1

Presentation of the ROSC Reportin BiH: Main findings

Mr. Frédéric Gielen Senior Financial Management Specialist, World Bank

Experts: JF des Robert and Anne-Marie RaynaudWorkshop on Review of Accounting and Auditing Practices

within the ROSC Initiative - Sarajevo, October 20, 2004

2

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 entitiesNew state framework law adopted in June 2004 to unify the frameworkLong way to attain full compliance with acquis communautaire

3

Statutory framework in FBiH

Statutory framework does not comply with the acquis communautaire :

Responsibility of cies board members not sufficientIAA has exclusive right to drive accounting and sell licenses, but cannot insure public interest and quality (no active members)Accounting law dating 1995 lacks clarityCodex falls short of IFRS (dating 1998)Banks and Insurance Cies do not apply full IFRSListed companies obligations not enforced for IFRS and audit obligation Financial Statements not available (ZPP closed), even in FBiH SECStatutory appointments mechanisms deficient

No evidence of competence of auditors and accountants

4

Statutory Framework in RS

Collective responsibility of directors in Law adequate but not taken seriouslyNo clear statutory framework in Accounting law dated 1999 (IAS 1999) for disclosure of FSRS accounting standards prepared by RS AAA fall short of IFRS translated in 1999Banks and Insurance have no special requirementsMost listed companies do not publish FSGreat burden on SME’s (audit obligation and accounting frame work)No termination of audit procedure, and no supervision for banksFS not publicly available except banks

5

The Profession in BiH

RS

Mostar

Profession still highly fragmented(5 associations)New Framework state Law (June 04) will promote unified profession and independent standard commissionNew commission include public-interest and is governed by a non-auditorNew Law create countrywide platform for auditors (recognition)New law sets grandfathering process : unqualified persons can stay in the profession.

Sarajevo FBiH

Brsko

6

The Profession in FBiH : IAA and the others

Regulated by the IAA, offspring of MOF (7 members)- including no professional membersIAA 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

7

The profession in RS : the AAA

AAA is a SRO of 4500 members,Including1100 certified accountants and 50 auditorsAudit profession too small : 50 auditors for 650 enterprisesA SRO, with limited limited oversight from MOF : all tasks delegated to AAA until 2007 full IFRS applicationGood will but Lack of resources (registration fees : 50 USD per year and per person)Auditors’ liability poorly drafted and never tested (Cap = 15000 USD)

8

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

9

Professional education and training in FBiH

IAA manages all qualification and education system and provides training

3 levels in FBiHTrainee : 4 years university degree in economicsIndependent accountant : 1 year practical experienceProfessional auditor : special IAA courses (auditing, financial accounting, IT, etc…)

CPE not compulsory but encouraged and organised by the IAA

10

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 bookkeeperIndependent accountantCertified accountantAuditor : 4 years plus practical experience not checked as acceptable following IES

CPE for minimum of 30 hours per year

11

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

12

Setting accounting and auditing standards in FBiH

IAA is the only accounting and auditing standard setter in FBiH, without any due processNational 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 modificationsAmendments and interpretations not translated by lack of time and financingISA standards, based upon 1998 IFAC standards were translated and published by IAA, but not updated

13

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’sneeds were endorsed and enacted

RS standards of audit follow the IFAC 1999 version, although new translation updated has been made recently

14

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 concernsGovernment mainly concerned by prevention of tax evasion, illegal activities and cash transactionsLack of sound quality assurance mechanism for the statutory auditNon conformity with the acquis communautaire requirements and IFAC pronouncements

15

Enforcing accounting and auditing standards in RS

No sufficient effective mechanism for enforcement by AAA, except for banksCompany directors not interested by disclosure financial statements, more by tax concernsGovernment concerned by prevention of tax evasion, illegal activities and cash transactionsLack of sound quality assurance mechanism for the statutory audit, although decided by AAANon conformity with the acquis communautaire requirements and IFAC pronouncements, and no public oversight.

16

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

17

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 adoptedSample 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

18

Accounting standards as designed and practiced in RSThe 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)

19

Auditing standards as designed and practiced in FBiH

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

Enron

Parmalat

Ahold

Shell

20

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)

21

Perception of the quality of Financial reporting in BiHLack 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