new financial markets legislation – Essay Furious


0316-27
Guidance for
supervisors
and auditors
working together
under the new
financial markets
legislation

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GUIDANCE FOR SUPERVISORS AND AUDITORS WORKING TOGETHER UNDER THE NEW FINANCIAL MARKETS LEGISLATION 2
ABOUT THIS GUIDANCE
New financial markets legislation brings opportunity to continue to advance the
working relationships between supervisors and auditors. Principles behind the new
legislation focus on clarifying responsibilities and the importance of communication
between supervisors and auditors.
This guidance has been prepared jointly by the Trustee Corporations Association of
New Zealand Incorporated (TCA) and Chartered Accountants Australia and
New Zealand (CA ANZ) to provide a framework for productive engagement which
supports the financial markets.
RESPECTIVE ROLES AND RESPONSIBILITIES
The Securities Act 1978 and Securities Regulations 2009 have been superseded by the Financial Markets Conduct Act 2013 (‘the FMC Act’)
and the Financial Markets Conduct Regulations 2014 (‘the FMC Regs’) hereon referred to as “FMC legislation”.
Issuers of debt securities
1 (hereon referred to as “issuer”) and registered schemes2 (hereon referred to as “scheme”) must have a governing
document and a licensed supervisor. This governing document is more commonly known as a trust deed, and the trustee who is appointed
under the trust deed is the supervisor.
Trust deeds refer to four main parties: the investor, the issuer or scheme, the supervisor and the auditor.
The supervisor is responsible for monitoring the activities of the issuer or scheme in order to protect the interests of the investors.
The auditor is responsible for forming an opinion on the annual financial statements and reporting their opinion. This work is governed by the
professional auditing standards issued by the New Zealand Auditing and Assurance Standards Board (NZAuASB).
FMC legislation also sets out some additional engagements involving auditors. These engagements are separate to the audit of the annual
financial statements and the work may be governed by different professional standards. Although FMC legislation refers to “the auditor”
– the auditor of the annual financial statements is a distinct role from any other engagements that may be carried out by an auditor. Therefore
when a trust deed or FMC legislation refers to an “auditor” it should be clear which engagement it is in relation to. This is because it is possible
for each of the engagements to be conducted by a different individual auditor or even a different firm of auditors. Some other engagements
within FMC legislation are discussed below.
ENGAGEMENTS INVOLVING AUDITORS
FMC legislation provides for the following engagements3 an auditor may be party to.

Legislative
reference
Type of engagement Engaging parties Applicable standards
Section 461D
FMC Act
Audit of the annual
financial statements
– MANDATORY
Issuer or scheme and auditor Audit under ISAs (NZ)
Section 218 FMC Act
and Regulation 108
FMC Regs
Audit of the register
of securities
– MANDATORY
Issuer and auditor Other assurance engagement
under ISAE (NZ) 3000
and SAE 31004
Schedule 10
Clause 2
FMC Regs
A “specified engagement”
– OPTIONAL
Issuer or scheme, supervisor
and auditor
There are a variety of
approaches, these are explored
on page 5 of this guidance.

1. Section 103 of the FMA Act.
2. Section 135 of the FMA Act.
3. Other legislation (outside of the FMC Act and FMC Regs) requires other engagements involving auditors. For example the assurance engagement
that custodians are required to obtain under section 9 of the Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014.
4. As per FMA information sheet (February 2015); Issuers’ registers of regulated products and the FMA’s discretion under section 224.

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AUDIT OF THE ANNUAL FINANCIAL STATEMENTS
Audit reports are usually addressed to the residual interest holder. So for a company issuing debt securities it is the shareholders and for a
registered scheme it is the members. The FMC Act also defines additional responsibilities for the auditor when completing the audit of the
annual financial statements. In summary these are:

Legislative
reference
Requirement Commentary
Section
198(2)
FMC Act
If the auditor provides the issuer, any of the issuer’s
members or shareholders, or any of the holders of
the debt security or managed investment product
with any document required by an Act or a trust
deed relating to the financial product or scheme,
the auditor must, as soon as practicable, send
a copy to the supervisor of the debt security or
registered scheme or, if there is no supervisor,
to the FMA.
Documents required by an Act
The only document provided by an auditor in
accordance with an Act is the audit report on the
annual financial statements. It is important to note
that this is not addressed to the supervisor but they
are entitled to receive a copy of the report directly
from the auditor under this section. The auditor has
a direct duty of care to the residual interest holder,
but the supervisor can have confidence in the audit
process. This is just one part of a body of evidence
gathered by the supervisor to enable them to
discharge their professional duties.
Documents required by a trust deed
Some trust deeds may require the issuer or scheme
to obtain additional statements by the auditor on
behalf of the supervisor. There are two options
for this
OPTION 1: No specified engagement
No additional procedures are carried out beyond
those required to complete the audit of the annual
financial statements. Any reporting will be in the
form of a letter addressed to the issuer or scheme,
which is copied to the supervisor.
OPTION 2: Specified engagement
Specific procedures, which are over and above
those performed for the audit of the annual
financial statements, are carried out to meet the
supervisor’s additional requirements. For example;
if the supervisor wishes to have a report on a
directors’ certificate. Further guidance in relation to
this is set out on page 5 of this guidance.
Section
198(3)
FMC Act
If, in the performance of the auditor’s duties,
the auditor becomes aware of a matter that, in
the auditor’s opinion, is relevant to the exercise
or performance of the powers or duties of the
supervisor of the debt security or registered
scheme, the auditor must, within 7 working days of
becoming aware of the matter, send—
a a written report on the matter to the issuer; and
b a copy of the report to the supervisor or, if there is
no supervisor, to the FMA.
This is a report by exception and is a matter of
judgement by the auditor. The auditor will only
report matters which come to their attention during
the ordinary course of the audit of the annual
financial statements.
Section
198(4)
FMC Act
The auditor must, from time to time, at the request
of the supervisor, provide the supervisor with any
information relating to the issuer or registered scheme—
a that the supervisor requests; and
b that is within the auditor’s knowledge; and
c that is, in the auditor’s opinion, relevant to the
exercise or performance of the powers or
duties of the supervisor.
In practice the matters which come to the auditors’
attention during the ordinary course of the audit
of the annual financial statements relate explicitly
to matters in the annual financial statements and
may not be relevant to the supervisor. This will be a
matter of judgement by the auditor.

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Legislative
reference
Requirement Commentary
Section
199—200
FMC Act
The auditor must notify the supervisor (and in some
cases the FMA) if they have reasonable grounds to
believe any of the following (a ‘serious problem’)
has arisen in relation to a financial product—
a the issuer has, may have, or is likely to contravene
an issuer obligation in a material respect; or
b the issuer or scheme is, or is likely to become,
insolvent; or
c the financial position of the scheme or issuer, or
the security of benefits, or the management of
the scheme or issuer is otherwise inadequate; or
d the manager of the scheme has contravened,
may have contravened, or is likely to contravene
any of the manager’s market services licensee
obligations in a material respect; or
e the trustee of the scheme has contravened, may
have contravened or is likely to contravene any of
the supervisor’s licensee obligations in a material
respect; or
f the custodian of the scheme has contravened, may
have contravened, or is likely to contravene any of
the custodian’s obligations in a material respect.
This is a report by exception and is a matter of
judgement by the auditor.
Section 200(4) of the FMC Act states this does not
require the auditor to carry out functions additional
to those functions they would ordinarily carry out.
Therefore, the auditor will only report matters which
come to their attention during the ordinary course
of the audit of the annual financial statements.

Any disclosure made under the above sections is a ‘protected disclosure’.
AUDIT OF THE REGISTER OF SECURITIES
An auditor is responsible for forming an opinion on whether the register of securities has been maintained by the issuer in accordance with
section 217 of the FMC Act and reporting this to the issuer. It is common for the auditor of the annual financial statements to also undertake this
engagement, but this need not be the case.
The audit of the register of securities must be a reasonable assurance engagement as per regulation 109(3) of the FMC Regs.
The FMC Act also defines an additional responsibility for the auditor of the register of securities:

Legislative
reference
Requirement Commentary
Section 219
FMC Act
If the register of securities has not been maintained
by the issuer in accordance with section 217 of the
FMC Act, the auditor (of the register of securities)
must advise the issuer, supervisor and FMA.
A disclosure made under this provision is a
‘protected disclosure’.
This is a report by exception.
If it comes to the attention of the auditor of the
annual financial statements that the issuer has
not appointed an auditor to audit the register of
securities, this could constitute a serious problem
under sections 199—200 of the FMC Act and this
auditor would be required to notify the supervisor
(and in some cases the FMA) of this matter.

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Example reporting style Work effort
Agreed-upon procedures engagement [APS-1]
“We compared [xx] to [yy].
The amounts were the same.
We requested confirmation
from x% of balances.
We received confirmations
from all. [zz] disputed the
amounts listed.”
This is not an assurance engagement, therefore judgements are not made and an opinion is not provided.
The supervisor can take comfort from the fact that the agreed-upon procedures have been performed
professionally and appropriately reported on.
The procedures (type and amount of testing) are agreed up front and are designed to obtain specific
information about particular matters. For example the auditor may undertake recalculations, confirm
balances with third parties or agree figures to supporting documentation.
The report will set out the procedures performed and the factual findings from those procedures.
This form of engagement provides the supervisor with additional, objective data on which to form their
own opinion on specific matters. This can be an effective way for the supervisor to get appropriate
information for the exercise or performance of their powers or duties.
A limited assurance engagement [ISAE (NZ) 3000]
“Based on our review, which is
not an audit, nothing has come
to our attention that causes us to
believe that [xx] is not presented
fairly in all material respects in
accordance with [yy].”
In a limited assurance engagement, procedures are performed to form an opinion over a subject matter,
measured against specific criteria, and is generally most useful for information that is lower risk. The
procedures are often limited to enquiry and analytical review. The opinion is expressed in a negative form.
It is necessary to have suitable criteria as the auditors’ role is to provide opinion on whether anything has
come to their attention to indicate that the subject matter has not been prepared in accordance with
relevant rules, requirements or framework. If there are no agreed requirements, there is nothing to which
the auditor can judge the appropriateness of the issuer or scheme’s reporting. This can be overcome by
agreeing up front what the suitable criteria are considered to be.
The Office of the Auditor General (OAG) requires a specified engagement to be carried out for all its clients
and for it to be this type.
A reasonable assurance engagement [ISAE (NZ) 3000]
“In our opinion, [xx] is presented
fairly in all material respects in
accordance with [yy].”
In a reasonable assurance engagement, procedures are performed to form an opinion over a subject
matter, measured against specific criteria. In comparison to a limited assurance engagement, the
procedures may also involve a combination of inspection, observation, confirmation, recalculation, re
performance, as well as enquiry and analytical review.
The opinion is expressed in a positive form. Therefore, in some circumstances it may not be possible to
obtain reasonable assurance over a particular subject matter
A compliance engagement [SAE 3100]
This is a subject specific standard which is used in conjunction with ISAE (NZ) 3000
“In our opinion, [name of entity]
has complied, in all material
respects, with the [applicable
requirements] for the [period
from.…/…/….. to…./…./…..].”
This can be either a limited assurance or a reasonable assurance engagement (similar to the limited and
reasonable assurance engagements explained above).
Assurance is obtained on the issuer or schemes compliance with specific requirements (as stipulated in
the trust deed or elsewhere) measured against suitable criteria (see explanation above).

SPECIFIED ENGAGEMENT
The FMC Regs provide the supervisor with the opportunity to request
a specified engagement. This engagement enables the supervisor to
request the auditor to undertake additional work that they believe is
relevant to the exercise or performance of their powers or duties as
supervisor, or to request specific reports.
This is an important element to provide a framework for the working
relationship between supervisors and auditors. Together with the
option for meetings, this provides the structure for the supervisor to
discuss their needs and requirements with the auditor and for both
parties to agree on the most effective and relevant means to meet
those needs.
Often work required for a specified engagement can be undertaken
in conjunction with the work for the audit of the annual financial
statements. Agreeing the type of specified engagement up front allows
for the work to be undertaken in an efficient and cost effective manner.
If additional work is requested of the auditor which is over and above
the audit of the annual financial statements, then this is a specified
engagement and the auditor should be remunerated accordingly.
Which other party meets this additional cost is a matter for discussion
between the directors of the issuer or the manager of the scheme and
the supervisor. Trust deeds often provide protection for the supervisor
against additional costs.
In describing a specified engagement, the FMC Regs make reference to
an assurance engagement. However, it may be that a non-assurance
engagement would meet the needs of the supervisor in particular
circumstances.
The table below provides an outline of the possible options for a
specified engagement and aims to assist in the discussion to establish
the most suitable for the specific needs of the supervisor in each case.

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ENGAGEMENT PROCESS BETWEEN SUPERVISORS AND AUDITORS
ENGAGEMENT LETTER
The agreement of the nature and scope of any engagement with an
auditor is recorded in an engagement letter between the engaging
parties. In the case of a specified engagement, the agreement will
usually be between all three parties; the supervisor, issuer or scheme
and auditor, that is, a tripartite agreement.
An engagement letter is usually made up of two parts; a covering
letter and the firms’ standard terms and conditions of business.
In addition, some audit firms include an example report.
The cover letter sets out the scope of the engagement and the
auditors’ associated work effort, so needs to be specifically tailored
to recognise the unique nature of each individual engagement.
The terms and conditions are established by the audit firms’ internal
process and are only amended in exceptional circumstances.
There is a process and hence a cost associated with any
amendments to the terms and conditions as the request has to
go to an audit firm’s review panel for approval. Although terms
and conditions will differ between audit firms, the concepts are
largely consistent across audit firms.
Understandably, many firms’ terms and conditions are currently
written in the context of the issuer or scheme being the only other
engaging party. The supervisor can only enter into an engagement
if the terms and conditions around the engagement do not
compromise their ability to protect the rights of the investors.
For example, section 529 of the FMC Act prohibits limitations of
liability in relation to auditor functions regulated by FMC legislation.
Therefore audit firms need to ensure that their standard terms and
conditions of business are appropriate for an agreement involving
the supervisor.
FACE TO FACE MEETINGS
Schedule 10 clause 3 of the FMC Regs prescribes some specific
paragraphs that must be included in any engagement letter:
That the auditor will, at the beginning of the engagement, give
the supervisor an opportunity to meet with the auditor, without
any representative of the issuer or scheme being present,
in order to allow the supervisor an opportunity to raise any issues
or concerns relevant to the exercise or performance of their
powers or duties; and
That the auditor will, at the end of the engagement, give the
supervisor an opportunity to meet with the auditor, without any
representative of the issuer or scheme being present, to discuss
matters arising in the performance of the engagement and to
answer any questions the supervisor may have concerning the
engagement.
The requirement for the auditor to give the supervisor an
opportunity to meet with them, before and after the engagement
without the directors of the issuer or the manager of the scheme
being present, is largely new
5. The objective is to encourage
communication between the auditor and the supervisor, and a
record of the discussion should be approved and retained by both
parties.
If the supervisor would like to engage in a specified engagement,
the pre-meeting enables them to agree with the auditor the specific
terms of the engagement and the scope of any additional work in
advance. The auditor will need to ensure that the engagement they
are asked to perform can be conducted in accordance with the
auditing and assurance standards or other appropriate engagement
standards.
The post-meeting provides the supervisor with the opportunity to
ask the auditor questions about the engagement. The scope of these
meetings and matters discussed remain in relation to the work of the
auditor that is relevant to the exercise or performance of the powers
or duties of the supervisor. It is possible that confidential matters
may be raised or asked during these meetings. Confidentiality
obligations are set out in the auditors’ Professional Code of Ethics
and legislation (ie sections 199—200 of the FMC Act).
5. The superseded legislative requirements for NBDTs included the opportunity for such meetings.
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EXAMPLE TRUST DEED CLAUSES
Here are some examples of problematic trust deed clauses, with an explanation of why they are not appropriate.

Example
Clause
Explanation
The auditor will confirm their
statutory audit opinion on the
annual financial statements for
the benefit of the trustee
6.
The auditor is not able to confirm their audit opinion for another’s benefit as it has not been completed in
contemplation of any other purpose. The auditor is required to provide the supervisor with a copy of their
audit report on the annual financial statements under section 198(2) of the FMC Act. The supervisor is
entitled to read the audit report, together with the annual financial statements, and form their own view
on the financial statements.
The auditor (of the annual
financial statements) will
confirm directly to the trustee on
whether the register has been
duly maintained.
If the auditor of the annual financial statements is not the auditor of the register of securities they would
not have carried out the work required to make this statement. If they are the same, the auditor still is not
able to confirm their audit opinion for another’s benefit.
The auditor (of the register of securities) is required to report to the supervisor under section 219 of the FMC
Act if the register has not been maintained in accordance with section 217 of the FMC Act. If an auditor had
not been appointed to audit the register of securities, the auditor of the annual financial statements might
be required to report this to the supervisor as a serious problem under sections 199—200 of the FMC Act.
The auditor will confirm to the
trustee the aggregate principal
on issue and outstanding.
Use of the term ‘confirm’ implies that the auditor is forming a conclusion on the principal values as a whole.
The auditor may not be able to obtain sufficient appropriate evidence where requirements are articulated
in terms of absolutes. Also this is only audited as part of the overall financial statements to a level of
materiality, it is not necessarily audited separately. The auditor may be able to refer the supervisor to a
disclosure in the audited annual financial statements.
The auditor will report to the
trustee whether or not they
are satisfied that all principal
and interest payments have
been made.
An audit is based on the concept of selective testing of the data underlying the financial statements.
Therefore the problematic word here is ‘all’ because only a sample is tested. Also this is only audited as
part of the overall financial statements to a level of materiality, it is not necessarily audited separately.
This is an example of a situation where the supervisor could engage the auditor of the annual financial
statements in a specified engagement.
The auditor will peruse the
Director’s Certificates and
report whether the
statements are correct.
An auditor is not in a position to state whether something is ‘correct’ as this an absolute term. Only the
party preparing the certificate may be in position to make such a statement. Also it is unclear what is
expected by the word “peruse” as it can have a variety of meanings.
Ordinarily, a detailed review of the Directors’ Certificates does not form part of the normal procedures
for the audit of the annual financial statements. If the supervisor wants the auditor to do any work on the
Director’s Certificates, this could form part of a specified engagement.
The method of valuation of the
investments and liabilities is in
accordance with the trust deed.
The auditor issues an opinion as to whether the financial statements are prepared in accordance with the
applicable financial reporting standards. The method of valuation stipulated in the trust deed may not be
an NZ IFRS measure.

6. The superseded legislative requirements for NBDTs included such a confirmation.
PRACTICAL ISSUES WITH TRUST DEEDS
Historically the supervisor has established the terms of the trust
deed and agreed them with the issuer or scheme. In the past, the
auditor has not been party to the drafting of the trust deed and has
not been consulted about its terms. As a result, trust deeds that
were drafted some time ago may contain old and outdated terms, or
refer to different responsibilities to those set out in current legislation.
The transition to the new legislation provides an opportunity for trust
deeds to be reviewed and revised in consultation with auditors to
enable alignment of expectations. There are a number of issues that
have been encountered in practice, for example:
Trust deeds which impose obligations on auditors without regard
to the inherent nature and limitations of the audit of the annual
financial statements. The work of the auditor is bound by the
auditing and assurance standards, and the professional and
ethical standards issued by the NZAuASB.
Use of terminology that is inconsistent with the definitions which
are set out in the auditing and assurance standards. For example
the term ‘verify’ is often used in trust deeds to imply assurance.
However, under the auditing and assurance framework this may be
regarded as a non-assurance engagement such as an agreedupon procedures engagement.
Use of terminology that is not encompassed by the auditing and
assurance standards. For example the term ‘certify’ is used.
Certification is akin to absolute assurance. The auditing and
assurance standards state that absolute assurance is not possible
and cannot be provided due to the inherent limitations of audit
work.
Use of broad clauses which demand expertise that is beyond that
required to perform the audit of the annual financial statements,
for example; “the issuer/scheme manager has complied with
relevant legislation” or broader. Auditors are not lawyers and are
not qualified to make such comprehensive statements. In addition
the subject matter and criteria are not sufficiently specific to allow
for meaningful procedures to be designed to test such compliance.
The auditor should ensure the issuer or scheme and the supervisor
are made aware of any unclear or unduly onerous trust deed clauses
so they can be amended appropriately. In such circumstances, the
supervisor may engage the auditor in a specified engagement as
an alternative.

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