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The Co-operatives Board and the Co-operative’s Auditor 29th October 2007 The management of coco-operative societies Advanced Course organised by APEX

Rolan Micallef Attard Certified Public Accountant & Co-operative Consultant email: rolan@yesitmatters.com web: http://www.yesitmatters.com

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Legislation & Regulation Governing Co-operatives Societies Compliance Matters

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Main Legislation Regulating Co-operative Societies 

1946 – CoCo-operative Societies Ordinance 1978 – CoCo-operative Societies Act



2001 – CoCo-operative Societies Act (Cap.442)



Statute for a European CoCo-operative Society (EU Council Regulation No. 1435/2003)



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Subsidiary Legislation Regulating Co-operative Societies  (L.N. 35 of 1990) – CoCo-operative Societies (Rate of Dividend on Share Capital) Regulations 1990  (L.N. 49 of 2002) - Commencement Notice  (L.N. 108 of 2002) – CoCo-operative Societies (Central Cooperative Fund) Regulations, 2002  (L.N. 115 of 2003) – CoCo-operative Societies (Establishment of Administrative Penalties and Sanctions) Regulations, 2003  (L.N. 116 of 2003) – CoCo-operative Societies (Central Cooperative Fund) (Amendment) Regulations, 2003  (L.N. 198 of 2003) – CoCo-operative Societies (Levying of Fees) Regulations, 2003  (L.N. 338 of 2003) - Notice of bringing into force of the CoCo-operative Societies (Establishment of Administrative Penalties and Sanctions) Sanctions) Regulations, 2003  (L.N. 48 of 2007) – Employee involvement (European CoCo-operative Society) Regulations 4

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Co-operatives Board - Forms 

Application for Registration of a CoCo-operative Society



Notification of changes among officials of the Committee of Management - Form A



Notification of changes among Members of CoCo-operative Society & Annual Members’ Members’ List - Form B 5

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Audited Financial Statements Compliance Co-operative Societies Act (Cap. 442)  International Accounting Standards (IASs & IFRSs)  International Standards on Auditing (IFAC)  Members’ Shares in Co-operative Entities and Similar Instruments (IFRIC2) 

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Handbooks & Legislation

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Taxation and Co-operative Societies Art. 12(1)(q) of The Income Tax Act (Cap.123) states: 



“There shall be exempt from the tax – the income of a coco-operative society” society” Income Tax Return of coco-operative societies needs to be filed with the Inland Revenue Department 8

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Co-operative Societies’ Surplus Surplus Distribution Matters

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Central Co-operative Fund  Art. 91(3) “Every society shall contribute 5% of the surplus resulting from its activities, investments and any other sources at the end of each accounting period to the fund” fund” For the purposes of calculating the 5% CCF contribution: • NO carry forward of deficit to following year is allowed; • NO shifting of surplus or deficit to different years by way of prior prior year adjustment is allowed.

 CoCo-operatives Board vs. KPH arbitration ruling dated 28th January 2002, “..ghall ..ghall--kalkolu taltal-kontribuzzjoni li l­ko­ ko­operativa ghandha tghaddi lilllill-Fond Centrali skond lartiklu 86(3) ta’ ta’ Att ghandu jittiehed in konsiderazzjoni rresidwu nett kollu, kollu, u cioe’ cioe’ mhux biss dak millmill-operat ekonomiku imma anki minn dhul iehor bhal dak minn investimenti” investimenti” 10

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Reserve Fund Art. 90 – Every society shall maintain a reserve fund under the following conditions:  Shall be used exclusively to recover losses  Shall be kept in the form of liquid assets  Minimum transfer; 20% of the annual surplus • The 20% p.a. transfer is required provided that the;  RF < 100% of paid up share capital + 20% of borrowed capital  statute does not make mention to the capping [proviso of Art. 90(1)(3)] 11

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“Net Surplus” in the context of Co-operative societies  Art. 2 – “Net surplus means the remaining portion of the surplus after adequate provision has been made for the Central CoCo-operative Fund and the reserve fund” fund”  Third Schedule (I&E Format) - Net Surplus is NOT the Accumulated Income & Expenditure account  CoCo-operatives Board vs. KPH arbitration ruling dated 28th January 2002 with respect to the meaning of “surplus” surplus” and “net surplus” surplus” 12

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Income & Expenditure Account – from Revenue to Net Surplus Revenue - Cost of Sales

Gross surplus - Distrib. Distrib. costs - Admin. Exps. Exps. + Other income - Other costs - Taxation

Surplus - CCF – 5% - Reserve Fund

= Gross surplus

= Surplus

= Net Surplus 13

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Distribution of the Net Surplus The net surplus of a society may be:

 Art. 92 – Divided among the members by way of dividend currently up to a limit of 5% of the paid up share capital [L.N. 35 of 1990];

 Art. 92 - Divided among the members in any manner authorised by the Act;  Art. 92 - Divided among the members in any manner authorised by the statute; statute;  Art. 92 - Allocated to any other fund of the society to such extent and under under such conditions as may be prescribed by the ACT or by the statute of the society;

 Art. 92(3) - Applied in accordance to the statute of a society or to general or

specific directions determined by a general meeting for any charitable, charitable, educational or other public purpose;  Art. 93 - Distributed by way of patronage refund among its members in proportion proportion to the volume of business or other transactions done by them with the the society;  Art. 94(2) - Distributed by way of bonus certificate and the holder may claim claim payment on a date not earlier than five years from the day when the bonus certificate was issued;  Art. 94(3) - Distributed by way of bonus share and the share may not be withdrawn withdrawn before ten years from the date of its issue unless the holder of the bonus share has ceased to be a member, in which case the share may be claimed up to twelve months after the date when the person had ceased to be member. 14

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From Net Surplus to Accumulated Surplus Account Net Surplus Divided by way of: Dividend Authorised by ACT Authorised by Statute Allocated to: Other Funds

Applied to: Charitable, educational & public purposes Distributed by way of: Patronage Refund Bonus certificates Bonus shares = Accumulated Surplus Account 15

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Dissolution & Liquidation of Co-operative Societies Assets Distribution Matters

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Distribution of Assets on Society’s Winding Up Art. 104 - The assets shall be distributed in the following manner and order:  Cost of liquidation  Discharge of liabilities  Payment of share capital and thereafter if the statute permits: permits:  Dividend up to a maximum as per regulation of the Act (currently 5% of the share capital for any period during which no dividend or patronage refund was in fact paid) paid) or  Patronage Refund for any period during which no dividend or patronage refund was in fact paid

 Art. 105 - Any moneys remaining after the distribution

SHALL NOT be divided among its members but shall be deposited in the CoCo-operative Societies Liquidation Account kept by the Board for five years, which in turn are transferred to the CCF 17

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Liquidating Society’s Assets Assets

Refund share capital

Distribute Patronage refund Distribute dividends

Sell all assets

Liquidation costs

Collect all debts Pay all liabilities

Liquidator

Transfer remaining cash to Co-operative Societies Liquidation Account

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The Auditor of Co-operative Societies Specialisation Matters

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The Co-operative’s Auditor Fundamental ethical principles:  Integrity  Objectivity  Professional competence and due care  Confidentiality  Professional behaviour Other conditions  Auditors must be warrant holders having a practicing certificate to act as auditor  An auditor must hold office at all times  Auditors are appointed at AGM  Disqualification of auditors (A.46) 20

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Audited Financial Statements of Co-operative Societies Presentation Matters

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Audited Financial Statements submission to the Board 

Financial statements must be delivered to the Board within 6 months after the close of each financial year in the following format:format:• 1 complete set of audited financial statements as presented at AGM • 1 set of abridged audited financial statements to be made available for public inspection (optional (optional))



The Board shall make available for public inspection the full set of financial statements in the event that the abridged accounts are not delivered within the stipulated six months 22

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Abridged Financial Statements – Format 

What statements are to be prepared? • Abridged Balance Sheet • Abridged Income & Expenditure Account • Abridged Notes to the accounts



ACT stipulates only one format as regards I&E and Balance Sheet

(Part V of the Third Schedule of the CoCo-operative Societies Act) 23

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Abridged Financial Statements Co-operatives vs. Companies 

Abridged Income & Expenditure Account is a statutory requirement when presenting abridged financial statements of cocooperative societies. (Not a requirement for companies)

(Part V of the Third Schedule of the CoCo-operative Societies Act) 24

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Departure from the prescribed Financial Statements Formats If in the opinion of the Committee of Management there are special reasons to depart from preparing the financial statements in the format prescribed by the Act (i.e. (i.e. Balance Sheet and Income & Expenditure Account), Account), the fact must be disclosed and the reasons explained in the notes to the accounts when the new format is first adopted (Para. 2 of Part I of the Third Schedule of the Act) 25

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The Audit Report of Co-operative Societies  Art. 49 – The audit report must state whether in the auditors’ auditors’ opinion, the financial statements:statements:• have been properly prepared in accordance with the Cooperative Societies ACT • show a true and fair view:view: of the state of affairs of the society as at the end of the accounting period; and  of the income and expenditure of the society for the accounting period.  Art. 48 - Audit reports are to be signed by the auditor or by an audit partner responsible to sign on behalf of the partnership and the name of signing partner to be clearly typed on the face of the 26 auditors’ auditors’ report © 2007 Rolan Micallef Attard & YesItMatters.com

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The Abridged Audit Report of Co-operative Societies Art. 48(1)(b) - The abridged audited financial statements must be accompanied with the full text of the audit report as laid down at the AGM, together with a declaration stating: “Whether in the auditor’ auditor’s opinion the society is entitled to prepare an abridged set of audited financial statements, for public inspection” inspection” Same as for companies

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Qualified Audit Reports of Co-operative Societies Audit qualification – should follow International Standards on Auditing

ISA 701(18) – “When there is a limitation on the

scope of the auditor’ auditor’s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’ auditor’s report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed.” existed.” Same as for companies 28

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The Co-operatives Board’s power to Investigate affairs of Co-operative Societies Investigation Matters

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The Role of the Co-operatives Board & Registrar of Companies Co-operative Societies Act

Companies Act

Art. 3(1) The Board’ Board’s Functions:

Art. 401(1) – The Registrar’ Registrar’s Functions:

 To register, monitor and exercise supervision over coco-operative societies and to ensure compliance with the provisions of the Act;  To support and assist the establishment ofof-cocooperative societies in all sections of the economy and society;  To furnish information regarding coco-operative principles, practices and management.

 To register any document, exercise the powers of investigation, recover penalties, ensure compliance with the provisions of the Act;

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Investigations - Co-operatives Board & Registrar of Companies Co-operative Societies Act

Companies Act

 Art. 13 - The Board may, on its own motion, if it deems that there are reasonable or sufficient grounds to do so hold an inquiry into the working or financial condition of a society

 Art. 404 - The Registrar may investigate the affairs of a company where it appears to him that it is expedient and in the public interest to do so.

 Art. 19 & Art. 100 - The Board considers the interests of the members, creditors and employees of the society.

 Art. 410 - The Registrar considers the interests of the members, and any other person whose financial interests appear to be affected, whether as a creditor, body corporate, or otherwise. 31

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Main duty of the Auditor towards the Co-operative Board shall forthwith inform the Board and the society or any of its officers, of any material irregularity disclosed in the course of the audit

 Art. 49(1) - Auditors

Forthwith = “immediately; at once; without delay” delay” i.e. definitely before the submission of the audit report to the Committee of Management  ISA 320 - “Materiality— Materiality—Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if 32 it is to be useful.” useful.” © 2007 Rolan Micallef Attard & YesItMatters.com

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Disagreement with the Co-operatives Board Expert Matters

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Engage co-operative experts Depending on the case  Seek advise from the experts:  The

legal advisor with coco-operative knowledge  The accountant with coco-operative knowledge  The business consultant with coco-operative knowledge  The tax expert with coco-operative knowledge  The coco-operative consultant

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Building a strong case  Prepare a clear strong case  Quote the relevant legislation, correct sequence of events and all arguments  Send all relevant documentation to the Board, and request a meeting with the Board  Prepare yourself for the meeting with the Board  During the meeting with the Board keep in focus on the topic  Never attend a meeting without your experts 35

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Audit exemptions for small enterprises! Shall Malta adopt the EU recommendations and follow other EU Member states…….? 36

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Web Links 













CoCo-operatives Board • http://www.coopsboard.org http://www.coopsboard.org APEX • http://www.apex.coop http://www.apex.coop SCOOPS • http://www.scoops.org.mt http://www.scoops.org.mt International Cooperative Alliance • http://www.ica.coop http://www.ica.coop Ministry of Education Youth & Employment • http://www.education.org.mt http://www.education.org.mt Ministry for Competitiveness & Communications • http://www.mcmp.gov.mt http://www.mcmp.gov.mt YesItMatters.com • http://www.yesitmatters.com/html/cohttp://www.yesitmatters.com/html/co-operatives.html

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Whilst great care has been taken in the preparation of this presentation presentation material, details may have been omitted which may be directly relevant. Reference Reference to the standards, authoritative material and official pronouncements should should therefore be made, and specific advice sought in respect to any particular matter. matter. No responsibility for loss occasioned to any person or entity acting acting or refraining from action as a result of any occurrence in this material can be accepted accepted by the presenter or any of his associated firms.

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