Western Balkan countries implementing the EU acquis communautaire: common challenges and shared solutions

Following the launch of EU-REPARIS last May, the new Financial Reporting Community of Practice (FRCoP) met for the first time on October 14-15 in Tirana to consider strategies for implementing EU accounting and auditing requirements in a way that takes into account national circumstances and needs. Over 40 participants, representing Ministries of Finance and other policymakers and members of professional accountancy organizations from the six participating countries, together with CFRR and European Commission experts discussed essential changes and identified challenges. A range of common issues emerged including effectively transposing EU directives into local law; improving public oversight and quality control; defining the size and scope of entities; a lack of staff with appropriate training and experience, and limited training facilities in the field of accounting and auditing. The policy experts offered guidance on tackling these and other challenges, and outlined the support available from the CFRR and European Commission in taking forward national implementation and regional coordination.

Drawing on Hungary’s experience of financial reporting and its future development

The growing interest in the potential and challenges of integrated reporting (IR) was clear when CFRR joined other international experts presenting to the Budapest Business School’s “Beyond FR” conference on 24 September. In common with many CFRR client countries, Hungary is working to ensure effective and high-quality financial reporting is delivered by skilled professionals; IR may offer one means of improving the efficiency of financial reporting while broadening the range and scope of information included to allow for better decision making. The Hungarian experience of reporting reform, improving audit quality, developing the audit profession and forward looking thinking on the simplification agenda, IR and sustainability reporting is relevant to many involved in CFRR programs and ways to capitalize on this under EU-REPARIS and STAREP are being explored.

Report recognizes growing momentum for corporate financial reporting reform in Georgia

An updated assessment of corporate reporting systems in Georgia, the 2015 Report on the Observance of Standards and Codes on Accounting and Auditing (A&A ROSC), was disseminated at an event in Tbilisi on 24 September. Those attending welcomed the findings of improvements since the previous A&A ROSC in 2007 in the accounting and auditing profession, the adoption of an effective new legal framework, and commitment to implementing Georgia’s strategic plan to improve the local business climate and work towards harmonization with the European Union (EU). Discussions addressed what more needed to be done to fully implement the new legislation and to further improve the financial reporting environment, especially for smaller businesses. A renewed focus on improving governance in state owned enterprises was agreed.

Albania begins new phase in improving financial reporting infrastructure

A new project for Albania, “Enhancing the Quality of Financial Reporting” was launched at an event at the Ministry of Finance in Tirana on 16 October. The project continues CFRR support for Albanian financial reporting infrastructure improvements under the EU-REPARIS program, building on progress achieved through the previous Corporate Financial Reporting Enhancement Project (CFREP) from 2011 to 2014. Those attending the launch event welcomed this new phase which would continue and expand the work begun under the CFREP with a focus on strengthening the human and institutional capacity of universities, accountancy and audit professional organizations, tax and supervisory authorities, and the commercial register.

European Commission shares positive conclusions on the use of IFRS in the EU with policymakers, standard-setters and stakeholders

The European Commission's evaluation of the use of International Financial Reporting Standards (IFRS) in the EU was presented at a conference in Riga on 25 June. It concluded that the regulation requiring IFRS to be applied to the consolidated financial statements of listed companies in the EU had been successful in creating a common accounting language for capital markets. There had been good progress in the implementation of the recommendations of the Maystadt report for enhancing EU endorsement of IFRS, a necessary process to ensure that they meet certain criteria and are fit for the European economy. CFRR head, Henri Fortin, moderated a conference session on the future and potential for global quality standards during which the tremendous progress in IFRS adoption over the last ten years was acknowledged. 116 jurisdictions require IFRS and 12 allow their use. A key motivation for adopting IFRS is to improve management at the group level, through the use of comparable and high-quality accounting information. Some key economic jurisdictions have yet to require or allow the use of IFRS by their domestic companies but uptake is increasing in Japan and China, and India has announced its intention to adopt IFRS. There is no foreseeable expectation of the US adopting IFRS but there is continued progress in convergence between IFRS and USGAAP.

Enhancing financial regulators’ understanding of IFRS across Europe – CFRR workshop implemented in cooperation with the IASB/IFRS Foundation

Given the growing adoption of IFRS it is essential that financial regulators are able to confidently engage with IFRS-based financial information and understand its role in monitoring and supervision. To address this the CFRR gathered over 70 banking and insurance experts and regulators from 21 countries in the EU, Western Balkans and South Caucasus region in Vienna on 29-30 September. This third annual workshop allowed those responsible for supervising banks and insurance companies and those in charge of drafting accounting and prudential regulations to discuss existing and forthcoming IFRS requirements, with a focus on financial instruments and the effects of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers (both effective from 1 January 2018). Participants valued both the opportunity to learn more about IFRS implementation using interactive case studies and also the knowledge exchange with peers.

Polish stakeholders welcome plans to update IFRS and offer their views on proposals

Work to improve IFRS and therefore financial reporting by providing clear, up-to-date and more complete concepts that can be used to develop new standards is currently underway. The International Accounting Standards Board (IASB) has published a comprehensive Exposure Draft of a revised and amended IFRS Conceptual Framework. This seeks to address areas not currently covered or lacking detail, and update and improve other aspects of the existing Framework to enhance understanding and application of the standards. The IASB has invited comments on the proposals and European Financial Reporting Advisory Group (EFRAG) is coordinating an EU-wide response. An event in Warsaw on 30 September gathered Polish views. Representatives of the Ministry of Finance, the accounting standard setting body, academics, auditors, and preparers of financial statements looked at the proposals with CFRR, EFRAG and IASB representatives. Areas including prudence and uncertainty; definition of and guidance on elements; and measurement and presentation provoked much discussion. Participants welcomed the initiative and their views will be noted by EFRAG in developing their response to the IASB.

University teachers gain experience of applying IFRS framework-based teaching

A fourth workshop introducing the framework-based method of teaching university students, trainee accountants of educational institutions and practicing accountants how to effectively apply the global International Financial Reporting Standards (IFRS) took place in Warsaw on 6 November. Polish accounting academics, members of university faculties and representatives of educational institutions of the Accountants Association of Poland (SKwP) familiarized themselves with this new teaching method through presentations, case studies, group work and a demonstration of tools. Poland aims to become the first country in the world to fully implement this approach aimed at improving the competence, confidence and employability of students.

The CFRR in cooperation with the IFRS Foundation also held a workshop in Kyiv on 18-19 November to introduce the framework-based method of teaching IFRS to approximately 75 teachers and professors who teach accounting in universities across the STAREP region. The workshop described the link between objectives, concepts, principles and rules in IFRS and demonstrated how to use the teaching materials available from the IFRS Foundation to develop their students’ ability to make the judgements and estimates to effectively apply IFRS.

Ukraine preparing for full implementation of IFRS in its banking sector

From January 2016, banks in Ukraine will be required to prepare their quarterly financial statements in accordance with IFRS. To support successful implementation the CFRR organized two workshops in Kyiv, one for banking supervisors and one for commercial banks. The first, delivered on 16-17 September, focused on strengthening the regulator’s capacity and practical ability to understand and work confidently with IFRS-based financial information. Some 40 representatives of Banking Supervision, Risk Management and Accounting Methodology departments of the National Bank of Ukraine (NBU) were briefed on IFRS and their role in monitoring and supervision. The second workshop on 16-17 November focused on the application of IFRS by commercial banks and supported direct and open dialogue between the banks and the regulators. Over 70 representatives of financial and accounting departments from 40 Ukrainian commercial banks attended the workshop, delivered jointly by the CFRR, the NBU, large commercial banks and audit firms, to increase knowledge of IFRS, including through interactive discussion of case studies and practical examples of conversion challenges from entities already applying and working with IFRS.

Further progress towards achieving excellence in accounting education

The latest in a series of EU-REPARIS education community of practice (EduCoP) workshops took place in Pristina on 14-15 September, showcasing existing and emerging models of accounting education as a way to improve employment opportunities for graduates. EduCoP members have been applying a profiling tool developed by CFRR which is used to show bachelor level accounting programs' performance against internationally recognized benchmarks. The workshop looked at the results of the most recent pilot studies at universities in Pristina, Tirana, Podgorica and Banja Luka and identified and discussed key areas for improvements. The workshop also addressed IFRS framework-based teaching of how to cover core financial accounting and reporting topics through sufficient incorporation of IFRS basic principles and rules and the host country, Kosovo, outlined the national experience of tackling educational reform.

The STAREP education community of practice (EduCoP) is also applying the profiling tool to universities in the region and a workshop in Kyiv on 20 November assessed the latest results. Representatives of universities in Ukraine and Moldova outlined their experience of applying the tool and discussed how the results would help shape the future development of their accounting curricula. There was general agreement that the tool was straightforward to apply and offered useful insights of benefit to university faculties. The EduCop agreed on a strategy for further rolling out its use in regional universities and looked forward to the introduction of a professional development profiling tool currently being developed by CFRR.

CFRR joins discussion with central, southeast and eastern Europe on fostering the development of PAOs

Supporting the development of strong and effective professional accountancy organizations (PAOs) in client countries is an important aim of the CFRR. One partner in this is the Institute of Chartered Accountants of England and Wales (ICAEW), especially through its Accountancy Profession Strategic Forum (APSF) Quality Assurance Network. Further cooperation was discussed at an APSF regional workshop hosted by CFRR in Vienna on 3 November, notably the proposal to develop an audit quality assurance network in the Western Balkans region for EU-REPARIS countries to join forces in building capacity and implementing audit quality and public oversight systems.

Supporting Eastern Partnership countries in developing effective audit oversight systems

The STAREP Accounting and Auditing Community of Practice (A&ACoP) met on 8-9 October in Chisinau for a 4th workshop as they work to address shared challenges and help deliver corporate financial reporting and audit reform. The focus this time was on “audit oversight and quality assurance: from setting the requirements to practical implementation”. The workshop looked in detail at the national institutional frameworks for audit oversight and quality assurance being developed and how these align with EU requirements, especially important for countries with EU Association Agreements. The workshop also addressed the role of Professional Accountancy Organizations (PAOs) in improving the business climate by increasing confidence in corporate financial reporting. Different models and strategies to achieve sustainable and effective PAOs, reflecting the increasing corporate nature of their operating models, were looked at and their potential contribution to public oversight and quality assurance was discussed.

Ukraine’s audit profession and business discuss ways to promote better auditing practices

A forum on 15 October, jointly hosted by CFRR and the Ministry of Finance of Ukraine as part of the STAREP program, gathered over 350 auditors, regulators, professional accountancy organizations, academics, representatives of private businesses, and international experts in support of ongoing audit reform in Ukraine and to focus on the “European Future of the Auditing Services Market”. The Forum facilitated greater cooperation amongst those involved in the audit market and encouraged open exchanges on new draft audit legislation which aims to improve audit quality in Ukraine, introduce public audit oversight, strengthen auditor independence, enhance transparency, and foster audit market diversity in alignment with EU directives. Significant consensus on the main direction of the proposed changes was apparent and participants agreed that further dialogue and consultations with key institutions and professions should follow.

Polish auditors discuss the future development of their profession

A CFRR team took part in the Polish National Chamber of Statutory Auditors (KibR) 16th annual conference on 21 October. Discussions included implementation of the 2014 EU Directive on Statutory Audits and Regulation on Statutory Audits of Public Interest Entities (PIEs), new auditor reporting models applicable to PIEs, and new and revised ISA. The team emphasized the importance of promoting effective communication and collaboration between auditors and audit committees to help create the right conditions for better quality audits. As Poland moves towards EU-mandated public oversight, rather than self-regulation, there is a risk that competence and access to professional knowledge could be lost. Effective audit oversight requires a thorough understanding of the work auditors do. The team highlighted the need to recruit, develop and retain talent to ensure quality assurance systems and oversight bodies are competent and adequately informed by the expertise of the profession while maintaining independence.

Survey in 35 countries points to the economic benefits of building constructive relationships between banking supervisors and auditors

A CFRR conference on 28 September attracted over 100 of Europe’s banking supervisors and external auditors to the Austrian National Bank’s prestigious headquarters in Vienna to promote cooperation between these practitioners in order to enhance the quality of supervision and auditing and to contribute further to the resilience of the banking system. The conference was convened to launch a report on “Banking Financial Supervisors and External Auditors: Building a Constructive Relationship”. This details the findings of CFRR research into the relationship between external auditors and banking supervisors based on a survey conducted in 2014 in 35 countries with the extended support of the European Banking Authority. A number of actionable insights and good practices revealed from the research, including the level, frequency and nature of contacts, were discussed. The consensus was that these could help banking supervisors develop policies and guidance to enhance their relationship with banks' auditors as well as defining inputs and processes towards improving auditing and supervision practices. The final report will soon be available on the CFRR website.

We asked Pascal Frerejacque, CFRR Senior Financial Management Specialist, about the background to this report.

As one of the main authors of this report, what inspired you to prepare it?

Pascal Frerejacque: The 2008 financial crisis triggered the worst global recession in almost 80 years. Amongst other things, the economic meltdown exposed weaknesses in banks’ control and governance processes as well as in their statutory audit and financial supervision structures. It became clear that the work of external auditors and banking supervisors is extremely important because it contributes significantly to market discipline, reliable financial information and financial stability – so ultimately, their work affects us all.

Our client countries were interested in greater clarity about the different roles of external auditors and banking supervisors and how collaboration between them could be improved. Around the same time, the Basel Committee on Banking Supervision published a draft paper on external auditing which further highlighted the importance of the relationship between auditors and supervisors for financial stability.

We therefore initiated a dialogue, with workshops in 2012 and 2013 as part of the REPARIS and STAREP programs, to review auditing and banking supervisory practices in the Europe and Central Asia region and consider the impact of the relationship between regulators and external supervisors. It was clear from this that there were a range of practices - some more effective than others - at influencing the audit quality of banks’ financial statements and making good use of information provided by external auditors.

We designed a questionnaire to understand the existing relationships in our client countries and explore practices that make better use of information shared between banking supervisors and external auditors and influence both audit quality of banks’ financial statements and the effectiveness of supervision, which we hoped would help suggest good practice models. We were able to expand the scope of respondents by partnering with the European Banking Authority (EBA). They helped us access relevant counterparts at European central banks and banking supervisory agencies, and build on our work for drafting their guidelines.

What was the response like?

Pascal Frerejacque: Impressive! My colleagues Johanna Lincoln, Carla Loum, and I received responses from supervisory authorities in 35 countries. Almost 90 percent of the authorities we approached took the time to respond to the 44 questions in the survey, which indicates the importance they attach to this subject. We are very grateful to everyone who took part and for the support of the EBA and World Bank colleagues in developing this report which could translate into a useful tool for technical assistance.

What was the main conclusion of the survey?

Pascal Frerejacque: That an effective relationship between banking supervisors and external auditors is a key factor in the quality of audits and the supervision of banks and, while each have distinct roles and responsibilities, they can both benefit from better communication and closer interaction. We received great examples of good practices which are featured in the report and can now be shared on a global basis.

Who is the main target audience and what kind of feedback have you received?

Pascal Frerejacque: Policy makers and regulators. By sharing policy actions based on good practice and encouraging discussions about implementing changes with our clients we hope the report will improve audit quality and the supervision of banks and encourage greater cooperation between auditors and supervisors.

The feedback from countries under the EU-REPARIS and STAREP programs was excellent. Other countries in Europe – for example, France, Germany, the Netherlands and the UK - have also expressed great interest in the report and its conclusions. Standard setters such as board members of the International Auditing and Assurance Standards Board have asked us to keep them informed, and several experts from European central banks and banking supervisory agencies have commended the report for clarifying a number of issues.

What do you see as the next steps?

Pascal Frerejacque: We need to disseminate this knowledge and ensure that the World Bank uses it when providing technical assistance on the subject. There is a lot of information in the report that can have global relevance. Within the EU a high quality framework has been developed and there is great potential for this experience and good practice to be shared and implemented in other regions around the world. We are fortunate to have experts around the world who can use this report. So I think we should seize the momentum it has generated and replicate this work in other parts of the world.

Dissemination event for FYR Macedonia A&A ROSC Update: 17 December 2015, Skopje

A dissemination event will review the main findings of the updated Accounting and Auditing Report on the Observance of Standards and Codes in FYR Macedonia which analyzes comparability of national accounting and auditing standards with international standards, and assess progress in implementing an institutional framework which supports high-quality financial reporting since the previous report in 2003.

We hope you find this issue of the newsletter interesting and useful. Please let Denise Brettschneider, our Editor (dscanlonbrettsch@worldbank.org) know if you have any comments or suggestions for topics that could be featured in future editions.