Presentation of the ROSC Report in BiH: Main findings Mr. Frédéric Gielen Senior Financial Management Specialist, World Bank Experts: JF des Robert and Anne-Marie Raynaud Workshop on Review of Accounting and Auditing Practices within the ROSC Initiative - Sarajevo, October 20, 2004 1
Institutional framework of BiH The two entities of BiH have different accounting and auditing regulatory frameworks Two sets of reports for companies registered in both entities New state framework law adopted in June 2004 to unify the framework Long way to attain full compliance with acquis communautaire 2
Statutory framework in FBiH Statutory framework does not comply with the acquis communautaire : Responsibility of cies board members not sufficient IAA has exclusive right to drive accounting and sell licenses, but cannot insure public interest and quality (no active members) Accounting law dating 1995 lacks clarity Codex falls short of IFRS (dating 1998) Banks and Insurance Cies do not apply full IFRS Listed companies obligations not enforced for IFRS and audit obligation Financial Statements not available (ZPP closed), even in FBiH SEC Statutory appointments mechanisms deficient No evidence of competence of auditors and accountants 3
Statutory Framework in RS Collective responsibility of directors in Law adequate but not taken seriously No clear statutory framework in Accounting law dated 1999 (IAS 1999) for disclosure of FS RS accounting standards prepared by RS AAA fall short of IFRS translated in 1999 Banks and Insurance have no special requirements Most listed companies do not publish FS Great burden on SME s (audit obligation and accounting frame work) No termination of audit procedure, and no supervision for banks FS not publicly available except banks 4
The Profession in BiH Profession still highly fragmented (5 associations) New Framework state Law (June 04) will promote unified profession and independent standard commission RS New commission include public-interest and is governed by a non-auditor New Law create countrywide platform for auditors (recognition) New law sets grandfathering process : unqualified persons can stay in the profession. Sarajevo FBiH Mostar Brsko 5
The Profession in FBiH : IAA and the others Regulated by the IAA, offspring of MOF (7 members)- including no professional members IAA Licensed 23 auditors, 60 audit firms and 3500 accountants (No professional SRO) 3 or 4 associations of practitioners, without resources or aims, grouped in 2003-2004 in 1 association, SRRiF-BiH (3000 members) Code of ethics outdated (1998 version) Auditors liability not tested, even penal or disciplinary measures 6
The profession in RS : the AAA AAA is a SRO of 4500 members, Including1100 certified accountants and 50 auditors Audit profession too small : 50 auditors for 650 enterprises A SRO, with limited limited oversight from MOF : all tasks delegated to AAA until 2007 full IFRS application Good will but Lack of resources (registration fees : 50 USD per year and per person) Auditors liability poorly drafted and never tested (Cap = 15000 USD) 7
Professional Education and training in BiH The new framework Law will establish 3 categories of practitioners : CAT (Accounting Technician) CMA (Accounting Manager) CA (Certified Auditor) CPE : 120 hours on 3 years (IFAC IES) Law to be enforced 8
Professional education and training in FBiH IAA manages all qualification and education system and provides training 3 levels in FBiH Trainee : 4 years university degree in economics Independent accountant : 1 year practical experience Professional auditor : special IAA courses (auditing, financial accounting, IT, etc ) CPE not compulsory but encouraged and organised by the IAA 9
Professional education and training in RS Adapted in 2001 to IFAC and UNCTAD IES by RS AAA Higher education plus practice at 4 levels : Certified bookkeeper Independent accountant Certified accountant Auditor : 4 years plus practical experience not checked as acceptable following IES CPE for minimum of 30 hours per year 10
Setting accounting and auditing standards in BiH New framework law will establish a unified standard setter, the Independent Standards Commission (9 members) Use of IFRS by all public institutions at state, entity and cantonal level, for all government public interest and small entities, but : Only public interest entities should use IFRS SME s should have a simplified system compatible with IFRS, like RS project Public interest entities should use IPSAS 11
Setting accounting and auditing standards in FBiH IAA is the only accounting and auditing standard setter in FBiH, without any due process National standards, based on IAS, published in 1998 in the official gazette as CODEX, is outdated, and includes many changes from IFRS. National standards based IAS 32 to 38 were published in 1999 with modifications Amendments and interpretations not translated by lack of time and financing ISA standards, based upon 1998 IFAC standards were translated and published by IAA, but not updated 12
Setting accounting and auditing standards in RS RS AAA is the accounting and auditing standard body, under light control of the RS Ministry of Finance (until 2007) The translation of IFRS by AAA, based upon 1999 IAS volume is outdated 16 standards corresponding to SME s needs were endorsed and enacted RS standards of audit follow the IFAC 1999 version, although new translation updated has been made recently 13
Enforcing accounting and auditing standards in FBiH No effective mechanism at all by IAA for enforcement, except for banks (Commission) Company directors not interested by financial statements, but by tax concerns Government mainly concerned by prevention of tax evasion, illegal activities and cash transactions Lack of sound quality assurance mechanism for the statutory audit Non conformity with the acquis communautaire requirements and IFAC pronouncements 14
Enforcing accounting and auditing standards in RS No sufficient effective mechanism for enforcement by AAA, except for banks Company directors not interested by disclosure financial statements, more by tax concerns Government concerned by prevention of tax evasion, illegal activities and cash transactions Lack of sound quality assurance mechanism for the statutory audit, although decided by AAA Non conformity with the acquis communautaire requirements and IFAC pronouncements, and no public oversight. 15
Accounting standards as designed and practiced in BiH Accounting requirements and practices insufficient for investors decisions Financial statements not reliable for decision making No recognition of transparency and disclosure needs by stakeholders Companies not convinced that disclosure is a benefit rather than a burden No interest from stakeholders to have extensive information published 16
Accounting standards as designed and practiced in FBiH FBiH accounting standards fall short of IFRS Conceptual framework incomplete (responsibility of management for FS) Financial instruments, Investment property and agriculture : IAS 39, IAS 40 and IAS 41 not adopted Sample of 5 FS in accordance with IFRS and 10 with FBiH standards : 5 on 10 with no notes, 4 on 10 without audit report No consolidation, no segment reporting Non disclosure of related parties transactions 17
Accounting standards as designed and practiced in RS The RS translation of IFRS is neither complete nor updated (14 standards enacted) Revaluation of assets based on price indices which overstate assets No deferred tax accounting (IAS 12) Several IAS missing : Financial instruments (IAS39), Investment property (IAS40) and Agriculture (IAS41) Impossible for the ROSC team to review complete FS (Notes, Cash Flow statement miss) 18
Auditing standards as designed and practiced in FBiH Shell Parmalat Enron Ahold Differences between 1999 ISA s adopted by IAA and actual IFAC ISA s Fraud and error (ISA 240) Communication of audit matters (ISA 260) Quality of statutory audit conflicting Lack of documentation Fraud and error not considered Internal control system not applied Inadequate disclosure of related parties transactions Lack of audit evidence : inventories, external confirmation Weakness of audit profession and practice create big potential risk for investor 19
Auditing standards as designed and practiced in RS Differences between ISA applicable in RS and the current ISA standards Insufficient training and compliance Audit reports accompanying financial statements not prepared in accordance with ISA800 (The auditor s Report on Special Purpose audit engagement) Major departures from auditing standards and IFRS (unqualified opinions) 20
Perception of the quality of Financial reporting in BiH Lack of availability and completeness of Financial Statements in FBiH and in RS Little reliance in the information contained in corporate financial statements Bank Financial statements more reliable than in commercial/ industrial sector (Role of Bank Control Commissions), but not in Insurance Cies Joint stock audited financial statements more reliable than limited liability companies (unaudited) Tax issues, accounting burden and fraud are the core motivations behind accounting improprieties Application of new framework Law and creation of Commission urgent to improve quality 21