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NATIONAL BANK OF ETHIOPIA
ADDIS ABABA
LICENSING AND SUPERVISION OF
THE BUSINESS OF CAPITAL GOODS FINANCE COMPANIES

Approval of Appointment of External Auditors of Capital Goods Finance Business

Directives No.CGFB /..../ 2015

Whereas, there is a need to appoint external auditors to report on the affairs of the Capital
Goods Finance Company as well as on legal and regulatory non-compliance issues, to ensure
the safety and soundness of capital goods finance business;

Whereas, it is important to promote the role of the external auditors as that of a watch dog
both for the shareholders and the regulators, to raise the level of trust and confidence and
promote the sector;

Now, therefore, in accordance with powers vested in it under Articles 4 (4) and 18 (4) of
Capital Goods Leasing Business (Amendment) Proclamation No 807/2013, the National
Bank of Ethiopia has issued these directives.

1. Short Title

These directives may be cited as “Approval of Appointment of External Auditors of Capital

Goods Finance Business ”Directives No. CGFB/.../2015”.

2. Definitions

For the purpose of these directives, unless the context requires otherwise:

2.1 “Affiliate”, in relation to a Capital Goods Finance Company, means a subsidiary of the
Capital Goods Finance Company or a company of which the Capital Goods Finance
Company is a subsidiary or a company that is under common control with the Capital
Goods Finance Company;
2.2 “Approval” means an approval given in writing;
2.3 “Auditor” shall mean an individual authorized to provide auditing service in Ethiopia by
the Office of the Federal Auditor General in accordance with the Office of the Federal
Auditor General Establishment (Amendment) Proclamation No. 669/2010, and
Regulation for the issuance of certificate of professional competence to private auditors
and accountants, No. 4/2010;
2.4 “Firms of Auditors” means an organization authorized to provide auditing service in
Ethiopia by the Office of the Federal Auditor General in accordance with the Office of
the Federal Auditor General Establishment (Amendment) Proclamation No. 669/2010,
 and Regulation for the issuance of certificate of professional competence to private
auditors and accountants, No. 4/2010;
2.5 “Capital Goods Finance Company”means a share company asdefined under the
Commercial Code ofEthiopia, in which the paid up capital is either wholly or partially
owned by foreign or Ethiopian nationals andorganizations wholly or partially owned by
foreign or Ethiopiannationals and registered under the laws of,and having its head office
in, Ethiopia, which is licensed by the Central Bank to carry on Capital Goods Finance
Business;
2.6 “Capital Goods Finance Business” has the same meaning as in the Capital Goods
Leasing Business (Amendment) Proclamation 807/2013;
2.7 “Director” refers toany member of the board of directors of aCapital Goods Finance
Companyby whatever title he may be referred to;
2.8 “Financial Institution” means a Capital Goods Finance Company, insurance company,
bank or other deposit taking institution, micro finance institution, postal savings, money
transfer institution or such other similar institution as determined by the National Bank;
2.9 “Person” means any natural or legal person;

3. Scope of Application

The provisions of these directives shall be applicable to all Capital Goods Finance
Companies licensed by the National Bank.

4. Appointmentof auditors

4.1 Subject to this section, shareholders of a Capital Goods Finance Company shall at each
annual meetingappoint, and at all times have, one or more firms of auditors, who may
exercise their duties jointly or separately.

4.2 Any firm of auditors appointed under subsection 4.1shall be subject to theapproval of the
National Bank.

4.3 When applying for approval of the appointed firm or firms of auditors, the Capital Goods
Finance Company shall ensure that the auditors are duly qualified and authorised to carry
out such duties.

4.4 A firm of auditors may not be qualified for appointment as an external auditor of a
Capital Goods Finance Company if:
a) any partner or a staff member of the firm of auditors is a shareholder, director or
employee of that Capital Goods Finance Company;
b) any partner or a staff member of the firm of auditors is a spouse or relative
byconsanguinity or affinity to the first degree to a person who is a shareholder, director or
employee of that Capital Goods Finance Company;

4.5 The firm of auditors shall be independent, experienced in the audit of financial
institutions and have the necessary resources to undertake audits of financial institutions
on a consolidated basis as determined by the National Bank.
4.6 No partner in a firm of auditors appointed under subsection 4.1shall be responsible for the
audit of a Capital Goods Finance Company for a continuous period of more than 3 years.

4.7 Where a partner in a firm of auditors has been responsible for the audit of a Capital
Goods Finance Company for a continuous period of 3 years or less, that partner shall
not be entrusted the responsibility for the audit of the same financial institution before
a period of 3 years from the date of termination of his last audit assignment.

4.8 A firm of auditors, any partner or staff member, a spouse or relative byconsanguinity
or affinity to the firstdegree to a person whois apartner or a staff member of the firm
of auditors, may not be appointed directors or managers of the companywhich they
audit, nor of one of its subsidiaries or its holding companywithin three years from the
date of the termination of their functions.

4.9 If a Capital Goods Finance Companyfails to appoint an external auditorin accordance

with the provisions of subsection 4.1, the appointment ofauditor of such bank shall be
made by theNational Bank.

4.10 Any Capital Goods Finance Companyfor which an auditor is appointedin accordance
with sub section 4.7 shall pay remunerations of the auditoras directed by the National
Bank.
4.11 An external auditor appointed in accordancewith sub section 4.7 shallhold office until
the next annual generalmeeting of the shareholders of theCapital Goods Finance
Company.
4.12 Where the external auditor of any Capital Goods Finance Company, forany reason,
terminates his service before histerm of office, he shall write to theCapital Goods
Finance Companyforthwith and send a copy of his notice of termination to the
National Bank.
4.13 Where a Capital Goods Finance Companydecides to terminate the services of an
auditorappointed under sections 4.1 or 4.7 before the expiration of his term of office:
a) it may do so by resolution passed at a meeting of its shareholders, or by
resolutionin lieu of meeting, notwithstanding Article 371 of the Commercial
Code of Ethiopia and shall at the same time appoint a new auditor; and
(b) obtain the prior approval of the National Bank to terminate the services ofthe
auditor, stating the reasons therefore or to appoint a new auditor.

4.14 A firm of auditors appointed as an external auditor of aCapital Goods Finance

Companymay not begranted any type of capital goods finance fromthat Capital Goods
Finance Company, except in the normal courseof business and at an arm’s length
basis.

5. Audit Reports

5.1 Without prejudice to the duties imposed by other relevant laws, the duty of the external
auditor, appointed in accordance with the provisions of section 4 of these directives shall
be to reportits audit findings and conclusions, carried out on the basis of international
auditing standards, to thes hareholders of the Capital Goods Finance Companyand the
National Bank.
5.2 The National Bank may further issuedirective as to the depth and coverage of theaudit to
be performed by external auditors.

5.3 The auditor's report shall be made on the financial statements of the Capital Goods
Finance Company and shall be consolidated to include the affiliates of the Capital Goods
Finance Company, if any;

5.4 The auditor shall, in the report, state whether -

(a) the financial statements have been prepared in accordance with“GenerallyAccepted Commented [M1]: GAP are currently in use. There are plans to
Accounting Principles” or International Accounting Standards and any additional adopt IAS.

prudential requirements set out in these directives and other regulations issued by the
National Bank and Proclamations 103/1998 and 807/2013;

(b) the financial statements are, in his opinion, complete, fair and properly drawn up;

(c) the financial statements present a true and fair view of the affairs of the Capital Goods
Finance Company;

(d) the financial statements have been prepared on a basis consistent with that of the
preceding year; and

(e) the explanations or information called for or given to him by the officers or agents of
the Capital Goods Finance Company, are satisfactory to him.

5.5 The report shall be read together with the report of its board of directors at its
annualmeeting of shareholders and transmitted to the board of directors of the Capital
Goods Finance Companythrough the Audit Committee established under section 6.6.15 of
the Corporate Governance for Capital Goods Finance Business Directives no/.../2015.

5.6 Subject to section 5.1, the auditor of any Capital Goods Finance Companyshall submit to
theNational Bank a complete audit report,including audit findings, recommendations, and
management discussion letter, within six months from the date of the financial year end
or at such period as the National Bank may specify.

5.7 The National Bank may, if not satisfied with theexternal audit report, order a second
auditorrequire the prompt appointment of a new auditorwho shall make an independent
audit report. Theremunerations of the newly appointed auditor shallbe paid by the Capital
Goods Finance Companyas directed by the NationalBank.

5.8 Where the external auditor of any Capital Goods Finance Company, inthe course of the
performance of his auditduties, finds out that:

a) there has been a material adverse change in the risks inherent in the business of the
Capital Goods Finance Company with the potential to jeopardise its ability to
continue as a going concern;

b) there has been a serious breach of, ornon-compliance with, the provisions
oftheCapital Goods Leasing Business Proclamation No 103/1998, the Capital Goods
Leasing Business (Amendment) Proclamation No 807/2013, Income Tax
 Proclamation No. 286/2002, these directives and any other regulation, guideline, or
guidance notesissued inaccordance with the Proclamations;
c) a criminal offence involving fraud orother dishonesty has been committed bythe
Capital Goods Finance Companyor any of its directors oremployees;
d) measures to counter the possibility of money laundering or the funding of terrorist
activities in accordance with any enactment have not been or are not being properly
implemented;
e) losses have been occurred which reducethe total capital of the Capital Goods Finance
Companyby 25% ormore;
f) serious irregularities have occurredwhich may jeopardize the Capital Goods Finance
Company’s abilityto continue conducting its business or thesecurity of its lenders and
creditors; or
g) any other grave irregularities or offenceshave occurred;

the firm of auditors shall immediately report the matter to theNational Bank and other
concerned bodies.
5.9 The National Bank may call at any time theexternal auditor of a Capital Goods Finance
Company, with or without the presence of the board of directors and/or the management
of the Capital Goods Finance Company, to discuss issuesrelated to the of the Capital
Goods Finance Company being audited by theauditor.
5.10 Every auditor appointed under section 4shall have a right ofaccess at all times to the
books, accounts and records of the Capital Goods Finance Company, whether kept
electronically or otherwise.

5.11 Where, in the performance of his duties, the auditor finds any matter which inhis
opinion is of material importance to the well-being of the Capital Goods Finance
Company, he shallcall a meeting of the Audit Committee for the purpose of considering
the matter.

5.12 The National Bank may, on a case to case basis, at least once a year, or as such
intervals at the National Bank may decide, arrange meetings with the Directors,
Management and auditors of a Capital Goods Finance Company, to discuss matters
relevant to the National Bank’s supervisory functions which have arisen in the
supervisory process, including on-siteinspections and off-site monitoring of the Capital
Goods Finance Company, relevant aspects of theCapital Goods Finance Company's
business, its accounting, internal control systems, monthly and periodic statements,
financialstatements, and any matters arising out of the statutory audit.

6. Effective Date

These Directives shall enter into force as of the ...day of ...................2015.