Concept of Skepticism in Internal Audit

Significance of Skepticism in Internal Audit
The International Professional Practices Framework (IPPF) includes the Mission Statement, which in turn indicates the role of the internal audit in “enhancing and protecting the corporate value by means of providing assurance, advice and skepticism while taking risks into consideration”.

The risk-based skepticism depends on an important principle entitled the Professional Skepticism.

Definition of the Professional Skepticism
According to the International Standards on Auditing (ISA), “Professional Skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence, and requires ongoing inquiry whether or not the obtained audit information and evidences purport that there are critical observations arising from fraud.” In other terms, it means that the auditor should undertake a professional assessment, with a skeptical mind, of efficiency and suitability of the evidences obtained throughout the term of the audit task. Indeed, the concept of the “Professional Skepticism” enhances the concept of the “Professional Due Diligence” set forth in the International Standards on Auditing (ISA).

Professional Skepticism is necessary for the skeptical assessment of evidences. It includes the skeptical and in-depth scrutinizing of the contradicting and inconsistent evidences, the credibility of documents and the responses to their inquiries. It includes also the consideration of efficiency and appropriateness of evidences obtained in light of the common conditions. As such, the Professional Skepticism explores certain ways through which internal auditors can be more skeptical.

Relationship between the Professional Skepticism and the International Standards
Professional Skepticism is one of the main requirements for conducting audit works. Many international standards have covered it, including for example:

1. The International Standard on Auditing (ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing) emphasized the necessity of planning for and conducting the audit on the basis of the Professional Skepticism throughout the entire phases of the audit process, which include the following:
   
   
   
   • The phase of assessing engagement acceptance;
   
   
   • The phase of performing risk assessment procedures;
   
   
   • The phase of obtaining the audit evidence; and
   
   
   • The phase of evaluating the audit related evidences and work papers.
   
   
   
   


2. The International Standard (IASE3000) regarding the tasks related to the non-financial information, issued by The International Federation of Accountants (IFAC). It is applied to the audit of the internal control, sustainability and compliance with the laws and regulations. The Professional Skepticism requires the auditor to be alert to the following:
   
   
   
   • The audit evidences in contradiction with other obtained evidences.
   
   
   • The information that leads to inquiring about the authenticity of documents and the procedures of response to inquiries, which will be used as audit evidence.
   
   
   • The cases that could indicate a potential fraud.
   
   
   
   

Elements of the Professional Skepticism
The Professional Skepticism comprises three main elements as depicted below:

• The attributes: the qualifications of the auditor, i.e., knowledge, skills, and capabilities.


• The actions: the tools and methodologies adopted by the auditor to undertake the Professional Skepticism; including risk assessment methodology, quality of audit evidences, methodology of analyses and evaluation of information and document, etc.


• The mindset: the auditor’s psychological features which require neutralism, credibility, and independency in the course on undertaking the Professional Skepticism.

Application of the Professional Skepticism
The below exhibit depicts the application levels of the Professional Skepticism and its influence on the quality of audit evidences:



How can the internal auditor be more skeptical?
To be an efficient and skeptical internal auditor is not a coincidence. The internal auditor should consider certain features and habits that should be demonstrated by the internal auditors, and consider also anything that could help him attain success.

Furthermore, the internal auditor should consider the application of all or some of the following suggestions:

Develop your knowledge of the business entity and sector where you operate</strong
The internal auditor should be familiar with the strategic objectives of the business entity as well as the essential change initiatives and the key risks they face, by means of studying the business plans, annual reports, newsletters, briefing notes and other documents.

The internal auditor should be familiar with the market, the activities of the competing companies, the issues raised by the government and regulatory bodies, as well as the influence of technology. They should also visit the relevant websites and social networking sites.

Get to know more people from inside and outside the business entity
The internal auditor should begin with the issues that are most required by the management, and define the positive issues. Audit reports should indicate the successes and the things that go smoothly so that such things can be recognized and recommended to other divisions within the business entity.

They should get better understanding of the risks faced by the executive managers through the internal networks and regular meetings. This should be done in an informal way, especially in terms of the fields and topics that are indicated regularly in the internal audit plan. They should also consider the other formal opportunities like attending the meeting of work teams and training activities, and taking part in change programs. They should work in cooperation with the other assurance parties or seek support or advice from experts from within the business entity.

Be familiar with the new developments in the audit field
The should be aware of the new developments in the audit field not only through the International Professional Practices Framework (IPPF), but also through the guidelines, practical guidance, learning activities, seminars and conferences. The internal auditor should join an audit team that is responsible for certain sector, and keep in touch with other auditors working in the sector. Given the increasingly limited resources, the internal auditor should think in a more critical way of how to get the best results from the assessment process and the continuous professional development with a view to bridge their own gaps in terms of knowledge and development of specialized skills.

Identify a senior manager who is willing to be a mentor and sponsor
The mentor is a person who provides ongoing support, is willing to face the challenges and with whom the internal auditor can share the problems and ideas. It is preferable that such person should have experience in training and guidance, and it is not necessary to be a senior auditor or to be in regular contact with a senior manager. It is preferable to be a person that does not work with the auditor or being audited by them.

Look at situations from a different point of view
The internal auditor should look at situations from a different point of view. They should put themselves in the place of the customer, vendor or regulatory body, think of the expected way of performing the procedures as well as the types of behaviors they are expected to come across. Does the business entity abide by and respect their values?

Find parallel sources
The internal auditor should find a link between what they see and hear during the audit process and compare the same with similar situations. For example, the internal auditor should consider the pros and cons of the methodology followed by the business entity in dealing with the customer complaints, and compare the same with the other business entities they have dealt with (Benchmarking). Professional Skepticism can be obtained from other more irrelevant parallel sources.

Ask more questions
This attitude will help develop a comprehensive understanding of the way and reasons of performing tasks in a certain way. The internal auditor should ask easy and simple (content-free) questions to encourage the individuals to express their view in general and not to compel them to accept his own views. It is very important to literally listen to other individuals. Noteworthy is that the word Audit is derived from the Latin word that means “a person who eavesdrop”.

For the purpose of in-depth survey and research on specific issues, the internal auditor should apply a simple way that he feels satisfied with and that fulfills the requirement. The internal auditor should consider using the method of six useful questions; i.e., what, why, when, how, where and who, or the method of five questions beginning with the word “why” that will assist him in identifying the causes and effects, some of which will be linked to the attitudes and behaviors that form the common culture of that field.

Do not consider things as intuitive or taken for granted
The discussion of the way procedures are performed, and speaking about the risks and problems that face individuals are a good way to get a variety of opinions, but do not accept everything without scrutinization. The internal auditor should concentrate the audit testing to establish an evidence on what happens in reality and in particular with regard to managing the key risks or in case of divergence of views on what is happening and why. Evidences and results of interviews and discussion should be documented to support the recommendations of the audit.

Identify the attitudes and relationships
The internal auditor should use audit software and reporting tools that enable them to undertake the statistical analysis in order to detect the problems that individuals may not be aware of.

This is usually used to identify the gaps or recurrence in records. However, the current availability of huge data and powerful analytics tools provide the ability to explore data and evaluate the results from different points of view to develop new relationships, patterns and links. This area is very technical, but the emergence of huge data enables the internal auditors to develop certain skills and/or work in cooperation with information technology experts to attain the level of skepticism.

Change the way of reporting the message
The internal auditor should critically examine the internal audit reports to ensure that the structure of reports and the used language help convey the message and key opinions.

Are the reports concise, clear and focused on topic? The internal auditor should think of what the readers of the internal audit reports want to know or be familiar with, and what they should do to mitigate the risks.

Capital Markets Authority (CMA): Reminding Companies to submit their Annual Reports

Kuwait Capital Markets Authority issued Circular No. 1 of 2016 dated 5 January 2016 to the Chairmen of Board of Directors, regarding the annual report of the licensed persons. The Circular reads:

“We would like to draw your attention to the provisions of Article 5-7 of Volume XVI of the Executive Regulations of Law No. 7 of 2010 concerning the Establishment of the Capital Markets Authority and the Regulation of the Securities Activity, as amended, which emphasizes that Compliance Officers shall prepare an annual report to the Board of Directors of the licensed persons. The report shall include all actions taken to implement the policies, procedures, internal controls as well as any proposals to enhance the effectiveness and efficiency of such actions. In addition, a copy of such report shall be submitted to the Capital Markets Authority.

Therefore, you should abide by the above mentioned provisions and provide the Offsite Supervision Department at CMA with that report, inclusive of all actions taken throughout the reporting year, latest by 1st of March of each year.”

Differences between Securities and commercial papers as per Kuwait legislations

1. Historical BackgroundMan invented money as the first measure of value and store of wealth; hence money contributed in facilitating trading operations and expanding the volume of trade between dealers both within the same country and among different countries. Money continued to perform as a barter tool till the time it became solely unable to do the same full role, particularly when commercial transactions have a fixed term. Where every trader has kept his/ her money in the vaults till the time to discharge debts when falling due, could hinder the money from investment. In addition to that, the booming trade and expansion have resulted in the traders’ increased feeling of the need to secure the route for their trade from acts of piracy and banditry.Consequently traders felt the necessity to search for a way to achieve their safety in the face of dangers of theft and loss and to unseal tangles in relations between creditors and debtors especially if they are traders. Also to enable them fulfill their obligations without hindering money from investment in addition to executing the forward exchange process between without any concerns.Thus business environment has resulted in the invention of both the securities and commercial paper. Displayed below are the types and uses of both and the difference between them:


2. SecuritiesIt is any instrument – of any legal form – which establishes a share in a marketable finance transaction.
   Securities are classified as per issuance criteria as follows:
   
   
   
   1. Conventional securities
   
   
   2. Islamic Sharia consistent securities
   
   
   3. Islamic Sharia compliant securities
   
   
   
   Securities are divided into four types as follows:
   
   
   
   • shares
   
   
   • Bonds/ Sukuk and other instrument convertible into shares in the company’s capital
   
   
   • Units of funds
   
   
   • Financial derivatives
   
   
   • All marketable public debt instruments that are issued by government and public entities and bodies.
   
   
   
   We set out below each type:
   
   2-1   Shares
   The share is a shareholder’s equity in the company’s capital which gives the right to participate in the General Assembly meetings and in the management of the company through membership on the board. It also gives the right to gain a percentage of the company’s profits and participate in the distribution of assets upon liquidation.
   
   Shares are defined as marketable indivisible Sukuk of equal value and represent the right of the shareholder’s equity as a partner in the issuer company.
   
   Types of shares
   
   
   
   1. Ordinary shares
      These are shares that give equal rights to their owners. As long as the shares are of same class; the rights conferred by these shares are equal. These rights include the right to get an equal proportion of the profits, the right to attend and vote in the company’s general assembly meetings and the right to get an equal proportion of the company’s assets upon liquidation.
   
   
   2. Preference shares
      These are shares that give more rights than the rights granted by the ordinary shares.Such shares enjoy certain privileges in vote rights, profits, realization value or any other rights provided that the shares are of the same nature of equal rights and privileges.The preferred shares are divided into the following types:
      
      
      
      • Redeemable preferred shares: it is the type of preferred shares that can be redeemed either on a specific date or after a specific period of time during the issuer duration.
      
      
      • Irredeemable preferred shares: it is the type of preferred shares that can not be redeemed by the issuer within the period specified in the company’s contract and the value of these shares shall be settled upon issuer liquidation.
      
      
      • Convertible preferred shares: it is the type of preferred shares that gives its holders the right to convert such shares into ordinary shares in the issuer share capital at a subsequent date.
      
      
      • Non-convertible preferred shares: it is the type of preferred shares that does not give its holders the right to convert such shares into ordinary shares in the issuer share capital at a subsequent date.
      
      
      • Participating preferred shares: it is the type of preferred shares that gives its holders the right to participate in earnings surplus along with ordinary shareholders after the distribution of dividends at a specified rate to these shareholders.
      
      
      
      
   
   
   
   2-2   Bonds/ Sukuok
   Bonds is a borrowing process undertaken by shareholding companies through issuing bonds at fixed interest rate and for a defined period of time at the end of which the bonds value shall be paid back.
   
   A bond is a financial instrument entails indebtedness of issuer for the favor of bond holder who will hereby gain periodic distributions during the bond’s period or a payment or more of depreciation settlement or gain both payments which leads upon maturity to discharge of such bond.
   
   Types of bonds:
   
   
   
   • Government bonds: these are bonds issued by the government, ministries or public authorities and institutions, either through direct or indirect issuance or fully secured from the mentioned entities.
   
   
   • Convertible bonds: these are bonds that entitle their holders the right to convert into shares at a subsequent date.
   
   
   • Asset-backed securities: these are bonds have its structure based on key elements, including:
     
     
     
     1. The right of bond holders to recourse (directly or indirectly) against bond assets.
     
     
     2. Isolate bond assets and securitize them in a way to protect them from other creditors’ claims.
     
     
     3. Bondholders reliance on the assets of those bonds as a major source of periodic distributions and repayment of depreciation.
     
     
     4. Bondholders bear the risk of any loss in the value of bond assets.
     
     
     
     
   
   
   
   Sukuk are considered the Sharia-compliant type of bonds. Sukuk or the so-called “Islamic securities” are the process of issuing official documents and financial certificates equal to the value of common share in an ownership, whether it is the benefit, right, a combination of both, a sum of money, or debt, where this ownership is already existed or under establishment, and is issued by virtue of a binding legitimate contract.
   
   Sukuok are documents of equal value which represent common shares in the ownership of properties, benefits, services or assets in a particular project or investment activity.
   
   The types of Sukuk:
   
   
   
   • Governmental Sukuoks: these are Sukuk issued by the government, ministries or public authorities and institutions, whether through direct or indirect issue or fully secured by the mentioned entities.
   
   
   • Convertible Sukuk: the type of Sukuk that give holders the right to convert into shares at a subsequent date.
   
   
   • Sukuk based on assets: Sukuk do not entitle their holder to recourse (directly or indirectly) against the assets of those Sukuk. Holders of asset based Sukuk may recourse against outstanding liability of obligor mainly based on the creditworthiness of the obligor and their ability to repay.
   
   
   • Asset-backed Sukuk: Sukuk have its structure based on key elements, including:
     
     
     
     1. The right of Sukuk holders to recourse (directly or indirectly) against Sukuk assets.
     
     
     2. Isolate Sukuk assets and securitize them in a way to protect them from other creditors’ claims.
     
     
     3. Sukuk holders reliance on the assets of those Sukuk as a major source of periodic distributions and repayment of depreciation.
     
     
     4. Sukuk holders bear the risk of any loss in the value of Sukuk assets.
     
     
     
     
   
   
   
   Sukuk principle is based on participation in “finance” of a project or long or short-term investment, as per sharia rule stating that (Al Ghunm Bil Ghurm) “Risk to Win basis” i.e. participating in the profit and loss, which is equivalent to what is globally known in the trade, finance and corporate filed as stock system. Sukuk itself can be regarded as shares or stocks in an Islamic system, where a corporate is established, the partners are participating in the establishment of this company by offering certain shares to be subscribed by each individual at his/ her desire, then these sukuk are to be offered for public offering to individuals to be bought at their price. The sukuk holder has the right to participate in management, in the capital and in trading and has the right to grant gift and inheritance and all terms related to financial transactions.
   
   There are many various types of sukuk, which vary depending on its objective, and these types include:
   
   
   
   1. Investment sukuk is securities indicates the right to own the project, which is financed from the funds of these sukuk, and sukuk holder is entitled to an agreed proportion of the project’s profits, according to the profit and loss achieved.
   
   
   2. Mudharaba Sukuk which are used by the Mudhareb to use funds of these sukuk in financing a project. Mudhareb is the manager and in charge of such project in his capacity as – speculator – in return for getting certain share of the project’s profits. That is to say the Mudhareb gets a value and proportion greater than the other sukuk holders because the Mudhareb works as the project manager in addition to funding the project, and no loss charged.
   
   
   3. Istisna’a sukuk are instruments issued by the government or some companies that wishes to finance large projects in the country, as infrastructure projects.
   
   
   4. Murabaha instrument bears the same value of the purpose for which it was purchased in a project and profit is entitled to sukuk holder to buy and sell equipment at Murabaha transaction.
   
   
   5. Musharaka instrument which is closest type to the principle of stocks, and is issued by the project sponsors and agents.
   
   
   6. Ijara instrument which relates to leased properties where the profit is from renting properties related to these instruments.
   
   
   7. Trade instrument, the same so-called “financial sukuk (instruments)” which are requested by the government from financial institutions such as banks to issue these sukuk (instruments) to be used in the purchase of materials at a determined Murabaha rate.
   
   
   8. There are several other types of sukuk (instruments) that we do not have room to explain, including salam instrument, benefits instrument, Muzara’a (farming) instrument, Mugharasa instrument, Musaqat (irrigation) instrument, services instrument and many other types of instruments.
   
   
   
   2-3   Units of investment funds
   Investment funds are considered investment instruments that grant individuals – who do not have the ability to directly manage their investments – the opportunity to participate in the financial global or local markets. The concept of investment funds represents simply a large number of investors are combining their resources and managing it by specialized financial institutions to achieve the benefits that cannot be achieved individually. Investment managers have the experience which ensures the achievement of higher returns compared to returns that could be achieved if the investor solely has run their own funds especially in markets they little information about. In addition, consolidating the funds in one investment fund will lead to reducing the investors’ administrative burden, as well as reducing the risks to which the individual investor may be exposed in the financial markets.
   
   Investment Fund is an independent commercial entity managed by the fund manager and is divided into units. Each unit holder is treated as a shareholder stock in companies within permitted by the articles of association of the Fund.
   
   Investment funds are diversified into several types as per marketability of units issued by such funds. This type is also divided into two types. There are a closed investment funds, which indicates that a limited number of individuals have established these funds and it belongs to a certain category of investors. In addition we have open-ended investment funds where it can accept any individual wishes to invest with entry and exit at any time. Also there is another type of investment funds which are formed on an ad hoc basis which consist of money market funds in addition to ordinary equity funds and bond funds, balanced funds, which are also known as diversified funds. Further specialized investment funds, which includes certain industries of the banks sector or chemical industries etc. There is another type of investment funds, which are defined by objective and the last type is Islamic investment funds.
   
   The following is a review of classification of investment funds:
   
   Investment funds by marketability of units
   Investment funds by marketability of units issued are included into two forms:
   
   
   
   1. Closed-ended investment funds:
      It is a fund with a defined capital and its units may not be redeemed until the end of Fund duration. The fund’s capital may increased or reduced as determined by its articles of association.
   
   
   2. Open-ended investment funds
      It is a fund with a variable capital that may be increased by issuing new investment units or may be reduced by redeeming some of its units during the period specified within its articles of association.
   
   
   
   Investment funds by offering
   Investment funds by offering are classified into two categories:
   
   
   
   1. Public offering funds
   
   
   2. Private placement funds
   
   
   
   Investment funds by nature of its activity
   
   Investment funds by its nature of activity
   Following types of funds are classifies in this category:
   
   
   
   1. Monetary instruments funds
   
   
   2. Equity Funds
   
   
   3. Debt instruments funds
   
   
   4. Private equity funds
   
   
   5. Real estate funds
   
   
   6. Holding fund
   
   
   
   Investment funds by their objectives
   Following funds are classifies in this category:
   
   
   
   1. Aggressive Growth Funds
   
   
   2. Growth Funds
   
   
   3. Growth and Income Funds
   
   
   4. Income Funds
   
   
   5. Global Funds
   
   
   6. Tax – Managed Funds
   
   
   7. Dual Objective Funds
   
   
   
   Islamic investment funds
   The most important merit that distinguishes Islamic investment funds from other investment funds is directing its resources towards investments that are in line with the idea of Islamic investment. Furthermore, Islamic investment funds is not just a financial intermediary as is the case in investment funds established by the conventional banks, investment companies and insurance companies, but these funds, in addition, are adopting Islamic investment approach that blends between capital and work. Islamic investment funds represent a speculative venture (Mudharabah company contract) between the Fund’s management that will perform works only and the Fund’s subscribers who represent employers gaining (investment units) which represent a common share in the Fund’s capital. The management shall invest in a variety of different and diversified projects as well as investment in securities of firms that are in compliance with idea of Islamic investment.
   
   2-4   Financial Derivatives
   Financial derivatives are financial instruments that derive their value from the performance of a real asset or financial asset or the performance of a market index. Real assets include: international commodity (such as gold, oil, metals, wheat, rice, etc.. While financial assets include securities such as shares and bonds. Financial derivatives help transfer the financial risks among the contracting parties across regulated or parallel financial markets. The value of derivative instrument depends on the asset price or indicators subject of the contract. Unlike debt instruments, there is nothing to be paid in advance to be recovered and there is no accrued return on investment. Financial derivatives are used for a number of purposes, including risk management, hedging against risks, arbitrage between markets and also for the purposes of pure speculation.
   
   The most common forms of derivatives are:
   
   
   
   1. Options
   
   
   2. Futures
   
   
   3. Forwards
   
   
   
   


3. Commercial PapersCommercial papers are used for commercial transactions as a substitute for money to facilitate transactions between traders. Commercial papers are easily created and transferred. They are unconditional instruments including specific data prescribed under law. Through commercial papers, a person called the “debtor” undertakes to pay a certain amount of money to a person called “the creditor” or to another person called the “beneficiary”.Financial papers includes four types, namely: check, bill, trust receipt, promissory note and debt declaration; all of which are commercial papers and are considered methods for guaranteeing and protecting the rights. These are most common in people’s daily transactions. In practice, it has been established to accept these papers as tools to settle debt, like money. Through these papers, the creditor can secure his rights and money with others.
   Commercial papers include five main types as follows:
   
   
   
   • Bank check
   
   
   • Bill
   
   
   • Promissory note / bond to the order of
   
   
   • Trust receipt
   
   
   • Debt declaration
   
   
   • Documentary credits
   
   
   • Remittances
   
   
   • Tools handled among banks exclusively
   
   
   • Insurance policies
   
   
   • Rights from pension funds to beneficiaries
   
   
   
   3-1   Bank Check
   Check is a commercial paper written as per the data stipulated under. The check is an unconditional order from the “drawer” to the drawee” or to bearer. The check is payable on sight.
   
   Kuwaiti Commercial Companies Law allows the release of check amount on sight even if the date written on the check has not come yet. A check must be withdrawn to a bank and the amount must be available on the account in bank at the time of issuing the check otherwise it is considered a crime of issuing a check against no balance.
   
   The penalty of check against no balance has become a misdemeanor under law No. 84 issued in 2003. However, the legislators give the check a legal protection. Legislators consider that just signature on the check even without balance available at the drawee’s bank shall deem it as legal check regardless of the drawer’s intention. Thus the check was and is still a tool of payment like cash in commercial transactions
   
   3-2   Bills
   The bill is the oldest types of financial securities. It is a commercial paper that include a written unconditional order with specific date issued by the drawer (the bill issuer) by which another party (drawee) undertakes to pay a certain amount of money to a third party (beneficiary) on sight. The transaction parties of a bill may be two or three parties.
   
   3-3   Promissory Note
   The promissory note is a type of financial papers. It is an unconditional instrument issued as per the information stipulated under law by the drawer (the issuer) to pay to another party (drawee) a certain amount of money. The transaction parties of promissory note are two only.
   
   3-4   Trust Receipt
   Trust Receipt is a commercial paper in transactions. Law considers trust receipt as a deposit contract where the amount mentioned in the receipt is handed over to the debtor by way of deposit or trust. The debtor shall pay the amount to its owner on demand or at the date specified in the receipt.
   
   Trust receipt is also subject to Kuwaiti Penal Law like checks. Accordingly, in case of default of the trust receipt value, the perpetrator is considered to have committed a dishonesty crime like the crime of issuing a check against no balance. Article 240 of the Penal Law stipulates that:
   
   « A punishment of imprisonment for a term not exceeding three years and a fine not exceeding three thousand rupees, or both shall be imposed on anyone who acquires money owned by others, based on deposit, rent, mortgage, agency or anyone else providing account for this use, or based on a legal provision or a court order, that takes over that money for himself or disposes it off for his own interest or intentionally spoils that money»
   
   At maturity date, if the debtor or the nominee has not paid back the amount, he shall be considered dishonest and shall be punished as honesty violator.
   
   3-5   Debt Declaration
   Debt declaration is a commercial paper for commercial transactions. Debt declaration is a formal undertaking of payment issued by a competent employee at the Ministry of Justice at the request of the debtor and his acceptance of the debt. All necessary information shall be included such as the name of creditor, the amount and date of payment. In most cases, all debt declarations are concluded with a writ of execution. As such, if the debtor does not repay at maturity, the creditor does not needs to have a judgment from the court, but can get all executive actions against the debtor such as travel ban and seizure on bank accounts, cars and movables. However, no arrest and imprisonment of the debtor can be executed as such actions are only taken after issuing a legal judgment.
   
   Legal proceedings to be taken by the creditor for judicial collection of commercial papers
   In case of debtor’s default to repay the aforesaid commercial papers, the beneficiary shall have the right to resort to court to get its rights established by check, bill of exchange, promissory note or the trust receipt by issuing payment order by the court against the debtor in accordance with Article 166 of the Procedure Law which has taken into account simplifying the procedures and quick decision on payment order to protect the rights. It stipulated:
   
   «The debt shall be an amount of money such as a loan or a check or a bill of exchange, and to be of certain amount, matured and established by an official or customary paper signed by the debtor».
   
   In case of meeting all the above conditions, a payment order is issued against the debtor.
   
   Debtor grievance against the payment order
   Law has given the debtor, against whom a payment order has been issued, the right to challenge the order through the grievance or appeal if grievance timings overdue. The debtor’s submits its grievance within ten days from the date of notifying the debtor with the issue of the payment order. The appeal shall be submitted within 40 days of notifying of the payment order because grievance period is ten days plus thirty more days for appeal. During that period, the debtor may file a grievance against the payment order.


4. The difference between the financial securities and commercial papersThe differences between financial securities and commercial paper are as follows:
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

   S.	Description	Financial securities	Commercial papers
   1.	Issuer	Financial securities are issued in bulks by government bodies, institutions and are traded by organizations and people.	Commercial papers are issued when necessary by institutions / persons for the benefit of institutions / persons
   2.	Conditional or not	Financial securities may be conditional	Commercial papers are unconditional otherwise, they loses their characteristics as commercial papers
   3.	Issue objectives	They are either to invest in the company’s capital or its financing, in the form of a loan, to meet the company’s financing needs	These are instruments issued for settlement of a specific commitment as a result of commercial trading; such as payment of the price of goods or services
   4.	Issue value	Equal in value at each issue	The value varies at each issue
   5.	Trading markets	Negotiable and traded in markets	Non-negotiable, with no markets to be traded in.
   6.	Term	These represent a short, medium and long term investment tools.	Short-term (from one day to 270 days)
   7.	Interest bearing	Financial securities do not bear interest but are subject to the performance of the securities and the terms of the maturity.	The debtor and creditor may agree for charging interest for the term on the commercial paper
   8.	Discount at banks	Non-discountable at banks	Discountable at banks
   9.	Use for debt settlement	Financial securities are not acceptable as a method for debt settlement because they are vulnerable to price fluctuations.	Acceptable as a method for debt settlement because of their value stability.
   10.	Recoverability	The buyer of a financial security does not guarantee the financial solvency of the issuer for recovery of the same value.	The issuer of a commercial paper guarantees settlement of the amount at maturity otherwise prevented by the issuer bankruptcy.
   11.	Validity	Financial securities are valid unless invalidated by law.	The rights under commercial paper are subject to prescription after a relatively long period, (for example five years) determined by the legislative system in each country.

   
   

CMA Decision 72 of 2015 regarding issuance of Executive Regulations ofLaw 7 of 2010

Issuance of Regulations

Capital Markets Authority (CMA) has issued new Executive Regulations of the law establishing the Capital Markets Authority. The new Executive Regulations were published in a special edition number (1261) of the Al Kuwait Al Yawm official gazette issued on 10/11/2015, coinciding with the enforcement of Law No. 22 of 2015 amending certain provisions of Law No. 7 of 2010 on the establishment of Capital Markets Authority and Regulation of the Securities Activity. The new Executive Regulations were issued in 16 volumes comprising 1665 articles.

Enforcement of Regulations

The Executive Regulations shall come into force commencing the date of issuance on 10/11/2015, thus all the rules and instructions issued by CMA in the past would be nullified after they have been reviewed and included in the new regulations. The new Regulations shall comprise all amendments and updates that CMA may issue in the future, thereby reference to these provisions shall be integrated into one source and become easy to handle with consistency established.

Transitional provisions for the application of Regulations

The CMA has taken into account the transitional periods required by the concerned persons targeted by the provisions of the Regulations either with respect to any new requirements or additional obligations that were not set forth in the previous instructions and resolutions. Regulations have granted appropriate grace period extending to more than a year to meet these requirements and obligations. The CMA corporate governance rules shall apply as from 30 June 2016 as scheduled.

Resolution to issue Regulations

CMA has been keen to include several details - regarding resolutions that were nullified - in the resolution No. 72 of 2015, where the resolution included the following:-

• Appendix No. (1): resolutions and instructions of CMA and the CMA Board of Commissioners which have been nullified.


• Appendix No. (2): The Kuwait Stock Exchange resolutions that were nullified.


• Appendix No. (3): Concerning transitional provisions, which are 44 articles comprise spread in overall volumes of the Regulations and those provisions setup the roadmap with regard to privatization of the stock exchange and requirements upgrade the work of clearing company. Those provisions clarify as well periods of regularization for companies licensed by CMA to meet the new requirements.


• Transitional provisions have stated to allow the activity of the market maker for a maximum period of one year from issuance of the Executive Bylaws. Transitional provisions have obligated the stock exchange and clearing agency to fulfil all the necessary requirements for this activity within one year from the issuance of Regulations.

The most important dates by which the Regulations shall become effective

The following are the earliest dates by which the requirements of Regulations shall be applied:

1. Clause 35 of appendix No. 3: Rules of competence and integrity shall apply immediately and directly on the persons who apply for registration or nomination for positions with due registration after the issuance of this bylaws i.e. on 09/11/2015


2. Clause 40 of the Volume 11: The provisions of articles (9-13), (9-14) and (9-15) shall apply on pledge contracts concluded after the issuance of regulations i.e. on 09/11/2015


3. Clause 39 of the Volume 9: Mergers and acquisitions: Periods stipulated in Article (3-6) are calculated for the buying and selling rate allowed for the controller of the listed company effective 01/01/2016


4. Clause 43 of the Volume 13: Collective Investment Systems: The monthly information form contained in Appendix 5 of the volume 12 shall come into force on 01/01/2016

Business Tax Bill in Kuwait Moves at Faster Pace

Tax application in Kuwait is renewed issue that emerges on the surface from time to time. The reasons for its emergence always come to light when talking about diversification of the non-oil sources of income. Recently there has been serious debate about this issue when global oil prices dropped by about 60%, where price per barrel was above $100, to slip to about $42 currently

The problem lies in that such decline is not accidental. Yet, it occurred to continue for a long time, and as per the global expert reports, may only reverse back to normal within the next decade.

In line with this fact, the annual budgets of oil countries, including the State of Kuwait, will be vulnerable to deficit in revenues, which finance the state operating expenses, in addition to funding the state development plan.

Financing Budget Deficit

To bridge the deficit in the sources of financing the state budget, governments often resort to several alternatives. These are:

1. Reducing items of state public expenditure.


2. Reconsidering the government subsidy system, especially in relation to energy subsidy.


3. Regulating the development projects, and focusing on the profitable projects.


4. Privatizing the government entities.


5. Imposing tax on companies.


6. Imposing tax on individuals.


7. Government borrowing.

10% Proposed Business Tax

A study conducted by the International Monetary Fund (IMF), upon the request of the Ministry of Finance, proposed an annual percentage on the business profit that is acceptable and tolerable by the business circles, to be imposed on all companies, with no exception, thus achieving justice to the categories subject thereto.`

Cancelation of all Currently Applicable Taxes

Upon enforcement of the business tax law, all types of currently imposed taxes will be canceled. These are:
15% income tax on foreign companies;
2.5% Manpower support tax;
1% Zakat, and
1% contribution to Kuwait Foundation for the Advancement of Science (KFAS)

Economic Features of the Proposed Tax Bill

1. Achieves justice in local application by subjecting all local companies to the tax.


2. Achieves justice between local and foreign companies operating in Kuwait through equal treatment.


3. Will attract foreign investment to Kuwait, where the tax rate is the least in the Gulf region, yet and localize such investment.

Generally speaking, the creation of an inclusive and fair tax system in the State of Kuwait is based on a developmental perspective, considers the requirements of globalization and open-door policy, accommodates new trends in this respect, and achieves the objectives of the developmental plans, provided that such tax system will be carefully studied, realizes the economic implications. It should also consider the impact on the state’s need to provide additional sources of income, enabling it to extend distinct public services.

IMF Team Presents the Bill to the Competent Authorities

According to the Cabinet Resolution assigning the Minister of Finance to commence implementation and preparation of studies necessary to create business tax, IMF mission concerned with the preparation of a study on the business tax bill met several entities meant with the economic affairs, during the period 10-15 September 2015. Those include: Kuwait Chamber of Commerce and Industry, and Financial and Economic Affairs Committee of the Parliament.

Business Tax Bill to Provide a Non-Oil Income of Nearly KD 1b a Year

The business tax bill aims at raising the degree of justice in the imposition of tax on business profit. The business tax may generate additional revenue of up to KD 1b a year. Although slight, compared to the total state budget, this stream of income is significant in inducing the tax system to perform its role within the framework of the overall state financial policy.

Tax Enforcement

IMF report suggests 1^st April 2016 as the date when the business tax shall come into force. This means that the business tax shall apply to the profits generated in the state fiscal year commencing 1st April 2016.

A Set of Core Changes to the Application of FATCA

The governments of the State of Kuwait and the USA, on 29 April 2015, signed agreement on improving international tax compliance and application of the Foreign Accounts Tax Compliance Act (FATCA). The agreement stipulates that all financial institutions operating in the State of Kuwait shall comply with the requirements of the report issued by the US Internal Revenue Service, and the reporting according to FATCA. Under the agreement, all financial institutions in Kuwait shall exert due diligence by reviewing and identifying the financial accounts that belong to US persons. Following this, they shall transmit the information relating to those accounts to the Ministry of Finance (MoF) in the State of Kuwait, who, in turn, shall transmit the same information to the US IRS.

As the government of the State of Kuwait signed this agreement, Ministerial Resolution No. 48 of 2015 was issued regarding the provisional guidelines to implement the requirements of FATCA in the State of Kuwait. The Resolution was published in the Official Gazette on Sunday, 13 September 2015.

Hisham Sorour, Managing Partner of Baker Tilly, stated that as the Resolution contained obligatory details, Baker Tilly Audit, Tax and Consulting, conducted analysis of the Ministerial Resolution to highlight the new features and timelines contained therein, so as to facilitate follow-up of the resolution by the concerned persons.

The new feature in the Resolution is that the Ministry of Finance, in collaboration with the regulators in the State of Kuwait, shall take over supervision and collection of information on the compliance with FATCA according to the relevant agreement, instead of direct reporting by the financial institution to IRS. The aim is to standardize the compliance requirements at all financial institutions, whereby variance between such institutions in fulfilling the FATCA requirements can be avoided, eventually maintaining the financial reputation of the institutions, in particular, and the financial reputation of the State of Kuwait, in general, at a global level.

Regular Reports and Certificates by Accredited Audit Firms
The Ministerial Resolution, in Article 2 thereof, stipulates that the financial institutions subject to FATCA scope of application shall issue two types of reporting, which should be approved by an audit firm accredited by the Coordinating Committee for Concluding the FATCA Inter-Governmental Agreement (IGA). These are: financial institution rating accreditation certificate according to FATCA agreement, and the approval of the report issued by IRS from the technical perspective according to FATCA requirements. Also, an annual certificate, or as requested, shall be submitted on the financial institution’s compliance with FATCA requirements and the proper monitoring by an audit firm accredited by the Coordinating Committee for Concluding the IGA.

The Ministerial Resolution covers a set of core changes, representing preparedness to implement MoF’s reporting mechanism, instead of sending the reports to IRS, and compliance with the minimum information received under the Know Your Customer “KYC” document (individuals) in each financial institution. MoF will advise all financial institutions of the reporting guidelines and transmission mechanism.

31 December 2015 Deadline for Meeting IGA Requirements
Article 3 of the Resolution stipulates a number of deadlines to be met by the financial institutions. These cover 4 actions: amending the individual and corporate account opening procedures, and registration with IRS. Such obligations commenced 1 July 2014 and the deadline was 30 June 2015. In the event of failure by the financial institution to meet such deadlines, they shall instantly fulfill all obligations preceding 31 December 2015, in all cases.

$250,000 for Corporate, $50,000 for Individuals
Article 2 of the Resolution species the amounts to be reviewed in the US entities operating in the State of Kuwait, having one or more accounts, totaling over $250,000, or equivalent in other currencies, as of 30 June 2014. For individuals subject to FATCA, having one or more accounts, totaling $50,000 – $1,000,000, or equivalent in other currencies, as of 30 June 2014. Review shall be completed no later than 30 June 2016.

Tightening Required Customer Information
Article 4 of the Resolution states the minimum information on customers that financial institutions must obtain when opening new accounts or updating their information.
In the event of corporate accounts, the Resolution requires using Attachment 5 of the Resolution, i.e. FATCA Self Certification, and independent document among the procedures applied to identify all customers when opening the account and/or updating information.

In the event of individual accounts, the Resolution refers to Attachment 3, representing the minimum information received among the “KYC” document, and Attachment 4 if there are positive indications to subjection to FATCA.

Obligation by End of September 2015
Article 4 of the Resolution obliges the financial institution to identify an employee, and a substitute to ensure implementation of all FATCA requirements in the financial institution, and notifying MoF, with an official letter, no later than 30 September 2015, as well as notifying the supervising regulator.

Banking Secrecy
While the general legal principle, stipulating localization of laws, the US imposed FATCA as the first global act that aims at combating tax evasion, and to enhance tax transparency, making financial secrecy, in general, and banking secrecy, in particular, an obligation that does not conflict with tax transparency, thus classifying tax evasion as a crime to be combated by all global parties.

It is worth mentioning that FATCA is a set of policies and procedures circulated by IRS, especially designed to mitigate tax evasion by US persons. The application of FATCA obliges financial institutions, i.e. banks, investment companies, trustees, securities custodians, mutual funds, credit companies, insurance and re-insurance companies, at local or global levels, to comply with those policies and procedures issued by IRS. Otherwise, they will sustain financial losses and local penalties that may affect their local business, even if they have not US customers or dealings with the US.

Baker Tilly Team and Services
In this context, Baker Tilly Kuwait has formed a global team, including tax consultants from Baker Tilly International Network in the US, to provide consulting, audit and training services to financial institutions operating in the State of Kuwait.

The International Accounting Standards Board (IASB) publishedConceptual Framework Exposure Draft

On 28 May 2015 the International Accounting Standards Board (IASB) published for public comment an Exposure Draft proposing a revised Conceptual Framework for Financial Reporting. The proposals aim to improve financial reporting by providing a more complete, clearer and updated set of concepts that can be used by:

1. the IASB when it develops International Financial Reporting Standards (IFRS); and


2. others to help them understand and apply those Standards.

This Exposure Draft:

1. is more complete than the existing Conceptual Framework because it addresses the following areas that are either not covered, or not covered in enough detail, in the existing Conceptual Framework:
   
   
   
   1. measurement;
   
   
   2. financial performance (including the use of other comprehensive income);
   
   
   3. presentation and disclosure;
   
   
   4. derecognition; and
   
   
   5. the reporting entity.


2. clarifies some aspects of the existing Conceptual Framework. For example, this Exposure Draft:
   
   
   
   1. clarifies that the information needed to meet the objective of financial reporting includes information that can be used to help assess management’s stewardship of the entity’s resources;
   
   
   2. explains the roles of prudence and substance over form in financial reporting;
   
   
   3. clarifies that a high level of measurement uncertainty can make financial information less relevant;
   
   
   4. clarifies that important decisions on, for example, recognition and measurement, are driven by considering the nature of the resulting information about both financial performance and financial position; and
   
   
   5. provides clearer definitions of assets and liabilities and more extensive guidance to support those definitions.


3. updates the parts of the existing Conceptual Framework that are out of date. For example, this Exposure Draft clarifies the role of probability in the definitions of assets and liabilities.

Comment letters

The IASB is seeking comments on this Exposure Draft by 26 October 2015.