Financial Reporting Requirements in the Cayman Islands

The Cayman Islands presents minimal substantive requirements for financial reporting, accounting and record keeping other than regulated entities this represents one of its appeals as an offshore domicile for an entity undertaking any type of business. The following information will discuss the key points regarding accounting, financial reporting and auditing in the Cayman Islands

Unregulated Entities

The Companies Law (2007 Revision) addresses the subject of accounting records, financial statements, auditing and filing requirements in general for Cayman Islands companies. The law is brief in its discussion and states only that Cayman Islands companies must maintain "proper books of accounts." It makes no mention of specific accounting requirements nor does it mandate any recognized generally accepted accounting principles ("GAAP") to be used.

The law states, however, that proper books of accounts shall not be deemed to be kept, "...if there are not kept such books as are necessary to give a true and fair view of the state of the company's affairs and to explain its transactions." Additionally, there are no statutory requirements for filing of financial information with any government body. The Companies Law (2007 Revision) makes no requirement that financial statements should be audited but states that the accounts may be audited. The preparation of financial statements and any specifics of the method of preparation, as well as the auditing there of, is generally embodied in the Articles of Association of the Company.

For Trust arrangements, there are no statutory accounting and reporting requirements. However, Case Law requires trustees to maintain records of trust property and the preparation of accounts is generally a requirement built into the Trust Deed. Auditing of the accounts may be required in the trust deed but it is not a statutory requirement.

Partnerships must maintain books and records at the partnership's place of business and each partner must have access to the books and records pursuant to the Partnership Law. The partners however may agree otherwise. For exempted limited partnerships, each limited partner may demand to be presented the financial condition of the partnership from the general partner. There is no express requirement in the law for the exempted limited partnership to prepare financial statements. However, the general partner is required to produce the financial condition of the partnership upon demand of limited partners and prudent commercial practices would seem to compel maintenance of accounting records. The laws do not require or even suggest specific accounting practices or principles and does not require that the accounts, if prepared, be audited.

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Regulated Entities

As discussed above, Cayman Islands entities, in general, have no statutory financial reporting requirements. However, there are reporting requirements for regulated companies of the Cayman Islands. These companies are regulated due to the nature of the business they undertake and such regulation is stipulated in laws specific to the type of business. These entities include Mutual Funds, Insurance Companies, Banks, Trust Companies, Mutual Fund Administrators and Company Management firms. The laws specific to these entities stipulate that entities undertaking these types of business (formally defined in the law) from the Cayman Islands must possess a licence. Under the laws, as a condition of maintaining their licence, the directors must file audited financial statements for the company's year-end with the Cayman Islands Monetary Authority (the "Authority or CIMA"). The Laws grant the Authority the power to regulate and supervise these entities as a designate of the Governor.

Banks and Trust Companies

Any company making application for a licence under the Banks and Trust Companies law must file a pro-forma balance sheet and income statement with the Authority. Once approved, licencees must file audited financial statements with the authority within three months of the end of their fiscal year. A qualified audit firm approved in advance by the authority must audit these financial statements. Approval of the audit firm is granted at the time of the granting of the licence and is generally limited to international firms. Licencees not incorporated in the Cayman Islands (branches) are required to file audited financial statements for the parent company and are required to be filed within three months of the parent's fiscal year end.

Extensions of time for filing the audited financial statements can be granted in certain limited circumstances and will require the filing of unaudited accounts at the time application is made for the extension. The request must be made prior to the statutory deadline. Changes in auditors must be communicated to the Authority, who have the power to seek explanation for the change and also the power to prohibit the change. Banks and Trust Companies incorporated under the Companies Law (2004 Revision) and branches with a physical presence in the islands must file quarterly unaudited financial information with the Authority within 21 days of the quarter year end. This information represents condensed financial information in prescribed forms (form BS and Related Schedules).

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Insurance Companies

The Insurance Law requires licenced insurance companies to maintain complete financial records in the Cayman Islands unless the Governor approves another location. The law further requires that licencees file audited financial statements with the authority within six months of their fiscal year end. As with banks, limited extensions of time to file may be granted in limited circumstances.

Such petitions must be accompanied by unaudited management accounts and legitimate reasons for the extension must be given. Insurance company licencees must also file a Certificate of Compliance signed by the independent auditor, a licenced insurance manager or such other person as the Governor may approve. The Certificate of Compliance confirms that the business undertaken is in accordance with information given in the licencee's application.

Mutual Funds

Mutual Funds, regulated under the Mutual Funds Law, must file audited financial statements with the Authority within six months of their fiscal year end. The Mutual Funds Law stipulates no accounting principles and does not require that the financial records of the Mutual Fund be maintained in the Cayman Islands. Generally the books and records are maintained in the Cayman Islands if the Mutual Fund utilizes a licenced Grand Cayman mutual fund administrator. Limited extensions of time to file are granted by the Authority upon application and for good reason and with presentation of unaudited management accounts.

Special Reporting

The Authority, under its powers granted as regulator under respective law, may also require special reporting by regulated entities including the commissioning of external auditors to conduct mid-year audits, limited reviews or internal control reviews. These powers are invoked during infrequent circumstances where the Authority feels it is in the depositors, policyholders' or shareholders' best interests. The Authority may also perform their own on-site inspections, as they deem appropriate. These on-site inspections are generally limited to a review of the policies, procedures and practices of the institution for compliance with relevant law, including the Proceeds of Criminal Conduct Law.

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The winding up of a Cayman Islands company, regardless of its industry, also requires limited financial reporting.

Pursuant to the Companies Law (2007 Revision), in a voluntary winding up, the liquidator is required to file a final account and final report with the Registrar of Companies. The final account and report sets out the assets taken over by the liquidator and disposition of those assets to creditors and shareholders. The Final Account and Report is approved by the shareholders in the final general meeting representing the culmination of the liquidation.

In an involuntary winding up, the liquidator must file accounts with the Courts as the winding up progresses at a frequency and level of detail as instructed by the Court. Although the Companies Law (2007 Revision) does not dictate the need for an audit prior to culmination of a liquidation; the authority may make such a mandate in the case of the liquidation of a regulated entity.

Cayman Islands GAAP or GAAS?

The Cayman Islands has not developed its own distinct GAAP nor generally accepted auditing standards ("GAAS"). There is no standard setting body over the accounting profession. The preponderance of the financial statements prepared in the Cayman Islands are prepared under GAAP in the United States, Canada, United Kingdom or International Accounting Standards.

The overriding determinant for the GAAP are the users of the financial statements. The GAAP most understood and useful to the readers of the financial statements should dictate the GAAP used.

The Authority, as regulator discussed above, accepts financial statements prepared under all GAAP's depending on the location and purpose of the entity. The overriding requirement to the regulators is that the financial statements are in English (the entity may also prepare accounts in another language for other users) include adequate disclosure for them to understand the presentation and underlying transactions and that they are not misleading. These are the overriding criteria for the most meaningful GAAP's and for an unqualified opinion from auditors. Intuitively, the GAAS used for Cayman Islands entities matches the GAAP.

There is no requirement that a regulated entity obtain an unqualified audit report on its financial statements. Qualifications in audit reports are not uncommon, especially for insurance companies. The authority may require additional information from management to understand the nature of the qualification and its effects on the entities' ability to undertake its business. There is no statutory or regulatory requirement that the director(s) sign the balance sheet nor that the audited accounts include a management discussion and analysis or director's certification page.

The accounting profession in the Cayman Islands is represented by the Cayman Islands Society of Professional Accountants ("CISPA") which body is recognized by statute.

Situation and Currency of Accounting Records

As discussed above, with the exception of Insurance Companies, there are no statutory requirements for accounting records to be maintained in the Cayman Islands. There are commercial reasons for doing so where the time zone of the Cayman Islands produces certain advantages. This has been useful for some Mutual Funds domiciled in Grand Cayman. There are no requirements for accounts to be maintained in a specific currency in the Cayman Islands or elsewhere.

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Retention of Financial Records

The Cayman Islands have no express statute on the retention of financial records. Prudent commercial practices should dictate the way financial records are held and a policy should be established and applied consistently. Regulated entities should maintain records to fulfill the needs of their auditors and stakeholders.