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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Liquidation
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.
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