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REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT

REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT. REPARIS Project in Macedonia. Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE OF AUDITORS. Basic regulation. EU basis:

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REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT

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  1. REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT REPARIS ProjectinMacedonia Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE OF AUDITORS

  2. Basic regulation • EU basis: • Directive 2006/43/ES on statutory audits of annual accounts and consolidated accounts (Official Journal of the EU, No. L 157 - 9. 6. 2006) • Regulation enforced in Slovenia: • Auditing Act (Offical Journal of the Republic of Slovenia, No. 65/2008 – 30. 6. 2008; hereinafter Zrev-2) Meta Duhovnik, Ph.D.

  3. Meta Duhovnik, Ph.D.

  4. Definitions of basic terms • Statutory audit • An audit of annual accounts or consolidated accounts as required by the legislation. • Statutory auditor • A natural person approved by the competent authorities of a Member State to carry out auditing. • Audit firm • A legal person or any other entity regardless of itslegal form, that is approved by the competent authorities of a Member State to carry out statutory audits. Meta Duhovnik, Ph.D.

  5. Definitions of basic terms(continuation) • Third country audit entity • An entity, regardless of its legal form, which carries out audits of the annual or consolidated accounts of a company incorporated in a third country. • Third country auditor • A natural person who carries out audits of the annual or consolidated accounts of a company incorporated in a third country. Meta Duhovnik, Ph.D.

  6. Definitions of basic terms(continuation) • Group auditor • The statutory auditor or audit firm carrying out the statutory audit of consolidated accounts. • Network • The large structure: • which is aimed at cooperation and to which a statutory auditor or an audit firm belongs, and • which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, common quality-control policies and procedures, a common business strategy, the use of a common brand-name or a significant part of professional resources. Meta Duhovnik, Ph.D.

  7. Definitions of basic terms(continuation) • Affiliate of an audit firm • Any undertaking, regardless of its legal form, which is connected to an audit firm by means of common ownership, control or management. • International auditing standards • International Standards on Auditing (ISA) and related Statements and Standards, insofar as relevant to the statutory audit. Meta Duhovnik, Ph.D.

  8. Definitions of basic terms(continuation) • Key audit partner – in the case of individual or group audit • The statutory auditor • designated by an audit firm for a particular audit engagement as being primarily responsible for carrying out the statutory audit on behalf of the audit firm; • signing the audit report. Meta Duhovnik, Ph.D.

  9. Transposition of requirements • Directive – Article 3 • A statutory audit can be carried out only by statutory auditors or audit firms which are approved by the competent authorities of the Member State (MS) requiring the statutory audit. • The competent authorities may be professional associations, provided that they are subject to a system of public oversight. • ZRev-2 • The Auditing Council of the Institute is authorized to make decisions regarding the issue of licenses for auditing activities and the tasks of a certified auditor. (Article 15) • Auditing services may only be provided by an audit company. On behalf of an audit company auditing services may only be provided by persons holding a license to perform the tasks of a certified auditor. (Article 5) • The Agency for the Public Oversight of Auditing (hereinafter: the Agency) is responsible for the oversight of the issue of licenses. (Article 31) Meta Duhovnik, Ph.D.

  10. Transposition of requirements • Directive – Article 3 • An entity can obtain a license if: • the natural persons who carry out statutory audits on behalf of an audit firm are approved as statutory auditors in the Member State concerned; • a majority of the voting rights is held by audit firms in EU or natural persons with a license; • a majority of the members of the administrative or management body represents persons with a license. • ZRev-2 – Article 61 • A company can obtain a license, if: • auditing services are provided by persons holding a license to perform the tasks of a certified auditor (Article 5); • the holders of shares whose joint participation in the capital and management of an audit company is at least 75%, have to be certified auditors, audit companies, and third-country audit firms or audit entities (Article 61); • the majority of the members of the management board and the president of the management board are certified auditors (Article 65). Meta Duhovnik, Ph.D.

  11. Transposition of requirements • Directive – Article 4 • Approval can be granted only to natural persons or firms of good repute. • ZRev-2 • The requirement is incorporated implicitly in the articles requiring ethical behavior and professional competency. MetaDuhovnik, Ph.D.

  12. Transposition of requirements • Directive – Article 5 • Approval of a statutory auditor or an audit firm has to be withdrawn if: • the good repute of the person or firm has been seriously compromised; • any of the conditions imposed is no longer fulfilled. • ZRev-2 • The Agency has to withdraw the license of a certified auditor if: • the license was obtained by stating false data; • the conditions required are no longer fulfilled; • the person has been convicted of a crime; • the certified auditor violates independence requirements, auditing rules or the duty of confidentiality (Article 54). Meta Duhovnik, Ph.D.

  13. Withdrawal(continuation) • ZRev-2 • The Agency has to withdraw the license of an audit company if: • the license was obtained by stating false data; • the additional measure was imposed on the audit company, and the competent body of the company failed to implement that measure or failed to rectify the violations (Article 84). Meta Duhovnik, Ph.D.

  14. Transposition of requirements • Directive – Articles 6, 7, 8, 9 and 10 • A person carrying out statutory audit had to complete a course of theoretical instruction, undergo practical training and pass an examination of professional competence of university final or equivalent examination level, organized or recognized by the MS concerned. • A minimum of 3 years’ practical training in auditing or accounting field (at least 2/3 with the audit firm) is required. • ZRev-2 – Article 48 • The conditions to be fulfilled to get a license of a certified auditor are: • completed second level study program; • minimum of five years of work experience, with a minimum of 3 years of experience (2 with the audit company) in auditing in the six years prior to submission of the application for the issue of the license; • the examination of professional competence to carry out the tasks of a certified auditor; • no prior withdrawal of a license; • no conviction of a crime; • active knowledge of Slovenian language. Meta Duhovnik, Ph.D.

  15. Transposition of requirements • Directive – Articles 11 and 12 • Possible exceptions in connection with the education. • ZRev-2 • No exceptions. • Directive – Articles 13 • Programs of continuing education. • ZRev-2 – Article 48 • The validity of the license can be renewed every two years at the holder's request, provided that the holder undergoes additional professional training (60 hours) in accordance with applicable rules. Meta Duhovnik, Ph.D.

  16. Transposition of requirements • ZRev-2 – Article 50 • A test of knowledge of Slovenian law and accounting standards in Slovenian language. • Directive – Article 14 • Approval of statutory auditors from other MS. • An aptitude test in one of the languages permitted by the language rules applicable in the MS concerned. Meta Duhovnik, Ph.D.

  17. Transposition of requirements • Directive – Articles 15-20 • Public electronic register of statutory auditors and audit firms in the language of the MS: • the data of natural or legal person; • third-country auditors and audit entities have to be clearly indicated in the register as such and not as statutory auditors and audit firms; • updating of registered information without undue delay; • statutory auditors and audit firms are responsible for the data. • ZRev-2 • Articles 77 and 78 • Notification of changes to all data entered in the register within 10 days. • Articles 153-157 and 159-161: • Harmonization with the Directive’s requirements. • The measures of supervision imposed are also included in the public register. Meta Duhovnik, Ph.D.

  18. Transposition of requirements • Directive – Article 21 • All statutory auditors and audit firms are subject to the principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care. • ZRev-2 • The professional ethics is incorporated in the auditing rules and regulations based on the Zrev-2. Meta Duhovnik, Ph.D.

  19. Transposition of requirements • Directive – Article 22 • Independence and objectivity • The absence of any direct or indirect financial, business, employment or other relationship – including the provision of additional non-audit services – between the statutory auditor, audit firm or network and the audited entity. • ZRev-2 – Articles 44-46 • Independence of auditing • Prohibition on the auditing of an individual legal person • Prohibition to assume the management function until at least to years have passed following the cessation of audit work as a certified auditor or key audit partner Meta Duhovnik, Ph.D.

  20. Transposition of requirements • Directive – Article 23 • MS have to ensure that all information and documents to which a statutory auditor or audit firm has access when carrying out a statutory audit are protected by adequate rules on confidentiality and professional secrecy. • ZRev-2 – Articles 38 • Exceptions: • supervision of the competent authorities (including internal) • written requirement of the competent court • reasonable suspicion that a criminal act which should be reported has been committed • replacement of an audit company, whereby the preceding audit company is obliged to provide the incoming audit company access to all data • written agreement of the audited entity Meta Duhovnik, Ph.D.

  21. Transposition of requirements • Directive – Article 24 • Independence and objectivity of the auditor • The owners or shareholders of an audit firm as well as the members of the administrative, management and supervisory bodies of such a firm, or of an affiliated firm, shall not intervene in the execution of a statutory audit in any way which jeopardizes the independence and objectivity of the statutory auditor. • ZRev-2 – Article 44 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  22. Transposition of requirements • Directive – Article 25 Fees for statutory audits • shall not be influenced or determined by the provision of additional services to the audited entity; • can not be based on any form of contingency. • ZRev-2 – Article 47 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  23. Transposition of requirements • ZRev-2 – Article 4 • Auditing has to be carried out in accordance with Zrev-2, the ISAs and other rules of the IFAC, basic auditing principles and other auditing rules adopted by the Institute, other laws governing the auditing of individual legal entities and other forms of auditing, and the regulations adopted on the basis thereof . • Directive – Article 26 • Auditing standards • ISAs adopted by the Commission and published in the OJ of the EU; • MS may impose additional requirements relating to the statutory audits of annual and consolidated accounts for a period expiring on 29 June 2010. Meta Duhovnik, Ph.D.

  24. Transposition of requirements • Directive – Article 27 • Statutory audits of consolidated accounts • The full responsibility of the group auditor for the audit report in relation with the consolidated accounts. • The group auditor maintains documentation of his or her review of the audit work performed by third-country auditors, statutory auditors, third- country audit entities or audit firms for the purpose of the group audit. • The documentation retained by the group auditor shall be such as enables the relevant competent authority to review the work of the group auditor properly. • ZRev-2 – Article 43 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  25. Transposition of requirements • Directive – Article 28 • Audit reporting • The audit report has to be signed by at least the statutory auditor carrying out the statutory audit on behalf of the audit firm. • ZRev-2 – Article 40 • The auditor’s report on financial statements has to be prepared and signed by a certified auditor. Meta Duhovnik, Ph.D.

  26. Transposition of requirements • Directive – Article 29 The quality assurance system has to: • be independent of the reviewed statutory auditors and audit firms; • be subject to public oversight; • have adequate resources – free from any possible undue influence by statutory auditors or audit firms; • have appropriate personnel with professional education and relevant experience; • be exclusive of the conflicts of interest; • ZRev-2 • Article 17(5) • Article 31 • Articles 10(3) and 30 • Article 17(2) , (4) • Article 17 (5) Meta Duhovnik, Ph.D.

  27. Directive – Article 29 (continuation) • include the quality assurance review (supported by adequate testing of selected audit files) of • compliance with applicable auditing standards and independence requirements, • quantity and quality of resources spent, • the audit fees charged, • the internal quality control system of the audit firm. • The quality assurance review has to be the subject of a report with the main conclusions and recommendations to be followed up. • Quality assurance reviews have to take place at least every six years. • The overall results have to be published annually. • ZRev-2 • Article 74(4) • Articles 74(7) and 129(2) • Article 74(3) • Articles 13(2) and 29(1) Meta Duhovnik, Ph.D.

  28. Transposition of requirements • Directive – Article 30 • System of investigations and penalties: • where statutory audits are not carried out in conformity with the legislation; • measures taken and penalties imposed have to be appropriately disclosed to the public; • penalties have to include the possibility of the withdrawal of approval. • ZRev-2 • Article 53 (certified auditors) • Article 80 (audit companies) • Article 152 (register ) • Article 53 (certified auditors) • Article 80 (audit companies) Meta Duhovnik, Ph.D.

  29. Transposition of requirements • Directive – Article 32 Principles of public oversight • All statutory auditors and audit firms have to be subject to public oversight. • The system of public oversight is managed by non-practitioners with appropriate knowledge on the basis of an independent and transparent nomination procedure. • The system of public oversight has to be transparent and adequately funded. • ZRev-2 • Article 31 • Article 20 (Slide 31) • Articles 29 and 30 Meta Duhovnik, Ph.D.

  30. Principles of public oversight(continuation) • Directive – Article 32 • Ultimate responsibility for the oversight of: • the approval and registration of statutory auditors and audit firms, • the adoption of auditing rules, • continuing education, • quality assurance, • investigative and disciplinary system. • ZRev-2 – Article 31 The nature of responsibility: • indirect (rules) • indirect (consensus) • indirect (consensus) • direct and indirect • direct Meta Duhovnik, Ph.D.

  31. Non-practitioner • Any natural person who, for at lest three years before his or her involvement in the governance of the public oversight system • has not carried out statutory audits, • has not held voting rights in an audit firm, • has not been a member of the administrative or management body of an audit firm and • has not been employed by, or otherwise associated with, an audit firm. Meta Duhovnik, Ph.D.

  32. Transposition of requirements • Directive – Articles33-36 Cooperation between public oversight systems at EU level • Designation of competent authorities. • The principle of home-country regulation and oversight by the MS in which the statutory auditor or audit firm is approved and the audited entity has its registered office. • The obligation of professional secrecy shall not prevent competent authorities from exchanging confidential information. • The competent authorities may refuse to act on a request for information or for an investigation, if: • it means a breach of the national security rules, • encroachment upon judicial proceedings has already been initiated in respect of the same actions and against the same persons before the authorities of the requested MS, • final judgment has already been passed in respect of the same actions and against the same persons by the authorities of the requested MS. • ZRev-2 • Article 26 (Agency) • Article 34 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  33. Transposition of requirements • Directive – Articles 37 Appointment and dismissal of the statutory auditor: • Appointment – general meeting of shareholders or members of the audited entity. • Dismissal – only where there are proper grounds. • Article 293 of the Companies Act. • Article 37(5) of ZRev-2 • The legal person must notify the Institute and Agency in writing of the dismissal or resignation of the audit company in writing in the period for which the appointment was valid and provide grounds for the dismissal or resignation. Meta Duhovnik, Ph.D.

  34. Transposition of requirements See next slide • Directive – Articles 39-43 SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PUBLIC-INTEREST ENTITIES (1) • Transparency report: • legal structure and ownership; • a description of the network and its legal and structural arrangements; • a description of the governance structure of the audit firm; • a description of internal quality control system of the audit firm and a statement by the administrative or management body on the effectiveness of its functioning; • an indication of when the last quality assurance review took place; • a list of public-interest entities audited during the preceding financial year; • a statement concerning the audit firm’s independence practices; • a statement concerning the continuing education of statutory auditors; • financial information; • Information concerning the basis for the partners’ remuneration. • ZRev-2 – Article 79 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  35. Public interest entities (PIEs) • Directive – Article 2 • Entities governed by the law of a MS whose transferable securities are admitted to trading on a regulated market of any MS, credit institutions and insurance undertakings. • MSs may also designate other entities as PIE, for instance entities that are of significant public relevance because of the nature of their business, their size or the number of their employees. Meta Duhovnik, Ph.D.

  36. Public interest entities (PIEs) • Directive – Article 39 • MSs may exempt PIEs which have not issued transferable securities admitted to trading on a regulated market and their statutory auditors and audit firms from one or more of the requirements regarding statutory audits of PIEs. • ZRev-2 – Articles 74 and 79 • PIEs are only listed entities. Meta Duhovnik, Ph.D.

  37. Transposition of requirements • Directive – Articles 39-43 SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (2) • Audit committee: • non-executive members of the administrative body and/or • members of the supervisory body and/or • members appointed by the general meeting of shareholders. At least one member of the audit committee has to be independent and has to have competence in accounting and/or auditing. • Main tasks: • monitoring the financial reporting process; • monitoring the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems; • monitoring the statutory audit; • reviewing and monitoring the independence of the statutory auditor; • giving proposal for the appointment of a statutory auditor. • Companies Act Article 280 of the Companies Act • Article 280(1): At least one member – independent expert All the others - members of administrative or supervisory body • Article 280(2): Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  38. Transposition of requirements • Directive – Articles 39-43 SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (3) • The statutory auditors or audit firms: • report to the audit committee on key matters arising from the statutory audit, and in particular on material weaknesses in internal control in relation to the financial reporting process; • confirm annually to the audit committee their independence from the audited PIE; • disclose to the audit committee any additional services provided to the audited entity; • discuss with the audit committee the threats to their independence and the safeguards applied to mitigate those threats as documented in the audit working papers. • ZRev-2 – Article 39(3) • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  39. Transposition of requirements • Directive – Articles 39-43 SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (4) • Rotating of the key audit partners: • within a maximum period of seven years from the date of appointment; • participation in the audit of the audited entity again after the period of at least two years. • ZRev-2 • Article 45(2) • Valid for all audited entities. Meta Duhovnik, Ph.D.

  40. Transposition of requirements • Directive – Articles 39-43 SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (5) • The statutory auditor or the key audit partner is not allowed to take up a key management position in the audited entity before the period of at least two years has elapsed since he or she resigned as a statutory auditor or key audit partner from the audit engagement. • ZRev-2 • Article 46 • Valid for all audited entities. • The quality assurance review of statutory auditors or audit firms auditing PIEs has to be carried out at least every three years. • Article 74(3) Meta Duhovnik, Ph.D.

  41. Transposition of requirements • Directive – Articles 44-47 INTERNATIONAL ASPECTS – AUDITORS AND AUDIT ENTITIES FROM THIRD COUNTRIES (1): • Approval of auditors from third countries: • reciprocity; • complying with the requirements. • ZRev-2 • Article 46 • Almost the same text as in the Directive. • Registration and oversight of third-country auditors and audit entities auditing the financial statements of companies : • incorporated outside EU; • listed on a regulated market of the MS. • Article 161 • Almost the same text as in the Directive. Meta Duhovnik, Ph.D.

  42. Transposition of requirements • Directive – Articles 44-47 INTERNATIONAL ASPECTS – AUDITORS AND AUDIT ENTITIES FROM THIRD COUNTRIES (2): • Cooperation with competent authorities from third countries: • working arrangements on the basis of reciprocity; • the competent authorities of the third countries meet adequate requirements; • MSs communicate to the Commission the working arrangements with the third countries’ competent authorities. • ZRev-2 • Article 35 • Almost the same text as in the Directive • Agency is competent for the co-operation. Meta Duhovnik, Ph.D.

  43. Conclusions • The Slovenian auditing profession meets all requirements of the Directive. • There are no obstacles for mutual recognition of regulatory arrangements between MSs, and between MSs and third countries in the field of public oversight if they are conceived on the principles of the Directive. Meta Duhovnik, Ph.D.

  44. SLOVENSKI INŠTITUT ZA REVIZIJOSLOVENIAN INSTITUTE OF AUDITORSTel.: +386 568 55 54meta.duhovnik@si-revizija.si Meta Duhovnik, Ph.D.

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