Law No. 15 of 2021 (New Law), which was published on August 5, 2021 in the official gazette and went into effect three months later, governs the regulation of external auditors. Consequently, the previously applicable Auditor’s Law No. 26 of 1996 (Repealed Law) was repealed, along with any provisions that contradicted the New Law.
New External Auditor’s Law
A comparison between the New Law and the Repealed Law demonstrates that the New Law provides more detailed regulations concerning the registration and code of conduct for external auditors, surpassing the level of detail found in the Repealed Law, specifically with respect to:
• The categorisation of auditors (Article 3);
• The conditions for the registration of auditors (Articles 4, 10 and 18);
• Prohibitions (Article 26); and
• Penalties (Articles 44 and 47). Additionally, under the Repealed Law, the responsibility for determining the aforementioned matters was assigned to the relevant ministry, whereas the provisions of the New Law address and regulate these matters directly.
Categorising Auditors
Article 3 of the New Law stipulates the categories of auditors that must be registered with the Ministry of Industry and Commerce (MoIC). The categories include:
• Trainee auditors;
• Practising auditors; and
• Non-practising auditors. The New Law defines trainee auditors as any person practising auditing for the first time. The legislation also obliges the owner of an auditing firm that employs such an individual to prepare reports on their performance. The duration of an auditor’s training is required to last for a period of five years, upon the completion of which the trainee may apply to the MoIC’s Auditors’ Register (Register) to request the transfer of their title and status from a trainee auditor to a practising one. During this stage, the MoIC reserves the right to request access to any performance reviews that have been prepared by the owner of the auditing firm in which the applicant completed their training.
Conditions of Registration
The New Law introduces a broader range of requirements for the registration of natural persons in the Register. Among the notable amendments outlined in the New Law is the extension of eligibility to non-Bahraini nationals, who can now be included in the Register provided they fulfil the following conditions:
• They possess a valid permanent residency permit for Bahrain;
• They are employed at an auditing firm in Bahrain or at a branch of a non-Bahraini licensed auditing firm operating in Bahrain; and
• They have a minimum of five years of accounting experience. One of the more significant changes in the New Law is the reduction in the amount of experience required to be added to the Register. The Repealed Law stipulated that seven years of experience in an auditing firm was the minimum amount required for auditors to be added to the Register. However, the New Law offers two alternative criteria to satisfy the experience requirement: the completion of five years of training at an auditing firm, or five years of uninterrupted accounting work following graduation.
For registered practising auditors working in commercial companies, Article 18 of the New Law differs significantly from the Repealed Law:
• The Repealed Law stipulated that a commercial company must be in the form of a simple partnership. However, under the New Law, a commercial entity must be established as a joint liability company and listed in the Register; and
• The Repealed Law required that the person responsible for signing audit reports in a company’s name be a partner and authorised signatory.
However, under the New Law, the manager of a company is allowed to sign off on audit reports, provided that the manager is also listed in the Register. There are two conditions that have carried over from the Repealed Law to the New Law: the prohibition of the partners practising the profession except in the name, and for the account of the company in addition to the prohibition of a partner from becoming a partner in another company.
In contrast to the Repealed Law, Article 10 of the New Law sets out more stringent requirements for registering branches of foreign auditing firms. According to the new provisions, companies must:
• Possess specialised international expertise that is in accordance with the standard determined by the MoIC;
• Hold a valid licence to practise in their country of origin;
• Have practised auditing for a minimum of 15 years;
• Demonstrate to the MoIC their activity, financial solvency, auditing record and constitutional documents;
• List a branch manager in the Register who has a minimum of 10 years of experience; and
• Fulfil any other conditions as stipulated by the MoIC. In addition to these conditions, auditors and branches of foreign auditing firms must submit a professional indemnity insurance policy to the MoIC within 30 days of their listing in the Register. Failure to comply with this step will invalidate the registration process.
Prohibitions
Article 26 of the New Law addresses certain gaps that existed in the provisions of the Repealed Law. Several prohibited acts originate from the general principle of conflicts of interest, which forbids auditors from engaging in certain activities that compromise the integrity of their auditing work. This principle also prohibits auditors from auditing the financial statements of companies in which they have either a direct or indirect interest.
Similarly, auditors are restricted from auditing companies in which they are a creditor or debtor, as well as from directly or indirectly selling or purchasing securities in companies they are auditing. Any actions considered to be in contradiction of the relevant laws, rulings, or commonly accepted standards of behaviour and ethics are also forbidden.
Penalties
The Repealed Law listed four disciplinary penalties for auditors who contravened its provisions, including reprimands, warnings, threeyear suspensions and removal from the Register. In a similar vein, the New Law stipulates similar disciplinary actions. However, Article 44 of the updated legislation introduces a fine not exceeding BD100,000 ($265,200). Moreover, the New Law specifies the circumstances that constitute an infraction warranting disciplinary penalties. These breaches include:
• Violating professional duties;
• Deviating from auditing requirements;
• Contravening either the rules of the profession, or generally accepted accounting and auditing standards; and
• Violating the provisions of the New Law, its implementation of regulations or decisions, or other relevant laws or decisions. In addition to the above, auditors can potentially face criminal prosecution for conducting the activities outlined under Article 47 of the New Law. This article specifies that auditors can face imprisonment and/or a fine of between BD10,000 ($26,500) and BD100,000 ($265,200) if they are found to have committed any of the following infractions:
• Wilfully falsifying personal information when applying to be included in the Register with incorrect personal information, such as false certifications;
• Reporting inaccurate information, such as preparing a report based on false data
• Falsifying information, whereby a report that is to be issued pursuant to law or by virtue of the rules of the profession is inaccurate or endorses falsehoods;
• Breaching the confidentiality of an audited client, or unlawfully disclosing their confidential information;
• Ratifying a financial report that was neither audited nor supervised by the auditor;
• Practising without a licence;
• Having a conflict of interest such as trading securities of a company under audit, providing advice to any person regarding the company, obtaining personal benefits from the entity or making use of information obtained during the course of an audit for one’s own personal gain; or
• Engaging in false advertising, or misleading the public to believe that they are a licensed practising auditor.
Amendment to Companies Law
The latest amendments to the Commercial Companies Law promulgated by Legislative Decree No. 21 of 2001 (Companies Law) were issued as part of Legislative Decree No. 20 of 2021 (CCL Amendment) and published on September 16, 2021 in the official gazette. The CCL Amendment came into effect the following day.
Prior to the amendment, the Companies Law stipulated that all companies – with the exception of joint ventures – must draw up their memoranda of association in Arabic. However, the amendment to Article 6 states that unless the memoranda of association are drafted in Arabic or English, the documents will be considered null and void.
This amendment brings Bahrain in line with the requirements of the corporate sector, where having constitutional documents written in more than one language at the outset of a business endeavour is essential to ensuring the effective governance of a company and resolving any potential disputes. The CCL Amendment can be seen as addressing what has been an ongoing practice in the market, as constitutional documents have traditionally been written in both Arabic and English.
Disclosing Board Remuneration
Regulated under Article 188 of the Companies Law, the disclosure of remuneration in a Bahrain shareholding company has been a controversial stipulation in recent years. Under the provision, a company’s articles of association must specify the manner through which the salaries for members of the board of directors are decided. In addition, Article 188 states that companies must submit a report to shareholders at the annual general assembly that provides a full account of the amounts paid to the board, including salaries, dividends, allowances for attendance and any other payments to them. Article 188 previously provided fewer details on the different categories of payments that members of boards of directors had to disclose. In light of this update, the CCL Amendment obliges a Bahrain shareholding company to disclose several different types of remuneration paid to its board members, whether these payments be the ones listed above or ones received in their roles as employees or administrators of the company in return for technical, administrative, consulting and other work.
Additional Documents
The CCL Amendment changes Article 244 bis of the Companies Law, which obliges joint stock companies to submit financial reports and audit reports to the MoIC within six months of the end of each financial year. This provision previously specified the required information necessary in the reports for them to be submitted, including the balance sheet, the profit and loss account, the annual report and the auditor’s report. The amendment to Article 244 bis widens the scope of the information to be submitted to the MoIC by giving the respective minister the power to request any additional documentation from a joint stock company.
Similarly, for limited liability companies, Article 286 C of the Companies Law specified the types of reports and the deadlines by which managers had to submit such reports to the MoIC. The CCL Amendment ensures that the requirements remain open-ended in the event that the minister deems the submission of additional documents necessary to further analyse a company’s performance. This measure enables the MoIC to conduct a diligent assessment of a company’s operations and its financial condition.
Other Amendments
To ensure the unification of the provisions of the Companies Law and to address any misinterpretations of its provisions, the CCL Amendment includes the following minor changes:
• The addition of sub-Article D under Article 265, which refers to any provision relating to the memoranda of association of companies or their relevant incorporation documents; and
• The replacement of certain terms in various articles of the Companies Law, such as “company’s documents” and “incorporation document” to replace the term “company’s Memorandum of Association” as context requires.
Social Insurance Law
An amendment to the Social Insurance Law enacted by Legislative Decree No. 24 of 1976 (Social Insurance Law) was issued by Legislative Decree No. 14 of 2022 (SIL Amendment), which was published on April 18, 2022 in the official gazette and took effect the following day. The amendment to the Social Insurance Law highlights various changes which include participation in social insurance programmes and the qualifications for receiving retirement pensions.
Social Insurance Participation
Participation in social insurance programmes is generally done through payments by employers and employees, the amounts of which are determined by the percentages listed in the Social Insurance Law. The changes to Articles 33.1 and 33.2 implemented by the SIL Amendment stipulate that the share to be paid by an employer for its employees will be raised from the previous rate of 11% of the salary of the insured individual to 17%. Note that the 6% increase will not have any effect on the share to be paid by an employee, as that figure is still set at 7% of their salary. The employee’s company will be responsible for covering the increased payment which is increased annually at the rate of 1% until it reaches the required 17%.
Retirement Pension
The previous requirements for receiving one’s retirement pension differed based on gender, as the retirement age was set at 60 for men and 55 for women. The SIL Amendment – specifically Article 34.1 – unifies the retirement age at 60 for both men and women, bringing the Social Insurance Law in line with prior amendments to Bahrain’s Labour Law for companies in the private sector. While the Labour Law previously amended the retirement age to 60 for both men and women, Article 34.1 addresses the necessary length of an employee’s participation in the social insurance scheme, which is at least 240 months.
While the official retirement age for women was raised from 55 to 60, the amount of time they are required to participate in social insurance programmes to receive benefits was also increased from 120 months to 180 months, as stipulated under Article 34.2. This amendment further closes the gap between the requirements for men and women.
Furthermore, the SIL Amendment helps those whose employment was terminated before they reached the official retirement age, on the condition that they had participated for at least 180 months in the social insurance scheme. The provisions of the Social Insurance Law previously stipulated that in the above circumstance, such an individual would not be entitled to a retirement pension, as the age requirement had not been fulfilled. Instead, the person was entitled to a compensatory pension, the amount of which would be given as a lump sum, theoretically putting the person at a disadvantage. Due to the SIL Amendment, individuals in such a situation have seen a significant change in their retirement plans. They are eligible to receive their pension at the age of 60, replacing the option of a lump sum.
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