The Cayman Islands presents minimal substantive requirements for financial reporting, accounting and record keeping other than regulated entities and that represents one of its appeals as an offshore domicile for an entity undertaking any type of business. The following will discuss the key points regarding accounting, financial reporting and auditing in the Cayman Islands.
The Companies Law 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. The Law states only that Cayman companies must maintain "proper books of account." 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 account 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 Law makes no requirement that financial statements be audited. The Law 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 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 pursuant to the Partnership Law. The partners 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.
As discussed above, Cayman 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 license. Under the laws, as a condition of maintaining their license, the Directors must file audited financial statements as of the Company's year-end with the Cayman Islands Monetary Authority (the "Authority"). 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 license under the Banks and Trust Companies law must file a pro-forma balance sheet and income statement with the Authority. Once approved, licensees 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 license and is generally limited to International firms. Licensees not incorporated in the Cayman Islands (branches) are required to file audited financial statements of for the parent 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 has 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 and branches with a physical presence in the islands must file quarterly unaudited financial information with the Authority within 21 days of quarter end. This information represents condensed financial information in prescribed forms (form BS and Related Schedules).
The Insurance Law requires licensed insurance companies to maintain complete financial records in the Islands unless the Governor approves another location. The law further requires that licensees file audited financial statements with the Authority within six months of the 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 licensees must also file a Certificate of Compliance signed by the independent auditor, a licensed 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 licensee's application.
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 Cayman. Generally the books and records are maintained in Cayman if the Mutual Fund utilizes a licensed mutual fund administrator in Cayman. Limited extensions of time to file are granted by the Authority upon application and for good reason and with presentation of unaudited management accounts.
The Authority, under its powers granted as regulator under respective Law, may also require special reporting by regulated entities including commissioning external auditors to conduct mid-year audits, limited reviews or internal control reviews. These powers are invoked in 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.
The winding up of a Cayman company, regardless of its industry, also requires limited financial reporting. Pursuant to the Companies law, 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 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 used is 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 overriding criteria for most meaningful GAAP's and for an unqualified opinion from auditors. Intuitively, the GAAS used for Cayman 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, and informally self-governed, by the Cayman Islands Society of Professional Accountants ("CISPA"). Pending legislation will recognize CISPA in its current role by statute. The legislation will require practitioners to have a recognized international accounting qualification. This law will not, however, convert CISPA into a standard setting body commissioned with developing Cayman GAAP. This has been deemed unnecessary and will continue to be so through the foreseeable future.
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 time zone of the Cayman Islands produces certain advantages. This has been useful for some Mutual Funds domiciled in Cayman. There are no requirements for accounts in Cayman, or elsewhere, to be maintained in a specified currency.
Retention of Financial Records
The Cayman Islands have no express statute on the retention of financial records. Prudent commercial practices should dictate and a policy should be established and applied consistently. Regulated entities should maintain records to fulfill the needs of their auditors and customers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances from a local lawyer or accountant.
This article also appears in the 'International Offshore and Financial Centres Handbook 2001. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to email@example.com