World Bank Centre for Financial Reporting Reform - Newsletter May 2013

Welcome to the CFRR’s spring 2013 Newsletter!

Welcome to the spring edition of the CFRR’s newsletter. In this issue, we give an update on proposals to reform the regulation of statutory audits in the EU and present highlights from the World Bank’s updated report on accounting and auditing in Kosovo. The Newsletter also summarizes the CFRR’s activities over the last three months, including a distance learning event on how a commercial bank accounts for loan loss provisions and two workshops on improving professional education.

Index

• Providing professional bodies with the material to train auditors to international standards
• Public oversight of auditors: learning from experience in Norway and the Netherlands
• Strengthening international links for accounting education in South-East Europe
• Accounting for loan losses: a commercial bank’s perspective
• Improving financial reporting by banks in Uzbekistan: progress to date and challenges ahead
• A&A ROSC Update for Kosovo: Taking stock of progress and launching a new phase in CFR reform
• Financial reporting in Austria: the views of SMEs and local banks
• European Parliament amends proposals for audit reform in the EU
• Serbia prepares new laws on accounting and auditing
• Upcoming Events
• New faces at the CFRR

Key recent activities

Providing professional bodies with the material to train auditors to international standards

As part of the REPARIS program, the CFRR organized a workshop from 6-8 February for Professional Accountancy Organizations (PAOs) and others providing continued professional development (CPD) training for auditors. The workshop was the second in a series of three, with an overall objective of constructing a Client File Series (CFS), containing all the documentation and teaching materials that CPD teachers need to present a case study of an SME audit, including the supporting materials needed to comply with International Standards on Auditing (ISA) and the IAASB’s main standard on quality control (ISQC1).

This second workshop focused on quality assurance issues surrounding the audit process, auditing internal controls, materiality, audit procedures for the revenue cycle and practical approaches to risk assessment. The workshop also discussed issues surrounding the report to management that the auditors prepare at the end of an audit.

The CFRR website has summaries, with supporting presentations, of this event and also of the first event in the series.

For practical reasons, these events are held mostly in English and can only be attended by a small number of participants from each country. In order to have a significant effect on the provision of CPD training on the ground, it is important that the knowledge gained in these workshops is passed on to a wider group of audit trainers in each country. A recent event in Moldova shows how this type of "information cascade" can work in practice. With the support of REPARIS, the Ministry of Finance in Moldova organized a follow-up workshop on 9-10 April, disseminating the materials and insights gained at the CFRR workshop to a wider group of audit trainers. This follow-up workshop was held in Romanian and provided participants with Romanian-language versions of the materials presented at the two previous workshops. A full summary (in Romanian) of this event can be found on the Ministry of Finance’s website. The CFRR is working with its local partners to support similar dissemination events in in each REPARIS country.

Public oversight of auditors: learning from experience in Norway and the Netherlands

As part of the FRTAP program, the CFRR organized study visits for members and staff of audit oversight bodies and professional auditors’ associations in the Czech Republic, Latvia, Poland and Slovenia to their equivalents in the Netherlands and Norway. These visits follow a similar study trip to the Swiss Federal Audit Oversight Authority in December 2012 (see the CFRR’s February Newsletter for further details). The visits were designed to familiarize participants with the approaches adopted in different countries in implementing the core tasks under the Statutory Audit Directive of overseeing auditors and carrying out effective quality assurance (QA) inspections.

In the Netherlands (13-15 March), the group visited the Authority for Financial Markets (AFM) and the Netherlands Institute of Chartered Accountants (NBA, the successor body to the former Royal NIVRA); in Norway (23-25 April), the group visited the Financial Supervision Authority (FSA) and the Norwegian Institute of Auditors (DnR). The visits provided participants with insights into the implications of integrating audit oversight and quality assurance activities within bodies that have broad regulatory mandates covering capital markets and financial services - in contrast to the Swiss FAOA, which is solely an audit regulator.

A topic of particular interest was the role of the professional body in carrying out QA inspections, as well as the nature of its interaction with the oversight body and how that had evolved over time. In the Netherlands, the AFM has devolved many of the activities surrounding the QA of auditors of non-public interest entities to the NBA, while the AFM itself carries out the QA for the auditors of the largest and most economically significant firms. In Norway too, the FSA carries out QA of the audits of public interest entities. In both countries, the fact that the oversight body itself carries out the QA of the audits of the largest firms means that they place particular emphasis on the quality of their inspectors, many of whom are former senior practicing auditors.

Strengthening international links for accounting education in South-East Europe

As part of the REPARIS program, the Accounting Education Community of Practice (EduCoP) held a workshop from 24-25 April on a range of topics including practical methods for improving accounting education, with a particular focus on co-operative arrangements, such as twinning of institutions, for developing sustainable systems of education and accreditation.

One of the highlights of the workshop was a session exploring how links with established educational institutions can help universities in the REPARIS countries to modernize their curricula and meet their students’ needs for internationally recognized qualifications. In particular, two educational institutions from Sarajevo – the School of Economics and Business of the University of Sarajevo (SEUS) and the Sarajevo Graduate School of Business (SGSB) – gave presentations describing their experiences of co-operating with foreign universities in designing and delivering courses and obtaining accreditation for them. SEUS has restructured its courses in line with Bologna principles and is working with a range of foreign universities to broaden the range of courses it could offer. In some cases the foreign institution provided some of the teaching staff and course content, while in others the courses were jointly organized, giving students the opportunity to attend the foreign institution for part of the course. In both cases, the twinning arrangement allowed SEUS to offer a broader range of study option than it would be able to on its own. The SGSB outlined its experience in offering an MBA course in co-operation with a US university business school. This arrangement allowed SGSB to obtain accreditation for the course and to broaden its appeal and relevance to students.

In addition, the Serbian Deputy Minister of Finance presented a summary of the proposed new laws on accounting and auditing in Serbia and the Head of the Financial Systems Directorate of Montenegro's Finance Ministry outlined its proposals to reform audit regulation and oversight in Montenegro.

A summary of the workshop, with full supporting materials can be found on the CFRR website.

Accounting for loan losses: a commercial bank’s perspective

The accounting treatment of losses on bank loans is currently a hot topic, with the International Accounting Standards Board (IASB) publishing revised proposals in March 2013 as part of its IFRS 9 project.

In order to give financial regulators in the REPARIS more countries greater insight into how the IASB’s existing standard for accounting for loan losses (under IAS 39) works in practice, the CFRR invited senior staff from Raiffeisen Bank International (RBI) to present a virtual seminar on how the bank approached the issue of loan losses to small and medium-sized enterprises (SMEs) in its operations in South-Eastern Europe. This GDLN event, which was held on 13 February 2013, outlined the various models used by RBI to assess the level of loan loss provisions on SME lending. It also discussed how the IASB’s proposals, which were expected to come into force in 2015, were expected to lead to loan losses being recognized earlier than under the current system. As a result, the level of loan loss provisions was likely to rise, at least in the short term.

A summary of the event can be found on the CFRR website.

Improving financial reporting by banks in Uzbekistan: progress to date and challenges ahead

As part of the FIRST initiative, the CFRR is working with the Central Bank of Uzbekistan (CBUz) to enhance financial reporting and auditing in the Uzbek banking sector. Building on the 2008 A&A ROSC, the project’s main objective is to prepare a detailed action plan for the adoption of international standards in financial reporting (International Financial Reporting Standards – IFRS) and auditing (International Standards on Auditing – ISA) in the Uzbek banking sector. This involves the analysis of the existing legal framework, drafting proposed changes to Uzbek laws and regulations and facilitating the adoption of an official translation of IFRS and ISA into Uzbek, together with a sustainable mechanism for updating the translations to reflect future changes in the international standards.

In addition, the project aims to raise the capacity of preparers of bank financial statements and bank auditors to prepare and audit bank financial statements by developing training materials that can be used in university and professional education programs. The project will also train bank regulators in the CBUz in how to use bank financial statements prepared under IFRS in their supervisory activities.

The project was launched in September 2012 and is due to be completed in December 2013. This presentation summarizes the main elements of the project.

A&A ROSC Update for Kosovo: Taking stock of progress and launching a new phase in CFR reform

The key findings and recommendations of the updated Accounting and Auditing Report on the Observance of Standards and Codes (A&A ROSC) for Kosovo were presented at a workshop in Pristina organized by the World Bank on 7 May.

The A&A ROSCs analyze how well national accounting and auditing practices meet international standards, both in terms of their formal content and their practical implementation. The CFRR is responsible for producing the A&A ROSCs for the countries of Europe and Central Asia.

The updated report for Kosovo, which builds on the previous A&A ROSC for the country published in 2006, finds that recent changes have brought the country’s legal framework in Kosovo closer to that of the EU. In addition, Kosovo’s accounting and audit profession has developed, with the Society of Certified Accountants and Auditors of Kosovo becoming a member of the International Federation of Accountants (IFAC) in 2010. The report finds that there are several areas where further progress is required. Some further amendments to domestic legislation will be needed to achieve full alignment with the EU’s acquis communautaire. Just as importantly, this legislation needs to be implemented more effectively. In particular, many companies outside the financial sector do not comply with the existing legal requirement to compile and publish financial statements.

A summary of the launch event and the full text of the A&A ROSC itself can be found on the CFRR website.

A particularly challenging area for Kosovo is establishing an audit quality assurance system. The REPARIS program will support Kosovo in its efforts to deepen the reforms and to achieve closer alignment with the acquis.

Financial reporting in Austria: the views of SMEs and local banks

Small and medium-sized enterprises (SMEs) play a particularly important role in the Austrian economy, with commercial banks acting as their main sources of external finance. As SMEs are also very important in the REPARIS countries, analyzing how SMEs and their banks view the operation of financial reporting in Austria could produce some useful pointers for the design of financial reporting frameworks in the REPARIS countries.

In cooperation with the Austrian Federal Economic Chamber and the Austrian Institute for SME Research, the CFRR conducted two surveys in late 2012 collecting information on SMEs' experience with corporate financial reporting and on Austrian banks’ requirements for financial information from SMEs applying for credit. The surveys found that financial statements, both audited and unaudited, play a valued role for Austrian SMEs; not only for tax purposes, but also in helping SMEs to improve the financial management of their businesses. In addition, due to their important role in banks’ decisions whether to extend a loan, financial statements facilitated SMEs’ access to bank financing.

However, the potential benefits for Austrian SMEs from financial reporting very much depend on: (i) the system striking an appropriate balance between promoting improved financial information and reducing the regulatory burden on reporting firms; and (ii) the accounting and auditing profession’s ability to provide reasonable assurance regarding the data accuracy of the financial information provided in a SME credit application. In this respect, the surveys found that the Austrian audit profession has a generally good reputation for providing reasonable quality assurance for financial decision making among Austrian credit institutes.

Summaries of the survey of financial reporting in SMEs and the survey of bank lending practices to SMEs are already available for download. The CFRR is also preparing a report on corporate financial reporting in Austria based on the methodology of the A&A ROSCs.

News from Europe

European Parliament amends proposals for audit reform in the EU

In November 2011, the European Commission published proposals for an updated Audit Directive and a new Regulation on the audit of public interest entities (PIEs). Some of the Commission’s detailed proposals, especially the compulsory rotation of audit firms, and restrictions on audit firms’ ability to offer non-audit services were controversial and provoked strong resistance from audit firms, industry groups and some national institutions.

The Commission’s proposals were sent to the European Parliament for consideration last year and in a meeting on 23-24 April 2013 the Parliament’s Juri (legal affairs) committee made a number of important amendments to the proposed Directive and Regulation. In particular, the committee voted to reduce the obligation for companies to regularly change their auditors (under the Commission’s original proposals, auditors would be "rotated" every six to 12 years; under the amendments proposed by the Juri committee, this period would be extended to 14-25 years) and to weaken the Commission’s proposed restrictions on audit firms providing non-audit services. In addition, Juri removed provisions in the Commission’s proposals that would reduce the role of professional bodies in regulating statutory auditors.

The next step is for the European Parliament, the Commission and the European Council (representing the governments of the EU member states) to try to agree on a set of proposals that is acceptable to all three sides. This "trialogue" process is likely to take several months, raising the risk that it will not be completed before the 2014 European Parliament elections and the appointment of a new European Commission.

This presentation, given by Dane Brujic of the UK’s Financial Reporting Council (FRC) to the latest workshop of the REPARIS Corporate Financial Reporting Community of Practice (CFRCoP), gives a concise overview of the current state of the reform proposals.

Serbia prepares new laws on accounting and auditing

New laws on accounting and auditing will shortly be presented to the Serbian parliament for approval. The new laws are broad in scope and would go a long way towards aligning the framework for corporate financial reporting in Serbia with the EU acquis. The proposed accounting law simplifies reporting requirement for SMEs and, especially, for the smallest (micro) enterprises. The proposed law on auditing introduces a public oversight board for auditing and gives legal backing to the quality assurance of audit.

Upcoming Events

The CFRR and the IFRS Foundation are organizing a week-long executive workshop on the use of IFRS by financial regulators. The workshop is being held from 3 to 7 June 2013 at the Diplomatic Academy in Vienna. For further details, see the dedicated event page on the CFRR website.

The CFRR, in cooperation with the Chamber of Financial Auditors of Romania, is organizing a conference in Bucharest on 6 June 2013 to promote greater awareness and understanding of the audit committee’s role and responsibilities in the financial reporting process. The conference will offer audit committee members practical insights from both a Romanian and an international perspective on how they can fulfill their role more effectively. For further details and to register for the conference, see the Upcoming Events page on the CFRR website.

The key conclusions of the updated A&A ROSC for Moldova will be presented on 11 June in Chisinau at an event organized by the World Bank's FPD Department.

The CFRR is organizing a regional workshop for senior policy-makers, regulators and practitioners from the countries of Central, Eastern and South-East Europe from 30 September to 2 October 2013 in Vienna. The workshop will allow participants to hear about the latest developments in international financial reporting and changes to audit and accounting regulation in the EU, as well as offering them the opportunity to learn from other’s efforts to implement financial reporting reforms. For the first time, this workshop will also include participants from countries taking part in the CFRR’s new regional program, Strengthening Auditing and Reporting in the countries of the Eastern Partnership (Armenia, Azerbaijan, Belarus, Georgia and Ukraine). Attendance at the event will be by invitation only.

Future events, many of which are open to invited participants only, are listed on the CFRR Events page of the CFRR website.

Latest developments at the Centre

New faces at the CFRR

Johanna Lincoln

In April, Ms. Johanna Lincoln joined the Centre as a Financial Management Consultant. Prior to this, Johanna worked as an Investment Banking Associate for HSBC and as an Actuarial Associate with Towers Perrin in London. She holds a Masters in Finance with Merit from the London School of Economics and a Masters in Economics and Management from the Université Paris Dauphine. Johanna is a Licensed Investment Professional by the French Financial Market Authority. She speaks fluent French, English, Creole and German.

.

Natalie Manuilova

In May, Ms Natalie Manuilova joined the CFRR as a Senior Financial Management Specialist. Natalie will play a key role in the CFRR’s activities in Central Asia, Belarus and Ukraine, with a particular focus on supporting reforms to external audit. Natalie is a Ukrainian national and a graduate of the National University of Economics in Kyiv. She worked for Deloitte & Touche in Kyiv and New York for eight years, before joining the IFC in 2007.

.

Let us know what you think

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

We plan to send out the next edition of the CFRR Newsletter in September

Partners of the CFRR