THE World Bank (WB) has published a report criticising Bulgarian auditing and accounting practices and saying that the country is far from the proper introduction of International Accounting Standards (IAS).
The report said that there was no effective enforcement of compliance with national accounting standards and there were conflicting opinions about the effectiveness of the audit quality control reviews carried out by the Institute of Certified Public Accountants of Bulgaria (ICPAB).
"While ICPAB is aware of the challenges it faces, the transition to full International Standards of Auditing (ISA) audits requires extensive education and strict enforcement of standards by the profession," the World Bank report said.
Financial reporting and auditing requirements in Bulgaria were in a period of transition from compliance with national standards to compliance with IAS, ISA, and the European Union directives and regulations.
A new Accountancy Law came into effect in 2002 and sought to attain maximum compliance with the EU Fourth and Seventh Directives and to create an environment for the comprehensive implementation of IAS for both legal entity and consolidated financial statements in 2003/2005. A new Independent Financial Audit Law came into effect in 2002 and sought to attain compliance with the EU Eighth Directive and ISA beginning in 2003, according to the report.
Investors, lenders, and rating agencies generally differentiated between the larger banks audited by international audit firms and other Bulgarian companies, the report said. They said that the audited consolidated financial statements of the larger banks were generally readily available and of adequate quality, with exceptions. They generally did not have a high opinion of the quality of audited financial statements issued by the balance of Bulgarian companies.
The WB found several areas of serious concern about the quality of financial reporting in Bulgarian companies, such as related-party transactions, hidden revenues, transfer pricing, lack of comparability between years, and impairment of assets.
While many audit firms made strenuous efforts to carry out audits in accordance with national standards based on ISA, there were claims that few shareholders, directors, and members of management understood the purpose of an audit, therefore making it difficult to obtain appropriate audit evidence. While this problem undoubtedly occurred in other countries, including those with developed audit requirements and practice, it was understood that the extent of some problems was more widespread in Bulgaria than in other countries.
Representatives of audit firms referred to several practical difficulties in implementing current IAS in the particular circumstances of Bulgaria. The most frequent problem was the pervasive influence of tax legislation on the choice and application of accounting requirements. Another significant issue was the relative unimportance attached to consolidated financial statements. There was also a lack of understanding by management that accounting and reporting extended beyond the accounting department.
There was an obvious need for more education of investors, directors, and members of management, the report said. The banking sector could also play an instrumental role in requiring audited financial statements from borrowers, not as part of a box-ticking exercise that afford the banks no extra protection, but rather as a key element of their credit risk assessments. The banks could also develop an internal register of acceptable auditors based on prior experience and thereby foster the development of quality audits, the WB recommended.
"There are many cases, in which auditors have to certify a certain financial report that is not technically consistent, and they help their customers in fixing it. This is not correct but in a period of transition it is the only thing to do," Levon Hampartzoumian, BulBank executive director told The Echo in a comment on the WB report. According to him, it was better than forcing the acceptance of improperly prepared reports.
"Generally, every auditor is facing the question of its own integrity. If the auditor lacks such integrity, no regulations can prevent the ill-intentioned deed," Hampartzoumian said.
The chairman of the board of ICPAB Simeon Milev said that the conclusions in the report had been reached at the end of 2002.
The report said that there was no effective enforcement of compliance with national accounting standards and there were conflicting opinions about the effectiveness of the audit quality control reviews carried out by the Institute of Certified Public Accountants of Bulgaria (ICPAB).
"While ICPAB is aware of the challenges it faces, the transition to full International Standards of Auditing (ISA) audits requires extensive education and strict enforcement of standards by the profession," the World Bank report said.
Financial reporting and auditing requirements in Bulgaria were in a period of transition from compliance with national standards to compliance with IAS, ISA, and the European Union directives and regulations.
A new Accountancy Law came into effect in 2002 and sought to attain maximum compliance with the EU Fourth and Seventh Directives and to create an environment for the comprehensive implementation of IAS for both legal entity and consolidated financial statements in 2003/2005. A new Independent Financial Audit Law came into effect in 2002 and sought to attain compliance with the EU Eighth Directive and ISA beginning in 2003, according to the report.
Investors, lenders, and rating agencies generally differentiated between the larger banks audited by international audit firms and other Bulgarian companies, the report said. They said that the audited consolidated financial statements of the larger banks were generally readily available and of adequate quality, with exceptions. They generally did not have a high opinion of the quality of audited financial statements issued by the balance of Bulgarian companies.
The WB found several areas of serious concern about the quality of financial reporting in Bulgarian companies, such as related-party transactions, hidden revenues, transfer pricing, lack of comparability between years, and impairment of assets.
While many audit firms made strenuous efforts to carry out audits in accordance with national standards based on ISA, there were claims that few shareholders, directors, and members of management understood the purpose of an audit, therefore making it difficult to obtain appropriate audit evidence. While this problem undoubtedly occurred in other countries, including those with developed audit requirements and practice, it was understood that the extent of some problems was more widespread in Bulgaria than in other countries.
Representatives of audit firms referred to several practical difficulties in implementing current IAS in the particular circumstances of Bulgaria. The most frequent problem was the pervasive influence of tax legislation on the choice and application of accounting requirements. Another significant issue was the relative unimportance attached to consolidated financial statements. There was also a lack of understanding by management that accounting and reporting extended beyond the accounting department.
There was an obvious need for more education of investors, directors, and members of management, the report said. The banking sector could also play an instrumental role in requiring audited financial statements from borrowers, not as part of a box-ticking exercise that afford the banks no extra protection, but rather as a key element of their credit risk assessments. The banks could also develop an internal register of acceptable auditors based on prior experience and thereby foster the development of quality audits, the WB recommended.
"There are many cases, in which auditors have to certify a certain financial report that is not technically consistent, and they help their customers in fixing it. This is not correct but in a period of transition it is the only thing to do," Levon Hampartzoumian, BulBank executive director told The Echo in a comment on the WB report. According to him, it was better than forcing the acceptance of improperly prepared reports.
"Generally, every auditor is facing the question of its own integrity. If the auditor lacks such integrity, no regulations can prevent the ill-intentioned deed," Hampartzoumian said.
The chairman of the board of ICPAB Simeon Milev said that the conclusions in the report had been reached at the end of 2002.
