Банкеръ Weekly

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AUDIT TRAPPED IN A LEGISLATIVE MESS

Bulgarian law-makers have again botched a work of their own. The latest amendments in the Independent Financial Audit Act as of June 2008 are positive as far as they came in power after four to five years of pondering, according to the expert-accountant guild. However, according to the professionals, the matters are again not mastered. Paradoxically, the amendments in the Independent Financial Audit Act which affect the setting up of a commission for public supervision upon chartered auditors are already in force while the governors do not lay a whit of effort in order to establish it. By the way, it is paradoxical but not unexpected: the tripartite coalition usually misses all deadlines when the question comes about choosing or shifting persons who take mandatory offices. And the offices at the Audit Supervisory Commission are exactly like this.
The law stipulates that the Bulgarian National Bank (BNB), the Finance Minister, the Financial Supervision Commission (FSC), the Minister of Economy and Energy, and the Institute of Chartered Certified Accountants (ICCA), need to propose members of the above-mentioned commission within a two-week term after the regulation has come in force. Two of the supervision authority's offices are intended for ICCA representatives and, for the time being, the auditors' organization only has assigned who they will be. ICCA head Mihail Dinev told the BANKER weekly that the persons in question are Hristo Mavrudiev and prof. Hristina Vucheva who have been assigned by the governing council. On the stipulation that he does not want to scrutinize, Mr. Dinev said that the act is strongly politically-tinted. The act was enforced in June but it is already being disobeyed. More than a month has passed but the commission has not been yet set up. I realize that the MPs were on holiday but the Parliament is already working and the governors should name members of the commission, deems ICCA head.
Most likely, similar reproaches forced MPs from the the parliamentary Budget Committee to unexpectedly supplement their October 8th agenda with choosing head of the new supervisory body. It became clear that Nikolay Chatalbashev would most probably head the commission for public audit upon registered auditors. He is currently chief expert at the National Audit Office and secretary at the Audit Quality Assessment Commission, also a unit of the Audit Office. His candidature is being endorsed by both Mihail Dinev and Audit Office head Valeri Dimitrov. However, it did not become clear whether there were other aspirants after the attractive position and who they were. Mr. Chatalbashev himself told the BANKER that the remaining commission members would be appointed within 10 days after he had been endorsed by the Parliament and taken his new office.
But choosing members is just one of the problems related to the application of the new Independent Financial Audit Act. The major ground for its passing at the beginning of the summer was concerting the Bulgarian audit legislation with that of the European Union. That is to say, it was urgently needed the minimal mandatory regulations for independent financial audit to be standardized according to the 2006/43/EO Directive
The most important amendments to the legislative act
directly concern the companies carrying out activities of public interest, such as public companies and issuers of securities in Bulgaria or in any other country of the EU and the European economic medium, credit institutions, insurers, healthcare and pension insurance companies. The list includes also the firms which generate, distribute or sell electricity or heat energy, import, transport, distribute and transit natural gas, water supply and sewage companies, telecoms, Bulgarian State Railways (BDZ) EAD and its subsidiaries. The requirement of the law concern also companies which for the current fiscal year exceed the indicators of two of the following three criteria: the balance sheet of their assets exceeds BGN84MN as of December 31; their net proceeds from sales for the year exceed BGN97MN, and the average number of their personnel for the year is at least 250. That is also the EU standard for medium-sized enterprises.
Under the already passed amendments, each of the above-mentioned enterprise should set up in its management structure
an audit committee
to assist in working out more accurate reports. After the bankruptcy of the American energy giant Enron and of some other big companies, people were worried that enterprises' financial reports were not sufficiently reliable due to the bad practices used for drafting them. That on its part could lead to frauds. The establishment of audit committees will help for better corporate management and will guarantee to a greater extent investors' security. In the present conditions of a crisis, for instance, if the company is run well and if the audit committee is really independent and observes the requirements, the investor would be more at ease and won't try to get rid of his stocks in that company Marian Marinov, manager of Risk Control at Deloitte Touche, commented for the BANKER. He explained as well that executive directors, members of the juristic person's managerial bodies, and people working within the same structure, shall not be entitled to a position in the new units. Also, at least one of the audit committee's members should have a university diploma in accountancy or finance and at least five years of professional experience in accounting or auditing. At least one of the members should also be independent of the Supervisory Board.
As a whole big companies would be hardly particularly affected by the new requirements, as most of them have entire audit units, control systems, etc.
But smaller firms will face problems
as using the services of a chartered certified accountant is anyway expensive for them. The functions of the audit committee are quite serious. It will control the processes of financial reporting and look after the efficiency of internal control systems. Moreover, the new unit will recommend choice or replacement of the chartered certified accountant and will overview his independence. In fact, the establishment of these committees should not be difficult. But the establishment of the entire system for internal control and risk management and of an overall stable structure for internal audit would be a problem. Let's specify that in the enterprises which are joint-stock companies the functions of the audit committee could be undertaken by the Management Board, the BoD, or the Supervisory Board. However, that could happen only if as per the latest annual report the enterprise meets at least two of the following three criteria: average number of personnel - up to 50; balance sheet of assets as of December 31 - up to BGN18MN; net proceeds from sales for the year - up to BGN20MN.
Written in that way the legislative act leads to the suspicion that
someone wants to burden with costs for audit more firms
and oblige them set up audit committees. From 250 the minimum number of employees becomes 50, assets till the year-end are cut down from BGN86MN to BGN18MN, and the requirement for net proceeds from sales for the year goes down from BGN100 to BGN20MN. All that suggests that a new group - that of smaller enterprises is being pushed into the scope of auditing activities. For instance, each dealer in sugar with own warehouses meets at least one of these criteria. I am afraid that this public, independent supervision in the financial audit will in fact racketeer some firms, obliging them set up such audit committees, the independent MP Maria Kapon commented to a reporter of the BANKER. Practically, it turns out that in that way the number of enterprises liable to auditing will increase.
In fact, according to the law-makers, these committees should reduce
the possibilities for tax-evasion
and make firms show their real financial results. May it be so that the number of frauds is reduced indeed. But we should not hope that a single law would solve that problem. The scheme of organizing control should be different, ICCA's Chairman, prof. Mihail Dinev, commented. However, he declined to comment which is the right scheme according to him.
It turned out as well that the latest amendments to the legislative act
contradict other documents
According to Valeriy Pavlov, Chair of the Chamber of Internal Auditors, the new requirements for the establishment of managerial structures, such as the audit committees, are duplicating provisions of the Public Companies Internal Audit Act. Apart form that the Commercial Code does not have such provisions. On the basis of which legislative act should these new structures be set up? It is not clear. In one act the audit committees have auxiliary functions, in another - controlling, Mr. Pavlov commented. In his words, a private monopoly on a certain category of companies is created in that way on the part of ICCA in order to ensure more proceeds.
At the present stage nobody could tell how much money should be invested in the companies for setting up such additional units. I don't know how much that would exactly cost, but it will not be an expenditure they could not afford. The more so that it would rather bring them benefits as it is directly connected with better corporate management, and that on its part is bound with the companies' security, and hence - increase of their shares' quotations, Marian Marinov said. According to ICCA's Chairman, however, the companies will not only have financial, but also organizational difficulties. I share Ms Kapon's opinion that that would lead to racketeering of some firms. The state intervenes too much in the audit profession, he is adamant.
The chartered certified accountants from EUROAUDIT B X are also sceptical. There is no way to calculate how much the introduction of audit committees will cost as we don't have any practice in that direction yet. Moreover, it is not known what remuneration the people to participate in those structures would ask for. I admit it would be harder for the smaller energy companies. Although they do not satisfy the requirements for turnover, they fall into the group of companies where the new units should be set up only because of the sector they operate in, Izabela Dzalazova, managing co-partner in EUROAUDIT B X, commented to the BANKER weekly.

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