Welcome to the CFRR's Ministerial Conference Newsletter!
This special edition of the CFRR Newsletter focuses on the REPARIS Ministerial Conference held on 31 May in Vienna and the three supporting events that were held immediately before and after the conference.
Philippe Le Houérou, World Bank Vice-President for Europe and Central Asia, ministers from eight countries of South-East Europe, policy-makers, standard-setters and practitioners from the EU and several other ECA countries met in Vienna on 31 May to discuss the role that better financial reporting can play in helping the region deal with the economic problems raised by the financial crisis and the current difficulties in the euro zone. The conference attracted nearly 200 participants from 27 countries.
The conference was organized by the World Bank Centre for Financial Reporting Reform (CFRR) to review progress in its flagship program for South-East Europe, the Road to Europe Program of Accounting Reform and Institutional Strengthening (REPARIS). REPARIS is funded by the governments of Austria, Luxemburg and Switzerland and supports financial reporting reform in Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR Macedonia, Moldova, Montenegro and Serbia. These countries are in the process of aligning their institutional frameworks for accounting and auditing with the body of EU law and regulations, the acquis.
At the conference, ministers and senior officials reviewed the progress that their countries have made in building and improving their corporate financial reporting systems. As part of their efforts to support economic growth and to integrate more closely with the EU, most countries in the program have introduced new accounting laws. They are also strengthening their educational systems and raising the capacity of their local accounting professions. Several countries are now moving to the next stage of reform by setting up systems of public oversight and quality control to ensure that accounting and auditing norms are implemented effectively.
Ministers and senior officials also discussed how improved financial reporting helps reduce the barriers to business investment, especially for small and medium-sized enterprises (SMEs), thus helping to boost competitiveness and economic growth. They then looked ahead, considering what further measures they need to take to adjust their accounting laws in the light of the EU's new accounting directive, especially its special provisions for microenterprises, and also how to improve quality assurance and the public oversight of statutory audits.
In his opening address, Philippe Le Houérou acknowledged that the financial crisis has left the countries of Europe and Central Asia with higher levels of public debt, weakened financial sectors, and historically high levels of unemployment. The crisis unveiled weaknesses that called for deep structural reforms. In response to these challenges, one of the main pillars of the World Bank's strategy has been support for reforms to improve competitiveness. Mr. Le Houérou said "The work of REPARIS on financial reporting is critical to the competitiveness agenda. It is also an important aspect of good governance, which requires transparency and integrity both in the public and the private sector. Good public and corporate governance is not a luxury, but a necessity for sustainable growth."
Gerhard Schumann-Hitzler from the European Commission's Directorate General for Enlargement also discussed the challenges that the countries of the region were currently facing and the need for them to implement a wide range of reforms to raise their competitiveness and stimulate growth. He emphasized the importance of regional initiatives like REPARIS in improving the business environment, especially for SMEs, in the countries of the Western Balkans. These changes also help to prepare the participating countries for EU accession and, in particular, to meet the challenge of successfully operating in the EU's single market. As a concrete sign of the EU's support, the Commission was proposing to allocate funds under the new Enterprise Development and Innovation Facility for the Western Balkans to REPARIS, so allowing the program to continue beyond 2014.
Henri Fortin, the head of the CFRR, summed up the achievements of the REPARIS program since 2009 and outlined four future priorities for the program:
- improving accounting education systems, links between universities and the profession, and continuing professional education;
- developing more relevant accounting standards for SMEs and, especially, micro-sized enterprises;
- improving the links between financial reporting and reporting for taxation purposes; and
- implementing effective systems of quality assurance and public oversight for statutory auditors.
Welcoming Mr. Schumann-Hitzler's comments, Mr. Fortin concluded that the prospect of funding from the European Commission for a successor program to REPARIS would allow the participating countries to make further progress towards their shared objective of implementing corporate financial reporting frameworks that were fully aligned with those in the EU.
Three speakers from international regulatory and standard-setting bodies –the International Accounting Standards Board (IASB) the International Federation of Accountants (IFAC) and the Financial Stability Board (FSB) – described how the global environment governing financial regulation in general and corporate financial reporting in particular was evolving in response to the issues raised by the financial crisis. Philippe Danjou, a board member of the IASB, emphasized how the G20 and the IASB were seeking to learn the lessons of the financial crisis, in particular, by improving the accounting treatment of financial instruments. Although better financial reporting could not abolish the economic cycle, it could, by making public more of the exposures and risks that agents were taking, reduce the danger that financial imbalances would provoke another systemic crisis. However, for the REPARIS counties, the rapid evolution of reporting standards makes it more difficult for them to bring their reporting systems into line with those in the EU, as they are effectively chasing a moving target. In addition, as IFAC President Göran Tidström stressed, as well as drawing up new laws and regulations, countries need to develop strong institutions for financial reporting frameworks to work well in practice. This includes strong professional accountancy organizations. Regional programs such as REPARIS help the participating countries take such a broad view of the reform process and learn from each other's experiences.
This workshop brought together financial supervisors from the REPARIS countries with experts from the global financial regulators, standards setters and audit practitioners to discuss recent developments in accounting and prudential regulation and how auditors could collaborate with supervisors for better bank supervision.
The workshop received updates from Barbara Davidson of the IASB on progress in developing a new accounting standard for financial instruments (IFRS 9), which uses an expected loss approach to impairment in place of the incurred loss approach in the present reporting standard (IAS 39), and from Erik van der Plaats of the European Commission on the Commission's proposals to implement the Basel III rules in the EU. Martin Vazguez Suarez, who is now at the World Bank but previously worked as a supervisor at the Bank of Spain, complemented these presentations by describing the Spanish approach to "dynamic provisioning" and the limitations it showed during the financial crisis. He argued that the buffer provided by the dynamic provisions had given the Spanish authorities more time to act but that the approach had not prevented the current banking crisis; it also made it more difficult to assess the resilience of Spanish banks, leading to over-confidence. He stressed the importance of bank supervisors having sufficient knowledge of accounting to be able to challenge the managements of the banks that they were supervising.
The workshop also discussed how bank supervisors could develop closer relationships with bank auditors in order to take advantage of the particular knowledge that auditors had of their clients' financial performance and risks. This discussion drew on the experience in Germany, where bank auditors have to prepare a "long-form" audit report for the bank supervisor (BaFin), and in the UK, where the problems revealed by the financial crisis have led to an increased focus on co-operation between the financial regulators and bank auditors. Michael Taylor from the FSB described how the FSB was seeking global agreement on action to improve the information that audits provide to prudential regulators and also to increase the effectiveness of public oversight of audits of financial institutions.
Jointly with IFAC, the CFRR organized a forum for professional accountancy organizations (PAOs) from the REPARIS countries on 1 June. The forum discussed two main topics: how professional accountants could improve their ability to provide services that businesses, especially SMEs, valued and what the accounting profession in the REPARIS countries needed to do in order to create a sustainable structure for the profession serving the public interest.
Professional accountants, especially those in small and medium practices (SMPs) have historically tended to rely on audits as a key revenue source. However, regulatory change means that many of the smaller businesses that SMPs tend to work with will no longer be obliged to carry out audits. This will force many SMPs to develop new services to supplement the shrinking volume of audit work. Speakers from IFAC and the European Federation of Accountants (FEE) emphasized that accountants generally enjoyed a reputation for competence and integrity with their clients. They discussed how SMPs could use this credibility to become "trusted business advisers", offering additional services to help their clients run their businesses more effectively. Such a change in focus posed management challenges for SMPs, especially in the areas of IT and marketing, but IFAC was developing a range of tools that PAOs could use in assisting their members.
The second part of the forum discussed some of the operational challenges facing PAOs in the REPARIS countries. As Tatjana Todorovska from Macedonia's Institute of Certified Auditors (ICARM) emphasized, PAOs from small countries were having to deal with major changes in the regulatory framework, including the introduction of public oversight and quality assurance of auditors and the need to provide support to SMPs in implementing ISAs and many other areas, with only very limited resources. Liam Coughlan from the CFRR illustrated the scale of these challenges, showing how the PAOs in the REPARIS countries had a smaller revenue base to fund their activities. At the same time, they faced a need to establish the reputation of the profession as serving the wider public interest. In response, the PAOs in the region would need to generate new sources of income, to be selective in importing QA and other systems from abroad and to be willing to work closely with the PAOs in neighboring countries.
The CFRR hosted a workshop for senior officials and other policy-makers from the countries participating in REPARIS to look in more detail at recent international developments in accounting and auditing and the challenges that the REPARIS countries face in implementing EU directives in corporate financial reporting.
The first half of the workshop dealt with recent international developments in financial reporting. Arvind Wadhera, the acting head of the Audit Unit in the European Commission's Internal Market Directorate General (DG Markt) described the Commission's proposals to reform statutory audit. These would lead to significant changes in the structure of audit firms and have been the subject of lively discussion among market participants. Jon Grant from the International Audit and Assurance Standards Board (IAASB) described how the IAASB was working on a framework for audit quality that SMPs could use to improve the quality of their audits. This framework needed to take into account that managements, members of audit committees, investors and audit regulators had their own distinct views about which aspects of audit quality were the most important.
Philippe Danjou from the IASB presented a summary of the IASB's recent activities. He focused on the IASB's response to the financial crisis, especially the new standard on financial instruments (IFRS 9) and the convergence program to reduce the differences between IFRS and US national accounting standards. He also set out how the IASB intended to review the IFRS for SMEs standard, which had been issued in July 2009 and adopted in over 80 jurisdictions, including Bosnia and Herzegovina and Macedonia. The IASB was planning to ask for comments on the IFRS for SMEs in the next few months, with the aim of releasing an exposure draft of the revised standard in mid-2013. The updated standard would only be effective from 2015 at the earliest. Henri Olivier, the former Secretary General of FEE, then described the European Commission's proposals to simplify the EU's Accounting Directives, placing a particular focus on the relaxation of accounting requirements for very small ("micro") enterprises. Mr. Olivier concluded that most of the Commission's proposals to modify the Accounting Directive were likely to become EU law, but that the wish of many EU member states to maintain a reporting regime that was applicable to all limited liability companies meant that even micro enterprises would still be obliged to produce some financial reports.
The second half of the workshop was devoted to a discussion of how these changes affected the REPARIS countries and what approaches they were taking to the process of aligning their domestic legislative framework with the EU acquis. Several REPARIS countries are in the process of drafting new accounting and auditing laws (Macedonia, Serbia, Montenegro) and will use concordance tables to transpose the relevant parts of the acquis into their legislation. Many of the proposed changes from the Commission, notably on the Statutory Audit Directive, will pose additional challenges for the REPARIS countries, making their regional cooperation more important than ever.
The presentations made at of the conference and at the three supporting events are available for download from the CFRR's website.
The next regular edition of the CFRR Newsletter will be published after the summer break.
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