2 3. Committee means a committee, which is set up in accordance with article 3 of the present regulations. 4. Trusted Auditing Firm means the Organization's trusted auditing firm, which has been admitted subject to the standards, prescribed herein and is entered on the list of the trusted auditing firms of the Organization. Chapter Two: Admission of the Trusted Auditing Firms Article 2: Every auditing firm, which is a member of the association, may fall within the category of the trusted auditing firms after the approval of the Organization by obtaining the qualifications set out below: 1. At least one year should have passed as of its membership in the association. 2. Any of the firm s partners should have signed at least ten audit reports on the financial statements. 3. The auditing firm must have full time professional staff proportionate to the size of its activities and its staff composition shall, in respect of various professional grades, have the ability to fulfill the maintenance of auditing service quality in accordance with the standards and rules prescribed by the association, inter alia, the regulations governing the designated threshold for provision of specialized and professional services by the members of association and its implemental by-laws. Accordingly, the number of professional staff of the firm with auditing experiences under two years after receiving their bachelor's degrees shall not exceed 40% of its total professional staff. 4. The names of the firm staff are to be regularly entered on the insurance and taxation lists of the auditing firm. 5. The scores of the auditing firm in terms of (A) quality control across the firm (fulfillment of requirements by the auditing firm of the association member) and (B) quality control at the auditing performance level (performance of 2

3 auditing as per the standards and professional ethics) which are set forth by the association shall not be lower than the scoring threshold designated by the Organization board of directors for the trusted auditing firms. 6. The auditing firm applying for admission, its partners and directors should not have any records of violations and disciplinary actions under paragraphs 3 to 6 of article 35 of the Association Statute (approved in September 1999 and its subsequent amendments) or at least one year should have passed from the end of their suspension period or their conviction period. 7. The partners and directors of the auditing firm applying for admission shall not constitute the offending partners and directors of the auditing firms removed from the list of the trusted auditing firms. Note 1. The criterion to include the name of an auditing firm on the list of trusted auditing firm shall be the date of the Organization's agreement concerning the admission of an auditing firm as the "Trusted Auditing Firm" Note 2. The auditing firms upon their admission as the "trusted auditing firms" shall typically obtain the threshold of scores for quality control both at the firm level and auditing service level (under paragraph 5 of this article). Failing to do so, their names shall be removed from the list of trusted auditing firms. Note 3. In the circumstances where the partner or director of the firm has not signed the audit report or is not responsible to investigate the violation, the provision of paragraph 7 of this article shall not apply. Note 4. The Audit Organization, being the only state audit organization, shall constitute the Organization's trusted auditing firms. Note 5. All auditing firms that have already been admitted as the trusted auditing firms of the Organization subject to the past rules, shall now be recognized as the Organization's trusted auditing firms. Such firms shall, within one year at the latest as of the approval date of these regulations, have to adapt themselves to the conditions laid down in this article. 3

4 Note 6. Upon the instruction given by the chairman of the Securities and Exchange High Council, the association shall, within 30 days as of the issuance date of the absolute and final verdict by the Supreme Disciplinary Board, report the results of the verdicts so passed with respect to the trusted auditing firms and the auditing firms applying for admission. Note 7. In the circumstances where the partners of the trusted auditing firms withdraw from such auditing firms and form a new auditing firm, the newlyestablished auditing firm shall be excluded from the restrictions mentioned in paragraph 1 of this article provided that at least two members of the partners of the auditing firm shall constitute the former partners of the trusted auditing firm. Article 3: In pursuance of present regulations, a committee is set up comprising 5 chartered/certified accountants with at least 5 years' work experience in the capacity of auditing senior directors as appointed by the Organization board of directors. Out of these 5 committee members, one member is selected as recommended by the association and approved by the Organization board of directors, one member as recommended by the Audit Organization and approved by the Organization board of directors and the other three members are directly chosen by the Organization board of directors. The procedures for the discharge of duties and running the related meetings shall be specified within the framework of the present regulations and in accordance with the guidelines which shall, upon the committee's recommendation, be approved by the Organization board of directors. Article 4: The auditing firms applying to be admitted as the trusted auditing firm shall have to submit their applications in the forms designed by the Organization for such purpose along with other records and documents in satisfaction of the requirements prescribed in article 2 of these regulations as well as the following detailed information to the Organization: a) the list of all persons (entities) for whom they have performed auditing services and have prepared audit reports during the past three years prior to the 4

5 submission of their application along with the list of the customers for whom they have provided non-auditing professional and specialized services; b) the list of auditing and advisory contracts and other ongoing professional and specialized services; c) A breakdown of fees received by each one of the persons in respect of auditing services and non-auditing professional and specialized services during the past two years; d) the statement of the firm's quality control policies regarding the auditing services and non-auditing professional and specialized services; e) the list of all professional staff of the auditing firm stating their particulars and track records (CVs); f) other information concerning the provision of auditing services to customers in that it is, at the discretion of the Organization, considered to be necessary to safeguard the public interests and support the investors; and, g) The certification by the association in satisfaction of fulfilling the conditions by the association member auditing firms and lack of violation and conviction records as referred to in paragraph 6 of article 2 herein. Note 1. It shall be required to submit the statement of the firm's quality control policies for the association member auditing firms following the issuance of the association directive within 6 months at the latest as of the issuance date of such directive. Note 2. All trusted auditing firms shall have to give permission to the association in a written letter so that when any information on the trusted auditing firms is requested by the Organization under the present regulations, such information shall be supplied by the Association to the Organization. Accordingly, the trusted auditing firm shall simultaneously have to send a copy of the said letter to the Organization. Note 3. The information received under this article by the Organization from the auditing firms applying for admission shall be treated as confidential. 5

6 Article 5: The Organization shall, within 10 days from the date of receipt, send the application of the auditing firm applying for admission along with relevant records and documents to the committee secretariat for examination and decision-making. The committee secretariat shall, within 15 days after completion of documentation, have to put forth the matter before the committee meeting and shall, within 10 days after the date of meeting, report the committee decision as to the rejection or acceptance of the auditing firm's application (by stating the reasons if the application is rejected) to the Organization. Article 6: In the event that the Organization or the committee secretariat finds out that the completed application forms and the documents submitted by the applicant are incomplete, it shall, within two weeks, notify the matter to the applicant auditing firm in the order of the date that the application has been filed with the Organization or sent to the secretariat. Article 7: The Organization shall, pursuant to the committee decisions, notify its approval or disapproval of the admission of the applicant auditing firm (by stating the reasons if the application is rejected) to the said auditing firm within one month at the latest from the date of receiving the committee decision. Note. If the auditing firm applying for admission raises an objection to the rejection of its application, the committee shall, within 15 days from the date of receiving the objection, have to deal with the matter and report the result to the Organization. Accordingly, the Organization shall, within 10 days from the date of receiving the committee s opinion, notify its final decision to the said auditing firm. Article 8: The trusted auditing firms shall, after their admission and before the insertion of their names on the list of the trusted auditing firms, have to guarantee in a pledge the implementation of all provisions of the present regulations. Note. The trusted auditing firms shall have to provide, in the auditing contracts with the company under audit, the necessity of transmitting the correspondence exchanged under these regulations to the Organization. 6

7 Article 9: The trusted auditing firms shall, in the independent auditor's and legal inspector's report prepared in accordance with the accounting principles and standards and in compliance with the Amendment to Commercial Code passed in 1968, have to audit the financial statements and expressly make comments on the following instances: a) adherence to the accounting standards in preparing and presenting the main financial statements and explanatory notes to such statements; b) the cases of non-compliance with the rules and regulations prescribed by the Organization; and' c) the cases of non-compliance with the Commercial and Tax Laws and Regulations as well as other rules of law relating to the operations of the entity (company) under review. Note 1. The Organization's trusted auditing firms shall, in addition to the expression of their professional opinion as to the annual financial statement, have to make their comments within the framework of the accounting standards in a separate or special report on other issues reflected in the independent auditor's and legal inspector's reports as prescribed in the enforcement regulations of article 45 of the Securities and Market Act of I.R.I so as to be utilized by the Organization. Note 2. The checklist on compliance with the set of rules prescribed by the Organization shall be framed through the Organization in collaboration with the association and the Audit Organization and be thereafter communicated to the trusted auditing firms. Note 3. The Organization shall put all its circulars and relevant regulations at the disposal of the Audit Organization, association and trusted auditing firms in writing or through its official website. Note 4. The Organization shall select the required information content from the special reports prepared by the trusted auditing firms which shall have to act for such purpose. 7

8 Chapter Three: Legal Entities Designated for Auditing Article 10: The following legal entities shall have to choose their independent auditors and legal inspectors from among the Audit Organization or the association member auditing firms that have been enumerated on the list of the trusted auditing firms: a) The listed companies or the companies applying for listing on the Stock Exchange; b) The subsidiaries of the listed companies or applying for listing on the Stock Exchange; c) Public joint-stock companies through public offering; d) The financial institutions designated in the Securities Market Act of I.R.I including: brokerage firms, investment companies, mutual investment funds, investment banks, pension funds, holding companies, exchanges, OTC markets, central securities depository and settlement companies; and e) the audit of projects applying for public issue of musharaka sukuk required to be registered with the Organization. Note 1. The standards for designating subsidiaries shall be set out pursuant to the accounting standards. Note 2. The auditing firms and the partners charged with auditing services of any of the above-mentioned entities shall not be authorized to accept for the second time the position of independent auditor and legal inspector at the said entity after the passage of four years. Furthermore, should the partners withdraw from the previous entity, the partner in charge of auditing service during the term of the four past years shall not be authorized to accept such position as partner with another auditing firm. This period shall start from the approval date of the present regulations. Chapter Four: Supervision of the Trusted Auditing Firms 8

9 Article 11: To protect the rights of investors and for the purpose of managing, maintaining and developing a transparent, fair and efficient securities market as well as ensuring the observance of professional standards and the provision of the present regulations, the Organization shall exercise continuous monitoring and supervision over the professional services of the trusted auditing firms as follows: a) in order to ensure the fulfillment of the conditions set out in the present regulations by the applicant auditing firms for admission and observance of such conditions by the trusted auditing firms after their admission and accordingly affirm the compliance with the Organization rules governing the activities of trusted auditing firms, the committee shall be authorized to correspond with the association and auditing firms and request for information, records and documents and, if necessary, shall, within the framework of the foregoing rules, conduct on-site inspection of the auditing firms through the quality control working group of the association; b) the quality control of the auditing records of the legal entities designated for auditing under these regulations shall be conducted through the quality control working group of the association and the quality control committee of the Audit Organization respectively so as to exercise professional control over the work of the trusted auditing firms as members of the association and of the Audit Organization. In order to address the issues referred by the Organization, a Special Quality Control Committee shall be set up in the Association and at the Audit Organization composed of five certified accountants with a possibility for the presence of two representatives on the part of the Organization; c) in the circumstances where the committee under article 3 is, directly or through the information given by the Organization's supervisory units and/or based on the complaints lodged against the audit reports, informed of the cases indicating non-compliance with the auditing standards and other professional standards and business ethics or encounters any question or ambiguity in this respect, it (the committee) shall, as the case 9

10 may be, report the matter in writing to the association or the Audit Organization so that the quality control working group referred to in paragraph "b" of this article shall, within 30 days, examine the auditing records and documents in relation to the company being audited and report the outcome to the Organization. Note 1. Upon the instruction given by the chairmen of the Securities and Exchange High Council, the association shall, by March 21 of the following year at the latest, have to report the quality control scorings at the auditing firm level and at the auditing service level for each year to the Organization. Additionally, under the circumstances where the trusted auditing firm forfeits the conditions laid down in the present regulations during the year, the association shall inform the name of auditing firm by stating the item(s) to the Organization. Note 2. Upon the instruction given by the chairman of Securities and Exchange High Council, the association shall, by March 21 of the following year, report the result of its assessments as to the observance of the prescribed threshold for provision of professional and specialized services by the trusted auditing firms for each year to the Organization. Note 3. The time-limit prescribed in paragraph "C" shall, under particular circumstances, be extendable for another 30 days by stating the reasons upon the request of the association or the Audit Organization. Article 12: Subject to article 30 of the association statute, the minimum quality control alternation at the auditing firm level (conditions fulfilled by the trusted auditing firm), quality control at the auditing service level (in performance of auditing work as per the auditing standards and professional code of conduct) and assessment of compliance with the by-laws on the prescribed threshold for provision of professional services by the trusted auditing firms shall be conducted once every year. 10

11 Chapter Five: Independence Article 13: With respect to the maintenance of the professional independence, the trusted auditing firms shall, in addition to the observance of the professional code of conduct prescribed by the association or the Audit Organization as the case may be, have to comply with the following issues: a) the trusted auditing firm shall not be authorized to be partner in and share the capital and gains of the entity under review or have business transactions for profit with such entity or, when the auditing services are rendered to a client by an independent auditor and legal inspector, simultaneously provide: 1) financial and accounting services, 2) taxation and financial management consulting, 3) system design and implementation, 4) shares valuation, 5) internal auditing service, 6) and other services specified by the committee and/or be delegated to attend the board of meetings on behalf of the said entity. Accordingly, the report compiled by the trusted auditing firm, in case of non-compliance with such standards, shall not be deemed to be valid and shall not be invoked in the interest of the said entity. Note 1. In the event that the trusted auditing firm has, prior to its selection, been charged with providing advisory services and design of financial systems to the client, it shall, while reporting the matter to the Organization (prior to commencement of accounting operations) and strict observance of the professional standards and principles, have to act in a manner that its professional qualifications and independence are not discredited. Note 2. Where the trusted auditing firm provides the design services of accounting system to a company, it shall be authorized to accept the auditing services of the said client (company) two years after the establishment and full operation of the such system. 11

12 Note 3. The trusted auditing firm shall not be authorized to accept the auditing of such company until two years from the transfer date of the shares of the company for which it has valuated. b) The trusted auditing firm and its partners, the spouse and the persons under the trusteeship, guardianship and wardship of such partners, directors, heads and senior accountants of the auditing firm shall not be authorized to act as director or be a shareholder in any of the units that are audited by the trusted auditing firm. Note 1. The trusted auditing firm as envisaged in these regulations shall have to draw up the list of the audited companies in which the auditing firms, for the purpose of retaining their independence, as described above, do not have the right to hold shares and shall deliver it to the Organization under the designation of "Independence Maintenance List". Note 2. The trusted auditing firm which is, at later stages, chosen as the independent auditor and legal inspector of a listed company shall have to indicate the name and particulars of the new company in the "independence maintenance list" so that all partners, directors, heads and senior auditors may, in case of holding shares of such company, take action to sell their shares in that company within 3 months. c) the trusted auditing firm shall not be allowed to accept the auditing of the companies in which the directors and partners of such auditing firms had already been in the employment of such companies for the period of three years. Accordingly, the trusted auditing firms shall not be authorized to accept the auditing of the companies for the period of three years where the partners of such auditing firms had already served in the capacity of the director or senior managers of such auditing firms and/ or had been charged with the auditing of such companies in the Audit Organization. 12

13 Article 14: Should the legal entities under article 10 of these regulations change their independent auditor and legal inspector before the expiry of the term of four consecutive years, they shall have to report the matter to the Organization by stating the reasons. The first term of such time-frame shall begin from the approval date of the present regulations. Article 15: An auditing firm shall not be authorized to receive over 25% of its income from one client or a group of special clients during a fiscal year. Chapter Six: Sanctions (Penalties) Article 16: Where the trusted auditing firms do not comply with the provisions of the present regulations and other rules and standards governing their activities, they shall, upon the committee's recommendation and based on the items provided in the attached table and with the approval of the Organization, be liable to the following actions: 1. Giving a caution/warning upon entry in the records; 2. Giving a notice upon entry in the records; 3. Prohibition from accepting new auditing services; 4. Delisting from the trusted auditing firms up to one year, 5. Delisting from the trusted auditing firms for over one year. Note 1. The disciplinary actions imposed by other competent authorities like the association shall not preclude the enforcement of the actions prescribed in this article. Note 2. The verdicts rendered for delisting the trusted auditing firms, in case of an appeal lodged by the appropriate trusted auditing firms or its partners, shall be referred to the Board of Review (Appellate Body). The members of this board is composed of five certified public accountants with at least 7 years of experiences in the position of senior auditing managers (three members chosen by the Organization, one member by the association and one member by the Audit 13

14 Organization). In case of issuing a verdict in favor of the appellant, the proceeding costs shall be reimbursed by the Organization, and, failing such, the proceeding costs shall be paid by the appellant. Chapter Seven: Other Previsions Article 17: The trusted auditing firms shall have to abide by the rules of the present instrument in addition to compliance with the standards and rules which are laid down by the association and other competent authorities with respect to the formation, administration and modus operandi of auditing firms. Article 18: The trusted auditing firms shall, within one month, have to notify in writing any changes in the cadre of their partners and directors to the Organization. The Organization shall, upon examining the changes in the composition of partners and directors of the trusted auditing firm, take the necessary decisions regarding the continuity of retaining the name of the auditing firm on the list of the trusted auditing firms or removal of its name from such list. Note. The trusted auditing firms shall not be permitted to hire the partners and directors of the auditing firms which have been removed from the list of the trusted auditing firms at least for the terms of their conviction as the auditing partner or director. The rehiring of such individuals as the auditing partner or director shall take place upon the recommendation of the committee and with the approval of the Organization board of directors. Article 19: The trusted auditing firms shall submit the copy of the letter containing their reports on the independent auditor and legal inspector, brief examination of quarterly financial statements, audit of projected financial information as well as the capital increase related to the legal entities designated for auditing to the Organization on the date the letter was issued. Article 20: The trusted auditing firms shall have to transmit the information requested by the Organization under article 4 of the present regulations as regards the status of 14

15 firm's operations and its partners for the first and the second semiannual periods of the year to the Organization by the end of the October of each year and the end of the April of the next year at the latest respectively. Article 21: Where the independent auditor and legal inspector is changed, the trusted auditing firm shall, pursuant to the professional code of ethics, correspond with the former auditor and make inquiries about the reasons for the change of the auditor and legal inspector and shall report the result to the Organization. Article 22: The present regulations comprising 22 articles and 29 notes and an appendix were approved on July 30, 2007 by the Exchange High Council and were substituted for the by-laws governing the requirements for the auditing firms trusted by the Securities and Exchange Organization (as approved on March 11, 2002 by the Exchange High Council) and the requirements governing the auditing firms and legal inspectors trusted by the Securities and Exchange Organization (as approved on May 24, 1999 by the Exchange High Council). 15