The auditing requirements for issuer trust deeds are in the Financial Markets Conduct Regulations 2014 and previously in the Securities Regulations 2009 and the Deposit Takers Regulations 2010.
Under the old regulations, a number of terms were implied into, or required in, trust deeds. These included requirements to provide separate audit reports to (and for the benefit of) trustees. Auditors at that time encountered difficulties around the reporting requirements to trustees as specified in trust deeds, as there was often a mismatch between the assurance requested from the trustees and that obtained by the auditor during the audit of the financial statements.
Under Schedule 10 of the FMC regulations, the clauses treated as implied into all trust deeds no longer include a requirement for the auditor to confirm its audit opinion for the benefit of the trustee. Instead, they require the issuer itself to give the supervisor (ie, the trustee) an opportunity to be party to a “specified engagement” for the purpose of the supervisor obtaining assurance of matters relevant to the exercise of performance of the powers of the duties of the supervisor, and to consult with the supervisor on the nature and scope of the specified engagement. (A “specified engagement” is an assurance engagement carried out by an auditor in relation to the issuer’s compliance with the trust deed.)
The New Zealand Auditing and Assurance Standards Board has been made aware, by some of its accountant members, that the wording of the auditing requirements in many trust deeds has yet to be updated to reflect these changes. This has been causing some tension, which appears to have been reinforced by a lack of understanding (and what auditors refer to as an “expectation gap”) by some trustees about the purpose and scope of a statutory audit. For example, a statutory audit cannot be used to confirm compliance with the trust deed. In some instances this has complicated the process of agreeing terms of the specified audit engagement between the auditor and the trustee and required lawyers to become involved. On the auditor’s part, some auditors appear to have continued providing assurance to trustees, based on work performed on the annual financial statements of the issuer, in order to meet the out-of-date requirements of the trust deed.
The NZAuASB raised this issue with the NZLS Commercial and Business Law Committee earlier this year. The committee agreed that the issue should be drawn to the attention of lawyers and firms that advise trustees and prepare deeds, and it has been consulted in the preparation of this article.
Committee member Stephen Layburn comments that, while this is an issue for all entities in the managed investment schemes sector which were required to transition (and become licensed) under the FMC Act, many have experienced a steep learning curve and are now working with their supervisors to develop a better understanding of what the regular/annual compliance and reporting landscape will look like. A number of entities have also gained exemptions, meaning they have had to pay little (or limited) attention to updating their governing documents. As experience under the FMC Act continues to develop, he believes many of the issues around the requirements for assurance will continue to be discussed and resolved in a somewhat more orderly way than the frantic lead up to the 1 December transition date allowed. Supervisors and their lawyers should bring their auditors into these discussions. This will also benefit the auditing profession, as the expectation gaps are bridged and the full range of assurance needs (beyond those for statutory reporting purposes) are appreciated.