AUDITING UNCLAIMED FINANCIAL ASSETS 1. BANKING SECTOR Presentation by: CPA John Mwangi November 2017 Uphold public interest
FRAMEWORKS Legal Reporting Auditing Unclaimed Assets Companies Act 2015- Incorporation Banking Act 2015- Industry Specific International International Financial Reporting Standards on Standards (IFRS) Auditing Unclaimed Financial Assets Act 2011; and UFAA Regulation 2016 Prudential Guidelines Capital Markets Act and Regulations
Banking Industry The industry forms the core of the financial service system. Unclaimed assets in the industry emanates from the products and services offered by the entities within the sector.
Applicable unclaimed assets Section of the UFA Act, 2011 Asset Section 4 Travellers cheques / money holders 2 Years Section 5 Cheques, draft or similar instruments 2 Years Section 6 Demand, Savings or matured time deposit 5 Years Section 10 Determination or Order by Court of 2 Years refund by holder i.e. where a determination / award is made by the court and the beneficiary cannot be traced. Section 11 Ownership interest i.e. Shares, 3 Years dividends, unit trusts Section 12 Assets from dissolved business entity 2 Years Section 15 Unpaid wages i.e unpaid allowances, 1 Year unpaid salaries Section 16 Assets held in safe deposit box 2 Years Period To Qualify as Unclaimed Asset
Potential Areas of Unclaimed Assets Equity/Shares- bonus issue, stock splits, cash dividends and scrip dividend; Customer Deposits- Current Accounts, Call deposits and Fixed Deposits; Funds in transit- Cheques and similar instruments; Custody Services/Fiduciary activities. Activities include: safe keeping of assets/securities, arranging settlement, collect information and income, manage cash bank transactions.
Potential Areas of Unclaimed Assets Deposits and balances due to banking institutions; Unclaimed cash in transit; Short-term and Long-term borrowings; Employees benefits; Accrued utilities; and Unclaimed dividend
Audit Approach General audit approach: Auditor s understanding the applicable regulatory frameworks; Auditor s understanding of their client business; Develop suitable audit plan and substantive procedures for potential areas of unclaimed financial assets. The objectives of the compliance audit are: i. Identify unclaimed assets ii. Account for unclaimed assets iii. Determine accuracy and completeness of the reports filed with the authority iv. Report unclaimed assets to the authority
Potential Unclaimed Assets - XYZ Bank Limited Liabilities 2016 2015 Potential UFA? KShs "000" KShs "000" Customer deposits 238,103,640 294,051,857Yes Deposits and balances due to banking Institutions 16,575,802 8,506,398 Yes Other liabilities 2,730,847 4,321,306Yes Borrowings 24,052,229 25,241,690Yes Current Income Tax XXX XXXNo
Potential unclaimed assets - XYZ Bank Limited Shareholders Equity 2016 2015 KShs "000" KShs "000" Potential UFA? Share Capital 1,056,284,000 869,440,000 Yes Share Premium 62,947,767,000 62,947,767,000 No Retained Earnings 30,268,722,000 24,392,925,000 Yes Statutory loan loss Reserve 760,779,000 - No - Other Reserves 344,325,000 37,970,000 No Proposed Dividend 792,435,000 506,275,000 Yes
Breakdown of customer deposits Note 18 2016 2015 Customer deposits "000" "000" Potential UFA? Current and demand deposits 70,129,916 58,311,968 Yes Savings accounts 23,426,777 19,745,273 Yes Fixed and call deposit accounts 144,546,947 115,994,616 Yes Total 238,103,640 194,051,857
Breakdown of other Liabilities Note 23 2016 2015 Other liabilities KShs."000" KShs."000" Potential UFA? Due to subsidiary company - 0 Yes Outstanding bankers cheques 93,085 425,268 Yes Accrued expenses 894,694 1,159,362 Yes Revenue collected on behalf of Revenue Authorities 634,496 432,268 No Deferred income 475,590 607,737 No Refundable deposits 261,559 218,443 Yes Other payables 1,371,423 1,568,228 Yes Total 3,730,847 4,411,306
Substantive Audit Procedures Liability Customer deposits- 5 yrs Procedure Review account opening and know your customer (KYC) procedures; Review the account opening forms for terms and conditions; charges and fees, interest income, taxes applicable.; Obtain aging report and identify dormant/locked accounts; Identify deposits without customer/s details; Ascertain that all the charges levied on deposit are approved by CBK; Obtain evidence for any amounts submitted to UFAA and verify completeness; Identify amounts due for submission but not yet submitted.
Substantive Audit Procedures Liability Procedure Unclaimed dividends-3 yrs Obtain evidence for dividends declared in the year; Obtain evidence for dividends paid in the year; Obtain movement schedule for the dividends account; Perform a roll forward to ascertain the closing unclaimed dividends amounts (opening + declared paid); Inspect dividends account under cash and bank balances; Obtain evidence for any amounts submitted to UFAA and verify completeness; Identify amounts and related shares due for submission but not yet submitted.
Substantive Audit Procedures Liability Assets held in safe deposit box- 2yrs Procedure Obtain the register of items under safe custody and identify ones held to full time and has not been claimed Identify assets with unpaid custodial annual renewal fees. Obtain evidence for any amounts submitted to UFAA and verify completeness; Identify amounts due for submission but not yet submitted. Unclaimed Collaterals Inspect the register of collateral against the loan covenants; Identify unclaimed collaterals pledged against fully paid loans; Obtain evidence for any amounts submitted to UFAA and verify completeness; Identify amounts due for submission but not yet submitted.
Substantive Audit Procedures Liability Procedure Financial assets surrendered to other government agencies- KDIC & FRC Due to related parties This include monies seized by FRC through confiscation or forfeiture orders. The seized financial assets will be assessed on the receiving agencies and therefore information obtained from the banks will help in identifying unclaimed assets emanating from seizures. Understand outstanding balances and terms and conditions of payment; Establish if related entities exist; Obtain aging report to identify dormant accounts; and Perform inquiry on dormant accounts and determine assets due for submission UFAA.
Substantive Audit Procedures Liability Procedure Cheques, travellers cheques, drafts and similar Instrument- 2yrs Inquire on the terms and conditions for the instruments issued; Obtain the reconciliations for the unpresented cheques and similar instruments; Review the aging of outstanding cheques and highlight the ones due for more than two years; and Obtain evidence for any amounts submitted to UFAA and verify completeness and determine amount due for submission.
Aging analysis for current deposits Account Branch Code Client Name Activity Status Net Credit 0-30 Days 31-180Days 366-9999 181-365 Days Days HO A Active 612,821.20 600,000.00-12,821.20 - Kisii B Active - - - - 722,288.85 HO C Dormant - - - - 769,167.00 Westlands D Active 1,066,432.00 492,241.15 430,823.00 143,367.85 - HO E Active 981,496.50 446,581.70 534,914.80 - - HO F Dormant - - - - 1,005,000.00 Kisumu G Active 928,629.35 928,629.35 - - - HO H Active 287,467.50 - - 287,467.50 788,645.35 HO I Active - - - - 1,145,751.20 Thika J Active 1,288,228.70 1,288,228.70 - - - HO K Active 1,182,346.65 139,636.05 1,042,710.60 - - Kiambu L Dormant - - - - 1,212,503.31 HO M Active 1,059,458.00 - - 1,059,458.00 181,905.13 Nyeri N Active 1,429,556.55 - - 1,429,556.55 3,920.20 O Active 1,460,104.20 - - 1,460,104.20 - HO P Locked 585,000.00 585,000.00 - - 990,000.00 MSA Q Active 1,140,000.00 1,140,000.00 - - 81,593.00 HO R Active 1,570,694.45 - - 1,570,694.45 - Bungoma S Active 1,842,354.35 1,503,206.75 339,147.60 - - HO T Active 2,132,479.80 - - 2,132,479.80 - HO U Dormant - - - 2,619,141.00
XYZ Bank Limited The selected firm for the case study files report and surredered assest worth 140 Million. It comprised of the following classes: Unclaimed bankers cheques; Unclaimed Dividends; dividends written back to income; Unclaimed dormant or current account; and Reports of Unclaimed shares.
Interactive Session Q&A
AUDITING UNCLAIMED FINANCIAL ASSETS 2. LISTED COMPANIES Presentation by: CPA John Mwangi November 2017 Uphold public interest
FRAMEWORK Legal Reporting Auditing Unclaimed Assets Companies Act 2015- Incorporation Industry Specific-Banking Act 2015, Insurance Act, The Energy Act Capital Markets Act and Subsidiary Regulations International Financial Reporting Standards (IFRS) International Standards on auditing Unclaimed Financial Assets Act 2011; and UFAA Regulation 2016
Capital Market Products Equities/ Shares- dividends, stock splits, Scrip dividends, bonus issues, pre-emption rights. Corporate Bonds- periodical coupons and redemptions of principal on maturity. Treasury Bonds- periodical coupons and redemptions of principal on maturity. Real Estate Investment Trusts (REITS)- Distribution.
Capital Market Players Oversight CMA- Regulator NSE- Market/ offers trading platform CDSC- Clearing and settlement Investors Institutional Retail Others Stock Brokers Central Depository Agent (CDA) Company Secretary Share Registrar
Criteria for unclaimed assets (Sec 11 of the Act) a) The interest in the entity is owned by a person who for more than three years has not claimed a dividend, distribution, or other sum payable as a result of the interest, or who has not communicated. b) the entity does not know the whereabouts of the owner at the end of the three year period.
Dividends- XYZ Limited Statement of Changes in Equity 2016 2015 2014 KShs."000" KShs."000" KShs."000" Proposed Dividend 892,435 705,275 681,064 Dividend paid to controlling Interest 705,275 681,064 The SoCE shows movement of dividend amount among Reserves within Equity.
Dividends Statement of Cash flows Cash flows (used in)/from financing activities 2016 2015 KShs."000" KShs."000" Dividends paid to equity holders of the bank (705,275) (681,064) All the dividend declared was paid out. Note 13 shows comparative dividend per share and the applicable withholding tax rates.
Substantive Audit Proceduresunclaimed dividends Obtain evidence for dividends declared in the year; Resolution by the board and ratification by the shareholders during AGM and subsequent public announcements. Make enquiry from the management on the modalities of dividends payment. Obtain the shareholders register as at the books closure date. Examine the aging analysis of the outstanding amount in the dividends/ coupon payment ledger accounts of the listed firms;
Substantive Audit Proceduresunclaimed dividends Examine bank reconciliations vis a vis the bank statements for the period under review to identify dividends unpresented cheques; Examine the registrar s records to identify shareholders who cannot be reached through the last known address. Examine shareholders register for all immobilized share certificates and documented efforts by the issuer to reach the shareholders. Obtain and review report and summary of submissions to the authority.
Substantive Audit Proceduresunclaimed dividends Determine the unclaimed dividends and the underlying shares due for submission to the authority. The auditor should ascertain from the registrar all dividends paid to custodians managing investors account. The auditor should assess whether dividends paid to custodians have actually been paid to beneficial owners. Conduct aging analysis for unclaimed dividends and determine amount due for submission together with the underlying shares.
Other Key areas of Item Initial Public Offers (IPO) Consideration Unclaimed Assets UFA arise from unclaimed refunds in case of oversubscription leading to allocation on pro rata basis. Substantive Audit procedures Obtain the offer documents (prospectus, Director and Shareholders resolutions) and requisite approvals issued by CMA. Understand the size, terms, timelines of the offer and.
Other Key areas of Consideration Item Initial Public Offers (IPO) Unclaimed Assets Obtain offer results and detailed allocation of shares and determine the gross refund. Analyse the aging for the amount refundable to the subscribers and determine the amount due for submission to the authority.
Other Key areas of Consideration Item Rights Issue- Unclaime d refunds Unclaimed Assets Existing shareholders are given pre-emption rights to buy additional shares proportional on their current shareholding. When the issuer offers a window for subscribing excess allotment could result to oversubscription triggering refunds. UFA arise from unclaimed refunds in case of oversubscription leading to allocation on pro rata basis.
Other Key areas of Item Rights Issue- Unclaime d refunds Consideration Unclaimed Assets Substantive audit procedures Obtain the offer documents (letters of entitlement, Directors and Shareholders resolutions) and requisite approvals issued by CMA. Understand the size, terms and timelines of the offer. Obtain offer results and detailed allocation of shares and determine the gross refund. Analyse the aging for the amount refundable to the subscribers and determine the amount due for submission.
Unclaimed Assets held by Brokerages Investors- Source of funds Stock Brokerage- Market Intermediaries Securities Listed at NSE
Assets held by Brokerages Sources of funds: Deposits for purchase of securities; Proceeds realized on sale of securities;
Substantive Audit Procedures Review account opening and know your customer (KYC) procedures and AML due diligence; Obtain client creditors control account aging report and identify dormant/locked accounts; Review selected subsidiary accounts to determine if there are balances that meet the threshold for submission to the authority Obtain the bank reconciliations for the client bank accounts vis a vis the ledger.
Unclaimed Assets held by Brokerages Obtain the bank reconciliations for the client bank accounts vis a vis the ledger. Identify deposits without customer/s details; Review a schedule of applicable capital market levies; Obtain evidence for any amounts submitted to UFAA and verify completeness; Identify amounts due for submission but not yet submitted.
Interactive Session Q & A