Records and audit are how the Securities Commission, and ultimately investors, find out whether a trustee or dealer has done what it says. Division 4 of Part III of the Capital Market Act 2015 and Part V of the Securities Commission Act 2015 contain the rules.
Books and returns: section 85
A holder of a capital market licence shall “maintain, or cause to be maintained, in the English language such accounting records and other books as will sufficiently explain the transactions and financial position of its business and enable true and fair profit and loss accounts and balance sheets to be prepared”, in a manner that enables them “to be conveniently and properly audited”, and shall retain them “for a period of not less than seven years”.
Section 2 defines “books” widely to include registers, any record of information, accounts and documents. The firm must also furnish returns in the form the Commission specifies (section 85(4)). Breach carries a fine of up to K5,000,000, or K10,000,000 or ten years’ imprisonment, or both, where the breach is with intent to defraud (section 85(6)). See client money rules.
Appointing an auditor: sections 103 and 104
Subdivision 6 applies to every capital market licence holder, among others (section 103(1)). Notwithstanding the Companies Act 1997, each must appoint an auditor for every financial year (section 103(3)); “auditor” means an approved company auditor under section 190 of that Act, and may not be an associate of the firm. Removing an auditor requires the Commission’s written consent, a resigning auditor must tell the Commission of any circumstances it should know about, and the Commission may itself remove an unsatisfactory auditor (section 103(5)–(7)).
Under section 104 the firm must lodge the auditor’s report with the Commission “within three months after the close of each financial year”, extendable by up to two months for special reasons. Failure to lodge carries up to K10,000,000 or ten years, or both (section 104(3)).
The auditor’s duty to report to the Commission
Where an auditor becomes aware of any matter that “may constitute a breach of this Act or any securities laws”, any irregularity that may materially affect the accounts “including any irregularity that jeopardises or may jeopardise the funds or property of the clients”, losses leaving the firm unable to meet minimum financial requirements, an inability to confirm that clients’ and creditors’ claims are covered by the firm’s assets, an offence in connection with the business, or a breach of exchange or depository rules, “the auditor shall immediately report the matter” to the Commission and, for a participating organisation, to the exchange.
The auditor’s loyalty therefore runs beyond the client to the regulator. An auditor is protected from suit for good-faith statements (section 105(2)), and the Commission may require it to extend the audit or submit further reports at the firm’s expense (section 105(3)–(4)). Section 106 obliges the firm and its officers to give the auditor all information within their knowledge, and not false or misleading information, on pain of up to K10,000,000 or ten years, or both.
Commission-appointed independent auditors
Where a firm fails to lodge its auditor’s report, or the Commission has received a report under section 104 or 105, it may appoint an independent auditor to examine and report on the firm’s books, accounts, records and assets, at the firm’s cost (section 107). Any person who alleges that a licensed firm has failed to account for money or assets held for them may apply for such an appointment (section 108). The independent auditor reports to the Commission and may examine the firm’s officers on oath (sections 109–111). Everyone connected with the firm must produce books and answer questions, with up to K5,000,000 or seven years, or both, for refusal (section 112); section 112(1) refers to “Section 110(c)”, where section 110(1)(c) is meant.
Destroying or falsifying records
Section 113 makes it an offence, with intent to defeat an audit or obstruct an examination, to destroy, conceal or alter books or property of a licensed firm, or to send them out of Papua New Guinea, punishable by up to K10,000,000 or ten years, or both. Once destruction or removal is proved, the accused must prove there was no such intent (section 113(2)). Section 457 separately prohibits entering false or misleading matter in a licence holder’s books or falsifying entries, with the same penalty. Section 452 makes a verified copy of a licence holder’s books prima facie evidence in legal proceedings.
Examination without notice under the Securities Commission Act
Section 67 of the Securities Commission Act allows the Commission to “examine without any prior notice, the books or other documents, accounts and transactions” of a capital market licence holder. Under section 68 the firm and its officers must give the examiner access to all books, documents of title, securities and cash, which the examiner may take into possession; refusal carries up to K5,000,000 or seven years, or both. Section 99 lets the Commission serve a written notice on an auditor to give information or produce books, overriding client confidentiality, with up to K10,000,000 or ten years, or both, and K1,000 for every day of default, and section 100 allows notices to produce books to issuers and parties to securities dealings. See how the Commission investigates.
A licensed trustee’s own accounts are audited under these provisions. Unit holders who suspect a trustee is not accounting for scheme money can ask the Commission under section 108 to appoint an independent auditor. See how to complain.
Sources
- Capital Market Act 2015 — ss 2(1) (“auditor”, “books”), 85, 95(10), 103–113, 452, 457
- Securities Commission Act 2015 — ss 67, 68, 99, 100
- Companies Act 1997 — s 190
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.