Financial Reporting and Auditing at a Crossroad: joint REPARIS-STAREP conference
1 October 2013, Vienna

A joint REPARIS-STAREP conference

From September 30 to October 2 over 160 deputy ministers, officials and financial and audit regulators from 26 countries of Central, Eastern and Southern Europe, together with senior staff from the European Commission and international accounting organizations gathered to discuss the latest developments in corporate financial reporting and auditing in Vienna. The series of three events was organized by the CFRR as part of the REPARIS and STAREP programs.

The accounting and auditing landscape is changing. The new EU Accounting Directive, with reduced obligations for micro and small companies, was published shortly before the conference. It remains to be seen how Member States will incorporate the Directive into their national law. Negotiations about the scope and shape of EU audit reform continue. The conference was an opportunity for all present to engage with the proposed changes and consider their potential impact, see below for more background on these important issues.

The first event on September 30 convened senior officials from Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro and Serbia to discuss their progress and ongoing challenges in building strong and sustainable financial reporting environments. Much had been accomplished, but plenty of work remained especially in the areas of SME financial reporting and audit regulation. Participants looked forward to the new CFRR follow-on program “EU-REPARIS” which aims to assist these countries to complete the reform process.

STAREP Launch Event Workshop
2 October 2013, Vienna

On October 1, participants from the REPARIS countries were joined by senior representatives of countries of the Eastern Partnership (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) for the Financial Reporting and Auditing at a Crossroad conference. The event sought to update and discuss recent international and EU developments in financial reporting and auditing; launch a new regional program on Strengthening Auditing and Reporting in the countries of the Eastern Partnership (STAREP); and share successes and experiences of implementing financial reporting reform. The presence of so many key individuals from partner countries and others with an interest in financial reform – including from the European Commission; International Federation of Accountants and the International Accounting Standards Board - resulted in a rich and valuable dialogue with particular focus on the new EU accounting directive and EU audit reform proposals.

Eastern Partnership country representatives, who will take part in the new STAREP program, then met on October 2. STAREP will focus on assisting these countries in strengthening auditing and reporting, building on the experience and knowledge gained from the REPARIS program (see Q&A below for more details). Participants in the workshop shared details of the financial reporting situation in each of their countries and discussed areas of common interest which will help shape the new program.

Focus on audit reform

STAREP Launch Event Workshop
2 October 2013, Vienna

Ongoing EU audit reform efforts were a key theme both during the main sessions of the conference and amongst participants in the margins. Audit is an integral part of the financial reporting environment which contributes to the reliability and stability of financial statements. Its importance is reflected in statute, the main EU instrument is a 2006 Directive which set out statutory auditors duties and introduced a public oversight requirement.

In the wake of the financial crisis the European Commission initiated a review and, in 2010, published a Green Paper seeking to address issues such as the need to more clearly define the role of auditor; reinforce their independence and professional skepticism; improve auditor supervision; facilitate cross-border provision of statutory audit services; to encourage more dynamism at the top end of the audit market; and to reduce unnecessary burdens on SMEs.

Proposals were published by the Commission in November 2012. They took the form of a Directive – to amend the current one which each Member State would need to transpose into national law - and a Regulation – which, if passed, would apply throughout the EU without being transposed into national law. Debate has since been ongoing in both the European Parliament and in the Council of Ministers (representing EU Member States) as co-legislators of the proposals. To be formally adopted the legislation needs the same wording to be approved by both co-legislators. This is achieved through “Trilogue” discussions which additionally involve the European Commission. These discussions began in October 2013.

The key issues being discussed are:

• The definition of Public Interest Entities (PIEs) as this will determine the scope of those subject to the new regulation;
• Auditors’ independence and the provision of non-audit services to audit clients designated PIEs;
• Whether there should be mandatory audit firm rotation for PIEs audits and if so what time limits should apply;
• Audit oversight between national competent authorities at EU level;
• Adaptations to the auditor’s public reporting on PIE audits;
• The role of professional bodies;
• And the choice of legal instrument – a Directive and/or a Regulation.

A Trilogue meeting planned December 4th, 2013 did not take place amidst disagreements on the proposals. There is some pressure to complete the legislative process before elections for the European Parliament in March 2014 and subsequent new European Commission.

More information is on the process is available on the European Commission website. Those with an interest in the subject may wish to look at further material available on the CFRR website including from the Corporate Financial Reporting Community of Practice workshop held in May and from the October Financial Reporting and Auditing at a Crossroad conference.

Focus on SMEs and the impact of the new EU accounting directive

Small and medium-sized enterprises (SMEs) are widely held to contribute to employment creation, GDP growth, market dynamism and/or economic inclusion – in most OECD countries they account for 60%-70% of jobs. But they face some specific problems: in financing – generally facing higher interest rates for borrowing and credit rationing because of a lack of collateral; in regulation – many are poorly equipped to meet regulatory requirements; and in gaining access to markets.

Financial Reporting and Auditing at a Crossroad: joint REPARIS-STAREP conference
1 October 2013, Vienna

The World Bank is committed to supporting and improving the business environment for SMEs. It works with governments and regulators to improve access to finance for SMEs. Speaking at the recent joint REPARIS-STAREP conference “Financial Reporting and Auditing at a Crossroad” the World Bank’s Vice President and Financial Controller, Charles McDonough reminded participants of the importance of trust in financial reporting and pointed to how good, transparent financial reporting could reduce an organization’s cost of capital. But requirements should not place unnecessary burdens on companies. Regulations should be manageable and effective. Gabriel Blanc, of the European Commission’s Directorate-General for Development and Cooperation, told the conference that this was a key Commission priority and the aim of the new EU Accounting Directive, published in June 2013.

The Directive had a “think small first” approach to simplify requirements, especially for SMEs. It would enable companies to prepare profit and loss accounts, balance sheets and notes more proportionate to their size and to the information needs of users of their financial statements. More than 90% of EU companies would be in the small category (defined as less than 50 employees, a turnover of not more than €8 million and/or a balance sheet total of not more than €4 million) for accounting purposes. Didier Millerot, of the European Commission’s Directorate-General for the Internal Market and Services, told conference delegates that the reduction in notes to the accounts required by the new directive was projected to save individual small firms around €1,000 a year. There would be no EU requirement for small companies to have an audit.

The degree of simplification will depend on the Member State, who have until July 2015 to incorporate the rules of the Directive into their national law. An option to adopt the IFRS for SMEs at EU level was rejected by the Commission (it was felt this would not reduce the administrative burden) but Member states may permit or require it as their accounting standard if it is modified to comply with the Accounting Directive requirements.

STAREP program at a glance

What is STAREP? Managed by the CFRR, it is a regional program working with the countries of the EU’s Eastern Partnership (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) to support the creation of effective and sustainable frameworks for accounting and auditing, in line with international standards and taking account of EU requirements.

Who is it for? The program is for all those in the region with an interest in the process of corporate financial reporting reform, for example for those involved in designing and implementing reform in Finance Ministries; members of the accounting profession; financial regulators; and those teaching accountancy at university. It offers targeted programs for these different groups and encourages peer-learning to share knowledge of other’s reform experiences and avoid potential problems.

Why is it needed? The countries of the Eastern Partnership have made significant progress in modernizing their systems of corporate financial reporting but some common challenges, especially in institutional capacity, remain.

What will it do? The CFRR is organizing a program of carefully targeted events focusing on, for example, enhancing accounting education systems; improving institutional frameworks for corporate financial reporting; fostering the adoption of EU-compliant standards; and building closer international ties and sharing best-practices between key institutions.

How is it funded? Initial funding has been provided by Austria’s Federal Ministry of Finance and the Austrian Development Cooperation.

Enhancing the dialogue between external auditors and financial regulators

Financial Sector Exchange Forum - Financial Regulators and External Auditors: Building a constructive dialogue
21-22 November 2013, Vienna

The relationship between banking supervisors and auditors is increasingly in the spotlight. As the EU is developing a regulation to enhance the quality of statutory audit of Public Interest Entities, a Basel Committee on Banking Supervision (BCBS) consultative paper on external audits of banks directly links enhancement of the auditor/supervisor relationship with improved audit quality.

Experts, including from the CFRR, sought to update senior staff of banking supervisory agencies from CFRR partner countries on this topical issue at a “Financial Regulators and External Auditors: Building a constructive dialogue” seminar in November 2013.

The event also marked the launch of a Financial Sector Exchange Forum study, supported by the CFRR, on key topics in building a constructive dialogue between external auditors and supervisors. Participants highlighted topics that will be included in a survey to be completed by senior banking supervisors from CFRR partner countries. The results are expected to be published in 2014.

Workshop on proposed reforms to Kosovo’s corporate financial reporting system
10-11 September 2013, Peja

Kosovo discusses options for corporate financial reporting reform

As Kosovo continues to explore options for further reform to its Financial Reporting and Auditing statutory framework following the recent ROSC A&A update report, the Kosovo authorities, Society of Certified Accountants and Auditors (SCAAK), World Bank Office in Pristina and the CFRR hosted a workshop to discuss possible further amendments to the Law on Financial Reporting and Auditing passed in 2010. Two panel discussions offered a broader perspective on two key issues (i) public oversight and quality assurance system for statutory audits, including possible approaches to designing the QA inspection and which institution would take part in it, and (ii) clarifying which accounting standards should be required for different business entities depending on their size. The Government of Kosovo has undertaken to move forward the process of adopting the amendments into law.

Moldova learns from Romania’s experience in enhancing accountancy education

Sustainable development in accounting and auditing profession
26 September 2013, Chisinau

The economic and financial crisis has highlighted the need for competent ethical graduates with accounting and audit knowledge to support economic growth and fiscal stability. There is much common ground to be found amongst educators in different countries. Working together makes best use of the resources available to improve the quality of education and increase the employability of graduates. The Republic of Moldova and Romania are pioneering such an approach as part of the South-South knowledge exchange project.

In September 2013, the CFRR, with the Accounting Faculty of the Academy of Economic Studies from Moldova (ASEM), brought together representatives of both countries in the fields of academia, policy making, economic entities, audit companies, national and international professional bodies to discuss "Sustainable development in accounting and auditing profession: applying the best practices in upgrading university curricula through cooperation and partnership with European Union member-states”. Drawing on Romanian experience to help map a way forward for Moldova in this important area, the conference welcomed a range of expert speakers. Themes addressed included the need for a national qualification for accountants and auditors; ways to improve university education including offering practical training opportunities; and developing continuous professional development in accounting and audit, based on modern standards and tools.

Those involved found the knowledge exchange initiative both innovative and important. It is hoped that the features and benefits of cooperation demonstrated by Moldovan and Romanian Universities may encourage other regional countries to consider similar collaborations.

Activities taking place in December include an FRTAP Workshop in Warsaw on implementing updated IFRS and a workshop for public oversight and quality assurance institutions on enhancing audit quality in FRTAP countries.

The 2014 program begins with an Accounting Education Community of Practice Workshop, focusing on curriculum mapping with the requirements of International Education Standards (IES), in January and an Audit Training of Trainers workshop, addressing the needs and challenges of SMPs to implement ISAs, in February.

A third Corporate Financial Reporting Community of Practice (CFRCoP) workshop, part of the REPARIS program, is being organized for Spring 2014. These workshops help policy makers and other stakeholders keep up-to-date on international reporting standards and global regulation. Information about previous events, which included discussions of international and regional developments in audit regulation; approaches to quality assurance of audits and auditors; public oversight; and transparency issues; are available on the CFRR website.

Details of further events, as they are announced, can be found on the "CFRR Events" page of the CFRR website.

A&A ROSC for Moldova

Moldova ROSC Update

The World Bank recently updated its Report on the Observance of Standards and Codes on Accounting and Auditing (A&A ROSC), which was presented jointly with the Ministry of Finance of the Republic of Moldova in September in Chisinau. The Report highlights the significant progress over the previous 9 years to improve the statutory framework for accounting and auditing. Implementation and enforcement of reform measures had, however, been hampered by capacity and resource constraints. Weak transparency and governance, as well as weak capacity to implement IFRS by non-bank entities, impacted the overall quality of corporate financial reporting in the country.

• A&A ROSC for Moldova (in English)
• A&A ROSC for Moldova (in Romanian)

EU candidate status recommended for Albania

In October the European Commission recommended granting EU candidate status to Albania and an 82 million EUR “Pre-accession Assistance” program was announced on 13 November. The funding will support reforms and investments in key areas including public administration.

Recommendations made on EU role in IFRS standards setting

EU finance ministers have received recommendations following concern in the European Parliament about the system of endorsement of accounting standards in the EU, and the need to strengthen the EU’s voice in IFRS standards setting. Philippe Maystadt (at the request of Michel Barnier, European Internal Market Commissioner) reviewed the current position amidst claims of insufficient EU influence on the International Accounting Standards Board (IASB). His proposals focus on a re-organization of the European Financial Reporting Advisory Group, financed through compulsory levies on listed companies, with a reinforced board able to examine political and economic, as well as technical, aspects of standards. Mr. Maystadt emphasized the importance of ensuring ISAB rules do not destabilize banks, insurers and markets.

UK Competition Commission changes to audit market

The UK Competition Commission published changes that will open up the UK audit market to greater competition and ensure that audits better serve the needs of shareholders in future. These include measures to improve the bargaining power of companies and encourage rivalry between audit firms; measures to enhance the influence of the Audit Committee; and measures to promote audit quality and shareholder engagement in the audit process.