croatian financial reporting infrastructure world banks accounting and auditing rosc findings david...
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Croatian Financial Reporting InfrastructureWorld Bank’s Accounting and Auditing ROSC Findings
David Nagy Gerald Kogler
World Bank Conference in Zagreb, April 22, 2008
World Bank – Our Role» Making the link between financial reporting and poverty
reduction» Advocate for improved standards and compliance» Contributor to the policy formulation process» Assessor» Advisor» Financier» Fiduciary reliance on external audit / use of accountants
and auditors to support Bank operations
…but not a standard-setter or regulator
Accounting and Auditing ROSC
East Asia (Thailand)
PhilippinesMalaysia
Hong KongIndonesiaTaiwanSouth Korea
1990 – Emerging Market Crisis and its effects
The G-7, World Bank IMF: focus on crisis prevention
The Financial Sector Assessment Program (FSAP)
The Reports on the Observance of Standards and Codes (ROSCs)
Accounting and Auditing ROSC
Latin America and the Caribbean
Europe and Central Asia
South AsiaMiddle East and North Africa
Africa
East Asia
Global Program
Accounting and Auditing ROSC
FINDINGS Recommendations
Factu
al A
ssessm
en
t
Perc
ep
tion
s
Economic Context
Legal & Institutional Framework
Accounting in Practice
Auditing in Practice
Diagnostic Process
Accounting and Auditing ROSC
Accounting and Auditing ROSC
Benchmarks
Acquis communautaireGood international practice
International Financial Reporting Standards
International Standardson Auditing
Financial reporting A fundamental foundation
Securities Regulation
Banking Supervision
Accounting & Auditing
Corporate Governance
Insurance Supervision
Insolvency & Creditor Rights
Accounting and Auditing ROSC
Financial Reporting
Development of Capital Markets
Job Creation
Financial Stability
Private Sector Growth
Financial Sector Development
Improved Access to Credit
Financial Information
ECONOMIC GROWTH
Accounting and Auditing ROSC
Rapid changes since 2002» Regulatory framework: new Act on Accounting, new Act on Auditing» Institutional framework: Financial Reporting Council has been
established and Chamber of Auditors has been created, non-banking supervision was consolidated into a single institution, the Croatian Financial Services Supervisory Agency (HANFA), Two Stock Exchanges merged
» Important policy change, which is to limit the required use of IFRS for the financial statements of all companies by: • a requirement for large, listed companies, and financial sector,• a choice for all other companies between IFRS and accounting
standards (to be) issued by the Financial Reporting Council
Accounting and Auditing ROSC
Additional positive developments» Proactive role of the Ministry of Finance (e.g. IPA “line”)» Croatian Steering Committee on corporate financial reporting
established (chaired by MoF) = key counterpart for the A&A ROSC» Support for financial reporting reform by all key stakeholders» Clearance on the A&A ROSC from the MoF» Robust on-site and off-site supervision by the Central Bank» IFRS officially published in the official gazette, as well as available on
the internet» Cooperation among key stakeholders (e.g. Memorandum of
Understanding between Central Bank and HANFA, forthcoming joint inspections)
» Some cooperation with European banking supervisors exists (Austrian FMA)
» More students enrolled to study accounting at the University of Zagreb» On-line review of regulatory framework
Accounting and Auditing ROSC
Space for improvement» Lack of enforcement on the quality of financial statements besides the
audit function» No quality assurance on statutory auditors» Lack of enforcement of publication of IFRS financial statements» Not yet finalized consolidation of supervision under HANFA» Disruptive translation of IFRS» Up-to-date translation of IFRS is not publicly available» Ethical standards including independence are outdated» Unclear situation about SME’s » Funding versus voting rights within the Chamber: “Taxation without
voting…”» No CPD Program
Accounting and Auditing ROSC
Financial Sector» Legal requirements for regulatory structure provides room for
improvement
- Adoption of new published Standards (IASB vs local legislation)
- Informal treatment of full compliance with IFRS
- CNB does not proactively follow changes and does not adopt supervisory activities
» Non-IFRS compliance of certain measurement CNB and HANFA -regulations (e.g. unclear audit opinions)
» Not readily available appropriate trainings on advanced requirements of reporting related to financial sector
Accounting and Auditing ROSC
Banking Sector (i)» High quality of IFRS financial statements compared to international
peer group
» General awareness of IFRS requirements very high
» Extensive CNB activities
» Senior management involvement in reporting & regulatory issues
» No qualified audit opinions
» Consistent application of IFRSs
» Availability of IFRS financial statements
Accounting and Auditing ROSC
Banking Sector (ii)» Unclear basis for preparation of financial statements
» Unconsolidated financial statements
» Non consistent application of effective interest method
» Loan loss provisioning not in line with IFRS (CNB-regulation)
» Unwinding of non-performing loan provisions not in line with IFRS
» Unclear/missing basis of preparation
» Uncompleted disclosures on:
• financial instruments
• Sensitivities
• Fair values
• Leases
• Provisions
Accounting and Auditing ROSC
Insurance Undertakings» Unclear basis for preparation of financial statements
» No IFRS financial statements publicly available for users
» Unclear requirements of supervision with regards to IFRS
» Rushed implementation of insurance law
» Focus on regulatory activities mostly on adequacy of insurance technically provisions
» Potentially interference of future regulations with other mandatory requirements (e.g. mandatory formats versus IAS 1 or measurement)
» For 2006 financial statements (most likely) no comparables for 2005
Accounting and Auditing ROSC
Importance of the financial reporting infrastructure, not just standards
Statutory Framework
Monitoring & Enforcement
Education & Training
Accounting Profession &
Ethics
Accounting Standards Auditing
Standards
Accounting and Auditing ROSC
All supporting pillars need to be strengthened
Statutory Framework
Monitoring & Enforcement
Education & Training
Accounting Profession &
Ethics
Accounting Standards
Auditing Standards
Accounting and Auditing ROSC
Policy Recommendations (i)» Ensure that Croatia mandates the use of up-to-date and complete IFRS» Carefully review existing differences between the Croatian legal
framework and the acquis» Remove the requirement for Croatian citizenship to become a licensed
statutory auditor» Ensure public availability of full sets of financial statements (including
the notes) for public interest entities rather than FINA’s two page summaries of key financial information
» Introduce sanctions on the non publication of financial statements by companies
» Prepare and adopt accounting standards for SMEs» Establish a continuous and sustainable translation and adoption
process for IFRS» Establish a continuous and sustainable translation and adoption
process for ISA and the IFAC Code of Ethics
Accounting and Auditing ROSC
Policy Recommendations (ii)» HANFA should continue to strengthen its institutional capacity to
effectively monitor and enforce financial reporting requirements for the entities which it regulates
» Ensure public electronic registration of statutory auditors and audit firms within the Chamber of Auditors
» Update university curricula and equip universities providing accounting and auditing education with sufficient up-to-date training materials
» Facilitate a major training program for prepares, users, auditors and regulators
» Establish Continuous Professional Development (CPD) programs for accountants and auditors
Accounting and Auditing ROSC
Thank you - Hvala puno
Contact details:
www.worldbank.org/cfrrwww.worldbank.org/eca/hraarosc