Croatian Financial Reporting Infrastructure
World Bank’s Accounting and Auditing ROSC Findings
David Nagy
Gerald Kogler
World Bank Conference in Zagreb, April 22, 2008
Accounting and Auditing ROSC
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
1990 – Emerging Market Crisis and its effects
Philippines
Malaysia
East Asia (Thailand)
Hong Kong
Indonesia
Taiwan
South Korea
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
Global Program
Europe and
Central Asia
Middle East and
North Africa
Latin America and
the Caribbean
Africa
East Asia
South Asia
Accounting and Auditing ROSC
Economic Context
Legal & Institutional
Framework
Accounting in
Practice
Auditing in
Practice
FINDINGS
Perceptions
Factual Assessment
Diagnostic Process
Recommendations
Accounting and Auditing ROSC
Benchmarks
International Financial
Reporting Standards
Acquis communautaire
International Standards
on Auditing
Good international practice
Accounting and Auditing ROSC
Financial reporting
A fundamental foundation
Insolvency &
Creditor Rights
Corporate
Governance
Insurance
Supervision
Banking
Supervision
Securities
Regulation
Accounting &
Auditing
Accounting and Auditing ROSC
ECONOMIC GROWTH
Development of
Capital Markets
Improved
Access to Credit
Job Creation
Private Sector
Growth
Financial
Reporting
Financial Sector
Development
Financial Information
Financial
Stability
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
Accounting
Standards
Statutory
Framework
Monitoring &
Enforcement
Education &
Training
Accounting
Profession &
Ethics
Auditing
Standards
Accounting and Auditing ROSC
All supporting pillars need to be
strengthened
Accounting
Standards
Statutory
Framework
Monitoring &
Enforcement
Education &
Training
Accounting
Profession &
Ethics
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
Thank you - Hvala puno
Contact details:
dnagy@worldbank.org
www.worldbank.org/cfrr
www.worldbank.org/eca/hraarosc