Contents Contents ..................................................................................................................... i Main Abbreviations and Acronyms ....................................................................... ii Acknowledgements ............................................................................................... iii Executive Summary ................................................................................................ iv I. Background ...................................................................................................... 1 I.A ROSC Program ..................................................................................................1 I.B Economic Context ............................................................................................2 II. Accounting and Auditing Framework: Main Changes Since 2006 ............ 8 II.A Statutory Framework ........................................................................................8 II.B The Accounting and Auditing Profession ....................................................13 II.C Accounting Education and Training ...........................................................15 II.D Accounting and Auditing Standard-setting ...............................................18 II.E Enforcing Accounting and Auditing Standards .........................................19 III. Observed Reporting and Auditing Practices .............................................. 21 III.A Status of IFRS Adoption in Kosovo ................................................................21 III.B Review of Financial Statements ...................................................................22 III.C Perceptions of the Quality of Financial Reporting .....................................22 IV. Recommendations ........................................................................................ 24 Annex 1. Summary of the Review of Financial Statements................................ 27 Annex 2: Status of the Recommendation of the 2006 ROSC A&A ..................... 29 Annex 3: Concordance Tables (DRAFT) .............................................................. 33 Kosovo – ROSC Accounting & Auditing Update i Main Abbreviations and Acronyms ACCA Association of Chartered Certified Accountants AMIK Association of Microfinance Institutions of Kosovo BPK Banking and Payments Authority of Kosovo CBK Central Bank of Kosovo EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product IAASB International Auditing and Assurance Standards Board IAESB International Accounting Education Standards Board (formerly EDCOM) IAS International Accounting Standards IASB International Accounting Standards Board IES International Education Standard IFAC International Federation of Accountants IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards IMF International Monetary Fund ISA International Standards on Auditing KAS Kosovo Accounting Standards KFRC Kosovo Financial Reporting Council KTA Kosovo Trust Authority MEF Ministry of Economy and Finance NBFI Non-bank Financial Institution PIE Public Interest Entity PISG Provisional Institutions of Self-Government POE Publicly-Owned Enterprise ROSC Reports on the Observance and Standards of Codes SCAAK Society of Certified Accountants and Auditors of Kosovo SME Small and Medium-sized Enterprise SMO Statement of Membership Obligation SOE Socially-Owned Enterprise SSA Stabilization and Association Agreement UN United Nations UNMIK United Nations Mission in Kosovo UNSCR United Nations Security Council Resolution CURRENCY: EURO Regional Vice President Philippe H. Le Houerou Country Director Jane Armitage Acting Sector Manager Marius Koen CFRR Head Henri Fortin Task Team Leader Jan Tyl Kosovo – ROSC Accounting & Auditing Update ii Acknowledgements This report was prepared by a team led by Jan Tyl (ECCAT) of the World Bank and including Akram El-Shorbagi (MNAFM), Lulzim Zeka (Consultant) and Anna Czarniecka (Consultant), on the basis of a diagnostic review carried out from October 2011 to April 2012. The review was conducted through a participatory process involving various in-country stakeholders, with the support of the Central Bank of Kosovo (CBK), the local accounting profession, the local academic and business communities and the World Bank Country Office in Pristina. Comments and suggestions were received from Denis Boskovski (ECCMK), Liam Coughlan (ECCAT), Henri Fortin (ECCAT), Jon Hooper (UK Financial Reporting Council), and Jamil Sopher (Consultant), as well as from the KFRC. The task team gratefully acknowledges the support and comments received. The report was cleared for publication by the Ministry of Finance on April 15, 2013. Kosovo – ROSC Accounting & Auditing Update iii Executive Summary i. This report is an update of the 2006 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing (A&A) in the Republic of Kosovo (Kosovo). The main objective of the 2006 ROSC was to assist the then-existing Kosovo Provisional Institutions of Self-Government in strengthening A&A practices, in order to support sustained economic growth and improve the competitiveness of local enterprises. For this update, a particular focus was placed on analyzing significant changes in (a) the statutory framework for A&A standards and practices; (b) the A&A profession; (c) the quality of accounting education at the tertiary level; (d) the enforcement of A&A requirements both within the profession and by financial sector regulators; and (e) financial reporting standards in the banking sector. The report also focuses on assessing the degree of alignment of Kosovo's institutional framework for corporate financial reporting with the EU acquis communautaire.1 This ROSC A&A Update will also provide inputs to the Financial Sector Assessment Program (FSAP) Update. ii. Kosovo is a potential candidate for EU membership and has an estimated population of 1.8 million as of 2010. Its gross domestic product (GDP) per capita is estimated at US$3,059 in 2010. The use of the euro as the de facto local currency has sharply reduced exchange rate volatility and has helped keep inflation low. The Kosovo economy is highly dependent on remittances. In the light of the country's ambition to join the EU, this update compares the corporate financial reporting framework in Kosovo with international experience and good practice in accounting and audit regulation, mainly in EU Member States, in order to assess the quality of financial information and to make policy recommendations. iii. Although consistent support for reforms has been provided by the World Bank, the European Commission and USAID since 2006, the landscape for corporate financial reporting has not changed dramatically since the last ROSC. The most significant change was the passing of a new financial reporting law in July 2011 and an increase in the threshold for statutory audits. Although the new law brings the legal framework closer to the acquis, further changes will be required to achieve full alignment with the acquis. iv. In the financial sector, prudential regulations and supervision have been substantially strengthened. A new Law on Banks, Microfinance Institutions and Non-Bank Financial Institutions (the new Law on Banks) was approved in April 2012. There is still no securities market in Kosovo. v. Kosovo's accounting and audit profession has developed rapidly over the last few years and the national professional body, SCAAK, became a member body of the International Federation of Accountants (IFAC) in 2010. SCAAK faces significant challenges in meeting its obligations as a member of IFAC, especially relating in the areas of 1 Acquis communautaire is a French term referring to the cumulative body of European Community laws, comprising the EC’s objectives, substantive rules, policies and, in particular, the primary and secondary legislation and case law – all of which form part of the legal order of the European Union (EU). This includes all the treaties, regulations and directives passed by EU institutions, as well as judgments laid down by the European Court of Justice. The acquis is dynamic, constantly developing as the Community evolves, and fundamental. Member States are bound to comply with it. (www.eurofound.europa.eu/areas/industrialrelations/dictionary/definitions/acquiscommunautaire.htm). Kosovo – ROSC Accounting & Auditing Update - Executive Summary iv ethics, quality assurance and discipline. There has been some progress in integrating accounting education in the universities with professional qualifications; however, more effort is needed in this area. vi. On the compliance side, the most significant change since 2006 is the improvement within the banking supervisor. Enforcement of accounting requirements among non-banking entities remains a challenge and there has been little improvement since 2006. The financial reporting regulator, the Kosovo Board for Standards on Financial Reporting (KBSFR), which was never fully functional, was replaced by the Kosovo Financial Reporting Council (KFRC) in 2011. No significant change, however, was made to the operating model of the regulator and, unless this is addressed, there is a distinct possibility that KFRC will follow in the footsteps of KBSFR. Steps have yet to be taken toward establishing a quality assurance system consistent with the EU Statutory Audit Directive. vii. The 2006 ROSC A&A set out a series of recommendations. To date, many of these recommendations have not been acted on, and most of those that have been implemented still need additional work. Summary of Recommendations viii. While all the policy recommendations set forth in Section VI of this report are important, there are several overriding themes, which the ROSC team considers to be "critical success factors" for the development of reliable and efficient financial reporting infrastructure, economic growth (including the mobilization of investment capital) and the fight against corruption. ix. These critical success factors are based on four underpinning principles as follows:  Clarity of reform objectives – for the alignment with the acquis effort to succeed, it is critical that the gaps are identified and appropriately addressed by amending relevant legislation. The ROSC team has prepared preliminary draft concordance tables to be discussed with the Ministry of Economy and Finance (MEF);  Effective implementation – amending the legislation will not resolve the challenges in itself. The legislation needs to be implemented and enforced and an official should be designated to oversee and coordinate the reform process;  Institutional capacity – institutions designed to supervise and enforce compliance with the law need to be adequately staffed and technically competent. "Competence" in this context includes the ability to understand and interpret the relevant international standards and regulations applicable in Kosovo.  Alliances – where capacity needs to be strengthened, stakeholders need to work together in order to achieve the desired results. x. Based on these principles, short- and medium-term priority actions have been identified and are summarized in the table below. In order to successfully address them, an action plan containing the next steps would be very helpful. Regional REPARIS provides one platform, where such a plan could be formulated and discussed, drawing on the experiences of other countries in the region, including Croatia (which has achieved alignment with the acquis in this area). Kosovo – ROSC Accounting & Auditing Update - Executive Summary v Recommended Short- to Medium-Term Priority Leading Objective Actions and Institutional Arrangements Institution(s) Use concordance tables to identify the differences between the current law and the acquis communautaire (drafts have been prepared by the ROSC team), designate an official responsible for the reform, and amend the law to align it with the acquis. Develop a To ensure a timely follow-up of this ROSC Update, seek strategy to support of donors to assist with the concordance table MEF, KFRC improve the completion and drafting the required amendments. financial SCAAK and reporting With the assistance of donors, retain experts to assist in donors infrastructure in preparing and implementing changes to the law. Kosovo Clarify which accounting standards apply to which type of business entity. Take initial steps toward establishing a sustainable quality assurance system for the statutory audit function. Revisit the requirement to publish financial statements to Develop a ensure that the institution assigned the task of collecting transparent the statements has the capacity to effectively enforce the MEF financial requirement. Consider assigning the task to the Kosovo reporting Business Registration Agency. regime conducive to Design a strategy, with the assistance of donors, to MEF, KFRC foreign improve the performance, functionality and capacity of investment and donors KFRC. Promote the integration of university and professional MEF, education. universities, SCAAK Strengthen accountancy Update and enhance the quality of tertiary-level Universities education accounting education. system SCAAK should share its resources with the universities and, at a minimum, part of the training program for SCAAK accounting technicians should be devolved to universities. A key long-term goal for Kosovo is to have a robust and effective audit quality assurance and disciplinary and sanctions systems in place. As an IFAC member, SCAAK should play a leading role in this, in collaboration with the KFRC. Kosovo – ROSC Accounting & Auditing Update - Executive Summary vi I. Background I.A ROSC Program 1. This assessment of accounting and auditing practices in Kosovo is part of a joint initiative of the World Bank and International Monetary Fund (IMF), to prepare Reports on the Observance of Standards and Codes (ROSC). The assessment should focus on the strengths and weaknesses of the accounting and auditing environment, and how those influence the quality of corporate financial reporting. It involves a review of mandatory requirements and actual practice, using International Financial Reporting Standards (IFRS) 2 and International Standards on Auditing (ISA) 3 as benchmarks. It draws on international experience and good practice in accounting and auditing regulation. The assessment also has regard to the relevant requirements of EU laws (the acquis communautaire). 2. Since its inception in early 2000, the ROSC Accounting and Auditing (A&A) program has concluded evaluations of the A&A environment in more than one hundred countries around the world including all but one countries of the Europe and Central Asia Region. The ROSC A&A initiative has, in general, two major purposes:  To evaluate the quality of national A&A standards, mainly by comparing them with IFRS and ISA, and by assessing compliance with those standards.  To assist the country in developing an action plan for improving the institutional framework that underpins its corporate financial reporting and auditing regime To meet these objectives, the scope and application of the standards need to be assessed in the framework of the country's overall development strategy, and recommended improvements need to be tailored to the country's specific circumstances. 3. This assessment is an update of the first A&A ROSC for Kosovo, which was published in June 2006.4 Therefore, the primary objective is to capture and describe the progress achieved since then, particularly as regards the implementation of international standards and good practice, as well as the degree of Kosovo's alignment with the acquis in relation to financial reporting. 2 International Financial Reporting Standards are issued by the International Accounting Standards Board (IASB), an independent accounting standard-setter based in London, United Kingdom. The IASB announced in April 2001 that its accounting standards would be designated "International Financial Reporting Standards" (IFRS). Also in April 2001, the IASB announced that it would adopt all of the International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC). Within this report, the term IFRS encompasses both IFRS and IAS as well as the related interpretations. 3 International Standards on Auditing (ISA) are the standards issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). 4 The 2006 ROSC A&A is available at: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentM DK:21569478~menuPK:7356128~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.html Kosovo – ROSC Accounting & Auditing Update Page 1 I.B Economic Context 4. Kosovo is landlocked and borders the Former Yugoslav Republic of Macedonia to the south, Albania to the west and Montenegro to the northwest. The remaining frontier belt is with central Serbia and remains the subject of dispute. The largest city and the capital of Kosovo is Pristina (alternatively spelled Prishtina or Priština ). The name Kosovo has represented a number of different entities with different borders over the centuries. There have also been periods when no political entity has existed with the name of Kosovo. Today's outline dates back to 1946. 5. Following the end of the Kosovo war of 1999, the United Nations Security Council Resolution (UNSCR) 1244 placed Kosovo under temporary UN administration (UNMIK). A declaration of independence was adopted on 17 February 2008 by the Assembly of Kosovo. In July 2010, by a ten-to-four vote, the International Court of Justice issued an advisory opinion that the declaration was not in violation of international law and stating that "the Court thus arrives at the conclusion that, taking all factors together, the authors of the declaration of independence of 17 February 2008 did not act as one of the Provisional Institutions of Self-Government within the Constitutional Framework, but rather as persons who acted together in their capacity as representatives of the people of Kosovo outside the framework of the interim administration."5 As of February 16, 2012, 87 UN member countries have recognized Kosovo.6 On 29 June 2009, Kosovo became a full member of the World Bank and IMF.7 6. As of 2011, the population of Kosovo was estimated at 1.8 million, of which 45% lived in urban areas. With a GDP per capita of EUR 2,368,8 Kosovo is one of the poorest countries in Europe;9 and its income levels are about two-thirds of other countries of the Western Balkans. Poverty remains widespread but has been declining − according to the latest available data (from 2009), 34% of the population is living below the national poverty line, and an estimated 12% are extremely poor. Extreme poverty is disproportionately high among children, the elderly, households with disabled members, and female-headed households. However, the narrowness of the poverty gap suggests that poverty is not deep. With a 45.4 percent official unemployment rate and a very low employment rate (26.4%), Kosovo has the weakest employment track record in Europe, and its labor force participation rate among the working age population (48.1%) is substantially below the average for all transition economies (65%). 7. Kosovo's economic growth has been steady since the end of the conflict in June 1999, attributable in part to large public investments in post-conflict reconstruction as well as an increase in private consumption and investment (albeit from a very low base). Growth slowed from 6.9 percent in 2008 to about 2.9 percent in 2009, and recovered to 4 percent in 2010 in the wake of the global economic crisis – this is a much better outcome than for the rest of Southeast Europe, which mostly suffered declines in output. The relatively small impact of the global financial and economic crisis on real growth up to this point reflects Kosovo's limited integration with the global economy. 5 http://www.icj-cij.org/docket/files/141/15987.pdf 6 http://en.wikipedia.org/wiki/International_recognition_of_Kosovo 7 http://www.state.gov/r/pa/prs/ps/2009/06a/125489.htm 8 The census from April 2011 revealed that population of Kosovo is smaller than previously estimated. This brings a higher GDP per capita than estimated before the census. 9 World Bank – Kosovo Partnership Program; Snapshot September 2011 Kosovo – ROSC Accounting & Auditing Update Page 2 8. Use of the euro as the de facto local currency has eliminated exchange rate volatility and kept inflation at a low level. However, Kosovo's economy is highly dependent on remittances. The external sector experienced a worsening trade balance in 2011. Imports of goods were expected to increase by 13.2%, while exports of goods were expected to increase by 10.5%. These developments contributed to increasing the trade deficit as a ratio to GDP by 1%, from 40.8% in 2010 to 41.8% in 2011.10 On official estimates remittances constitute 15% of GDP. However, by some estimates, the total flow of remittances amounts to 30% of GDP. The likely impact of the current European sovereign debt and banking crises on Kosovo is given in Box 1. In short, the expectation is that official aid, external bank lending, foreign direct investment and remittances from abroad will be reduced over the next couple of years as a result of the broad economic slowdown in Europe. 9. The vast majority of Kosovo's 90,000 businesses are microenterprises with limited access to external financing. Where external financing is extended to a business, the decision is ordinarily not based on the assessment of financial statements and repayment capacity, but, rather, on the quality and value of the collateral provided by the borrower. 10. Sound, reliable financial information is fundamental for moving away from the collateral-based lending model, toward cash-flow lending or credit-scoring, both of which depend on the lenders' ability to obtain transparent and accurate financial data. The quality of accounting and auditing practices in an economy like Kosovo is important for both the private and public sectors, in that both play an important role in driving the country's growth. 11. Since the 2006 ROSC was issued, the role of the banking sector has changed significantly relative to the financing of the Kosovo economy. It is still true that small private enterprises are typically funded by retained earnings and informal, family-generated funding. Loans to the private sector stood at 10% of GDP in 2003 and 23% of GDP in 2005. That ratio grew to 33% in 2009; in June 2011, the total value of loans issued by the banking system in Kosovo stood at EUR 1.6 billion (34.3% of GDP).11 Kosovo's banks remain liquid; their deposit-to-loan ratio was 181% at the end of 2004 and 133% in November 201112, providing a strong enough refinancing base for further expansion of their loans' portfolio. At the end of 2011 there were eight banks operating in Kosovo. As was the case in 2006, two of these, whose majority shares are owned by foreign banks, owned the majority of banking assets. Only two banks are owned by local shareholders, one foreign bank maintains only a branch in Kosovo. The banks are not involved in complex financial transactions and this helped them to avoid many of the recent difficulties of the global banking sector. The Central Bank requires the banks to follow, more or less, Basel I capital requirements. There are no investment banks or funds in Kosovo. 10 Macroeconomic Review No. 6 (July – September 2011) , Ministry Of Finance 11 http://bqk-kos.org/repository/docs/2011/Financial%20Stability%20Report%20No.%202.pdf 12 Central Bank of Kosovo Monthly Statistics Bulletin, November 2011 Kosovo – ROSC Accounting & Auditing Update Page 3 Box 1: Impact of the Current European Crisis on Kosovo The crisis in the eurozone increases the economic headwinds facing Kosovo, even though it is not a member of the single currency area. Kosovo is expected to be affected in the following ways:  Many members of the eurozone have had to adopt austerity programs, increasing tax levels and reducing levels of government spending. This has contributed to a weakening of economic activity in the EU, which has led to a reduced demand for exports from Kosovo and a reduction in the flow of remittances to the country. Austerity measures will also have an adverse impact on flows of donor aid which still make up a significant segment of receipts for the government budget in Kosovo.  In addition, due to losses on many of their assets, including holdings of sovereign bonds, many euro zone banks are seeking to strengthen their capital positions. This affects not only banks in the countries which have applied for assistance from the EU and IMF, but also large banks in Germany, France, the Netherlands and other EU centers of finance. As a result, many euro zone banks are reconsidering their levels of exposure to markets outside their home country. Given that banks from the euro zone are the largest bloc of capital providers to Kosovo banks, any reduction in the activity of such banks is likely to have a dampening effect on Kosovo's economic growth in the near to intermediate term. 12. At the end of 2011, thirteen licensed insurance companies had operations in Kosovo; of these, 10 were non-life insurance and three were life insurance companies. The separation of life and non-life insurance is a legal requirement. In general, the insurance sector remains underdeveloped, with the majority of premium revenue (70%) originating from third-party liability insurance (premium rates are set by the Central Bank of Kosovo - CBK). As of September 2011, the total technical reserves13 of all insurance companies in Kosovo stood at EUR 52.6 million, and the total annual profit for the sector was EUR 2.7 million.14 13. Microfinance institutions (MFIs) have recently provided significant capital to small businesses. There are 15 MFIs in Kosovo, of which 11 are NGOs and 4 are joint stock companies (the NGO status is a relic of the 1999 post-war period in Kosovo, when all MFIs were required to be registered first as NGOs). Twelve MFIs are members of the Association of Microfinance Institutions of Kosovo (AMIK). According to AMIK, the entire portfolio of MFI credits is about EUR 90 million, and the clientele consists of 60,000 businesses. MFIs make up approximately 5% of the financial sector in Kosovo in terms of assets, and their combined loan portfolio is around 15% of total lending in Kosovo. The largest MFI is KEP Trust (KEP). KEP started its activities in 1999, as a project of the Swiss-based International Catholic Migration Commission (ICMC). Its aim was to provide credit to small and micro enterprises, initially focusing on businesses of Kosovo refugees returning after the end of the 13 The technical reserves held by insurance enterprises consist of the actuarial reserves against outstanding risks in respect of life insurance policies, including reserves for with-profit policies which add to the value on maturity of with-profit endowments or similar policies, prepayments of premiums and reserves against outstanding claims (OECD definition). 14 Central Bank of Kosovo Monthly Statistics Report Nr. 123 Kosovo – ROSC Accounting & Auditing Update Page 4 conflict.15 KEP's portfolio is about EUR 30 million, allocated to more than 18,000 clients; the company has 34 branches and over 320 employees. In addition to MFIs, the financial sector includes 4 money transfer agencies, 30 exchange bureaus and 5 non-bank financial institutions.16 14. Given their importance to the economy, MFIs are also regulated by the new Law on Banks. The law differentiates between "registered MFIs" and "licensed MFIs"; the difference relates to the extent that time and savings deposits can be accepted by the MFI. The new Law on Banks stipulates that no MFI can operate in Kosovo unless it is registered or licensed by the CBK. The law lists specific conditions that must be met for an MFI to be registered, licensed and, where appropriate, to have its license or registration cancelled. The law also lists activities that are permitted and stipulates the MFIs can operate as NGOs or joint-stock companies. Prudential requirements include a minimum level of capital (EUR 200,000), and a ban on credits to management and related parties (if such credits are extended, the amounts are deducted from the capital for prudential reporting purposes). Total liabilities may not exceed 500% of equity. MFIs must maintain their records in accordance with IFRS. 15. Some MFIs are large enough that their operations have approached the scope of commercial banks, and governance issues have arisen in at least one case (involving management abuse of administered funds). For this reason, some of the larger MFIs are considering applying to the CBK to become banks. Such a change is permitted by the new Law on Banks, subject to possible retroactive taxation by the Tax Administration of donated capital and retained earnings. The transformation requires the initial registration of a joint- stock company with the clear identification of the future owners and their residence (NGOs do not have shareholders or owners). 16. One licensed, supplementary pension fund was in operation at the end of 2011 – the Sloveno-Kosovan Pension Fund (SKPF). Since the previous ROSC Report, the licenses of seven other supplementary pension funds have been revoked and/or cancelled, and their funds were transferred to either SKPF or the public pension fund. SKPF was established in September 2006 and licensed in November 2006 by the CBK. The founders are Prva Group of Slovenia and Dukagjini Corporation of Kosovo. The Prva Group asserts on its web pages that it serves 274,041 individuals, and that it has EUR 317.296 million of assets under management and EUR 32 million of capital as of November 30, 2011.17 These totals, however, relate to the entire Prva Group operations (in Slovenia, Serbia, Romania, Albania, FYR Macedonia and Kosovo). The SKPF itself has approximately 4,000 members and EUR 4 million in assets (the minimum required by law). The SKPF took over two other failed funds in 2008 and currently administers two funds, one comprising retired members, the other comprising members prior to retirement. As yet, Kosovo has no capital market. 17. The enterprise sector in Kosovo is currently comprised of three types of entities: (i) privately-owned enterprises, which account for the majority of the sector (by number and share of output); (ii) publicly-owned enterprises (POEs); and ( i i i ) socially-owned enterprises (SOEs). The distinction between POEs and SOEs - which together form the public enterprise sector – is rooted in the commercial legal regime of the 15 http://keptrust.org/?cid=2,27 16 Central Bank of Kosovo - http://bqk-kos.org/?cid=2,7 17 http://www.prvagroup.eu/en/members.asp?FolderId=343 Kosovo – ROSC Accounting & Auditing Update Page 5 Socialist Federal Republic of Yugoslavia (SFRY)18, which was reinstated in Kosovo by 19 UNMIK in December 1999. Under that regime, POEs corresponded roughly to the state- owned enterprises of other socialist countries; however, social ownership was a concept unique to the SFRY, in which enterprises were owned not by the state but by workers. UNMIK exercised the power to regulate and manage all POEs and SOEs until the Kosovo Trust Agency (KTA) was formed in 2002 as an autonomous agency. The KTA then took over responsibility for the POEs and SOEs.20 The KTA also become responsible for the process of privatizing the SOEs, which was begun in 2003. POEs were not included in this privatization process. 18. In 2008, the Privatization Agency of Kosovo (PAK) was established (by Kosovo Law No. 04/L-034 on the PAK) as the successor of the KTA. PAK is an independent public body and its primary mandate is to privatize or liquidate all remaining SOEs. All assets and liabilities of the KTA were transferred to the PAK. Those SOEs designated for privatization are sold by way of public tender in "waves." At the end of 2011, 53 such waves had been completed and the vast majority of SOEs had been sold. In general, PAK creates NewCo's from SOEs and then offers for sale assets and current liabilities. Investors only bid for the assets - and only a few of the current liabilities – of the NewCo, not those of the original SOE itself. PAK sometimes breaks SOEs into several smaller NewCos. Those SOEs deemed unfit for privatization are liquidated by way of the sale of assets. At the end of 2011, 10 such liquidation asset sales had been completed. Total proceeds from liquidation sales and privatization were EUR 31,399,356 and EUR 517,231,073 as of 31 March 2011.21 19. On June 13, 2008, the Assembly approved Law 03/L-087, On Publicly Owned Enterprises. The Law lists 30 POEs in total and classifies them into four categories: Central POEs (6 enterprises), Regional Water POEs (6), Regional Irrigation POEs (2) and Local POEs (16). While the regional and local POEs include water, waste and heating companies of little economic significance, the central POEs include much larger entities, such as the Kosovo Energy Corporation, Transmission System and Market Operator, Post and Telecommunications of Kosovo, Kosovo Railways and Pristina International Airport (in accordance with the agreement between UNMIK and the Government of Iceland (GOI), the GOI is responsible for ensuring that air traffic control operates in accordance with the rules of the International Civil Aviation Organization). 20. Foreign direct investment (FDI) inflows to Kosovo for the first three quarters of 2010 totaled EUR 203 million, an amount comparable to 2009. This is well below the 2007 annual high of EUR 414 million. The leading investors came from Germany, Slovenia and Switzerland; there were also smaller inflows of investment from Austria, Great Britain, Turkey, the Netherlands, Albania, the US and France. The main sectors attracting FDI were financial services, manufacturing, construction, processing industries and real estate.22 Despite some success in attracting new investors, the level of FDI inflows has stagnated in recent years. As a result, the trade balance has actually worsened in recent years, and the official unemployment rate remained at approximately 45%.23 18 i.e., the regime in place prior to 1989. 19 UNMIK Regulation 1999/24 - the legal definition of POEs and SOEs is given in the Law on Enterprises of the SFRY 77/88. 20 http://www.kta-kosovo.org/ktareg/UNMIK%20Regulation%20No.%202002- 12%20Establishing%20the%20KTA.pdf 21 Quarterly Report on Activities of PAK, 18 April, 2011 22 www.balkaninsight.com. 23 The World Bank - http://siteresources.worldbank.org/KOSOVOEXTN/Resources/Kosovo_Snapshot.pdf. Kosovo – ROSC Accounting & Auditing Update Page 6 21. This report assesses the quality of financial reporting only of selected POEs and private entities, and compares the findings with those in the 2006 ROSC report. This comparison then enables recommendations for improvement. Kosovo – ROSC Accounting & Auditing Update Page 7 II. Accounting and Auditing Framework: Main Changes Since 2006 24 II.A Statutory Framework 22. This report addresses changes in financial reporting by corporations (i.e. companies in which shareholders have limited liability) as well as by POEs and SOEs (Para. 17) since the 2006 A&A ROSC. The formation and regulation of business entities in Kosovo is governed by law No. 02/L-123 On Business Organizations (the Law on Business Organizations), which was approved by the Assembly in 2007 and succeeded UNMIK Regulation 2001/6 (2001) on Business Organizations. While the UNMIK Regulation provided a set of principles to be followed by business organizations, the Law on Business Organizations is much closer to a full-fledged commercial code. The Law on Business Organizations (similarly to the UNMIK Regulation) sets out that a business organization may be established as a personal business enterprise, a general or a limited partnership, or a corporation. A corporation may be incorporated as a joint stock company or a limited liability company:  A joint stock company is a corporation, which may have any number of shareholders, as well as different classes of shareholders. It may conduct a public offering of its shares, and the owner(s) may transfer his/her (their) shares without the approval of other shareholders or of the company. The minimum initial capital of a joint stock company must be at least EUR 25,000 (unchanged from the UNMIK Regulation requirement). The general meeting of shareholders is the ultimate governing body of a joint stock company. The board of directors is responsible for ensuring compliance with applicable laws and accounting standards. The law further requires the Board to ensure that the annual report contains "an independently audited statement of the company's financial position," which seems to require that annual reports of joint-stock companies include the audited balance sheet only.25  A limited liability company is a corporation, the shares of which are distributed only to its founders or among other pre-determined persons. The number of shareholders was limited to 50 under the UNMIK Regulation; this limitation has since been abolished. A limited liability company cannot conduct a public offering of its shares. Restrictions on transfer of ownership have been loosened: while the UNMIK Regulation gave existing shareholders a right of first refusal but permitted the company agreement to state otherwise, the Law on Business Organizations permits transfer of ownership to anybody, but permits the company agreement to include a right of first refusal. The governing body of a limited liability company is also a general meeting of its shareholders. The Law on Business Organizations abolished the provision of the UNMIK Regulation that required limited liability companies with more than 20 shareholders to appoint a board of directors.  The banking and insurance laws require banks and insurance companies to be incorporated as joint stock companies. Because of the nature of their activities, this report regards these financial institutions as public interest entities. 24 This report outlines the legal principles applicable with regard to accounting, auditing and financial reporting and does not attempt to give anything more than an introduction to the issues. This report is not meant to be an exhaustive rendition of the law nor is it legal advice to those reading it. 25 Law No. 02/L-123 On Business Organizations, Para 169.2b Kosovo – ROSC Accounting & Auditing Update Page 8 23. The Kosovo Financial Reporting Council (KFRC) is the successor to the Board on Standards of Financial Reporting (KBSFR); it was established in 2011 under Law No.04/L–014 On Accounting, Financial Reporting and Audit (the Law on Financial Reporting). As a super-regulator, the KFRC is the standard-setter for accounting, auditing, ethics and professional audit education, regulator, and enforcer. KFRC's mandate is identical to that of the KBSFR. However, the KBSFR always lacked the capacity to exercise its regulatory authority, which resulted in the significant implementation challenges noted in the 2006 ROSC. There is a need for an honest assessment of the KFRC as it is not clear that it will have the capacity to address the regulatory challenges that it faces. This report includes proposals to address the difficulties experienced by the KBSFR that may also affect the KFRC. The Law on Financial Reporting establishes the framework for accounting and auditing in Kosovo and makes the KFRC responsible for the following:  setting accounting and auditing standards for business organizations; however, this authority does NOT include the financial sector;  setting the accounting and auditing requirements for the financial statements of business organizations including corporations established under the Law on Business Organizations, SOEs, and POEs, though not for the financial sector;  establishing and issuing standards for the professional training of accountants and auditors, leading to the certification of accountants and the licensing of auditors; however, the law delegates the regulation of accountants to licensed professional associations; and  reviewing applications for and issuing audit licenses to individuals and firms, as well as the licensing of professional associations (currently, the Society of Certified Accountants and Auditors of Kosovo is the only licensed professional association). To discharge all these responsibilities, the KFRC must have an extensive technical expertise at its disposal. Currently, the KFRC does not possess such expertise. 24. Over the years, the KBSFR received some technical assistance as part of donor-funded projects addressing broader issues than financial reporting. This has allowed modest progress to take place, but the KFRC has yet to fully discharge all of its responsibilities. Without a functioning standard-setter and regulator, the Kosovo financial reporting regime has not been able to play any role in attracting inflows of FDI. The KFRC held its first meeting in the late 2011; and it is not yet clear whether it can develop the capacity to address its predecessor's shortcomings. The Law on Financial Reporting added another major responsibility on KFRC, namely, collecting and publishing the financial statements of entities subject to the requirement to file financial reports. The Law, however, still leaves the KFRC within the MEF (this means that the employees of KFRC are subject to public-sector salary scales) and maintains the provision of the previous law that fees and fines collected by the KFRC are revenues of the budget. 25. This configuration did not work well for the KBSFR during its almost ten years of existence and is not likely to work for the KFRC. Therefore, we recommend that the KFRC would benefit from a change in this aspect of its organizational structure. This would enhance its capacity to create the financial reporting infrastructure needed to support direct foreign investment. Such a change could be achieved through one of the following options: (i) the KFRC becoming a self-financing agency, responsible for collecting and administering fees and fines, which could employ Kosovo – ROSC Accounting & Auditing Update Page 9 experienced professional accountants and/or auditors in its office at market rates; (ii) maintaining the status quo, but increasing significantly KFRC's budgetary appropriation so as to provide it with the resources needed to function effectively; or, (iii) a combination of (i) and (ii). Options (i) and (iii) would require an amendment of the law. 26. The Law on Financial Reporting was approved in 2011; its drafting and approval took almost seven years (according to the previous ROSC Report the law was "in the process of being amended" In 2006). As was the case under the UNMIK Regulation, financial institutions are specifically excluded from application of the Law on Financial Reporting and are subject to regulation by the CBK instead. The new law was expected to contribute to the alignment of the corporate reporting framework with the acquis. Although, it fell short of this objective, the new law does represent an improvement on the UNMIK Regulation, and the salient points are described below. 27. Business organizations are currently classified as large, medium, small and micro on the basis of the following criteria: Type of Average number Turnover Gross assets organization of employees Large business higher than EUR 4 higher than EUR 2 in excess of 50 organizations (two million million out of three) Medium business higher than EUR 2 higher than EUR 1 more than 10 organizations (two million million out of the three) Small business higher than EUR higher than EUR up to 10 organizations (two 50,000 25,000 out of three) Micro enterprises lower than EUR lower than EUR fewer than 10 50,000 25,000 28. Large business organizations will have to apply, starting from 2013, IFRS, as well as interpretations, recommendations and necessary guidance that are approved by the KFRC. All medium and small business organizations registered as limited liability companies or joint-stock companies will also be required to apply IFRS as approved by the KFRC. The wording of the law raises a question as to whether the IFRS for SMEs could be imposed by the KFRC on medium and small enterprises, thereby alleviating some of the regulatory burden on these companies, or whether full IFRS must be applied by small companies. The KFRC has indicated that it is currently working with the MEF to amend the law so that the IFRS for SMEs will be applicable in Kosovo at some date in 2013. 29. The Law on Financial Reporting is silent on the use of Kosovo Accounting Standards (KAS), although it holds the KFRC responsible for maintaining KAS. This has created confusion. The law specifies that consolidated financial statements of all business organizations should be in accordance with 78/660/EEC (this is a reference to the "Fourth Directive" while the "Seventh Directive" on consolidated accounts is not mentioned) Kosovo – ROSC Accounting & Auditing Update Page 10 and IFRS. 30. Financial statements of large and medium business organizations must be audited, with the applicable auditing standards being ISA. The calendar year is also the fiscal year for all business organizations. The previous ROSC Report noted that the scope of statutory audit requirements was "too broad in Kosovo considering the stage of development of the audit profession." In this respect, the new Law on Financial Reporting represents a significant improvement. Under the UNMIK Regulation, financial statements of all corporations with annual turnover or total assets greater than EUR 250,000, as well as all POEs and SOEs were subject to statutory audit; however, the new law limits the requirement to large and medium business organizations. 31. Shareholders of non-financial companies subject to an audit requirement appoint the auditor from among the auditors licensed by the KFRC. The appointment of a bank or insurance company's auditor is subject to CBK approval. That approval is based on the following conditions:  The sole practitioner or audit firm must have been duly licensed by the KFRC. A foreign audit firm is eligible for licensing by the KFRC, if at least two of its local partners are auditors licensed in Kosovo.  The approval is granted for a given financial institution's audit in a given year, i.e. an audit firm/sole practitioner may be approved as the auditor of several financial institutions, but it is necessary for separate approvals to be granted to that firm for the audit of each financial institution for that financial year.  The audit firm/sole practitioner must provide the CBK with (i) a program for the audit of the financial institution, and (ii) a description of the resources to be used for the audit mission.  In practice, financial statements of all banks and insurance undertakings are audited by the local member firms of major international audit networks (Big Four plus Grant Thornton).  There is a five-year firm rotation requirement for auditors of financial institutions. This requirement is applicable to both sole practitioners and firms, as the regulation does not distinguish between the two. 32. Filing of annual company financial statements is required by law, in line with the EU acquis. Article 11 of the Law on Financial Reporting requires that, "Financial statements of large business organizations have to be submitted to and published by the KFRC and a copy submitted to the Ministry of Trade and Industry (MTI) which hosts the Business Registry, no later than 30 April of the following year." Further, consolidated financial statements have to be submitted to the KFCR and a copy sent to the MTI, no later than 30 of June of the following year. This requirement is similar to the requirement in the UNMIK Regulation, which imposed the obligation on all business organizations to file financial statements with the business registry and the Ministry for Economy and Finance (MEF). As was noted in the 2006 ROSC Report, this requirement is still widely ignored and is not effectively enforced. Continued non-compliance with the filing requirement contributes to the overall lack of transparency and trust in the business environment. 33. The filing requirement in the Law on Financial Reporting does not specify the Kosovo – ROSC Accounting & Auditing Update Page 11 agency at MTI to which the financial statements should be submitted; neither does the law provide guidance as to how the KFRC should arrange for the collection of those statements, given its current lack of capacity. Staff at the KFRC have been working to improve the situation and have achieved some successes. Still, with the exception of the financial institutions governed by the CBK, the financial statements of many Kosovo companies, including POEs and SOEs (Airport Pristina and Post and Telecom of Kosovo are notable exceptions) are not publicly available. This situation is inconsistent with the acquis; and the resulting lack of transparency is not conducive to attracting foreign direct investment. 34. Law No. 03/L-074 On the Central Bank of the Republic of Kosovo (the Law on the CBK) replaced the relevant UNMIK Regulation in 2008. The Law on the CBK contained a specific reference to standards setting: "… to set accounting standards for the financial institutions in Kosovo in line with international financial reporting standards." In 2010, however, the Law on the CBK was replaced by Law No.03/L –209 On the Central Bank of Kosovo (the new Law on the CBK). The new Law on the CBK does not include a reference to the mandatory application of IFRS by banks; instead it states in Article 23 that, "Financial institutions shall furnish the Central Bank with such information and records concerning their operations and financial condition as the Central Bank may require." However, the IAS/IFRS requirement was also specified in UNMIK Regulation No. 1999/21 for the licensing, regulation and supervision of the banks, and the new Law on Banks refers, in Article 53, to "internationally-accepted" accounting standards as applicable to Kosovo banks. 35. Financial statements of all banks are available on their websites. The requirement that banks publish their financial statements is not clearly specified by law and it is a good example of transparency in Kosovo that they do so. 36. Banks are required to produce the following prudential reports:  Weekly reports on liquidity reserve maintenance at the CBK;  Monthly reports, including a computation of liquidity reserves; balance sheet; statement of income; summary of classified assets and provisions; report on deposits, loans, and wire transfers; report on cash imports and exports; statistical report on balance sheet items; statistical report on interest rates; and a report on international transactions;  Quarterly Reports including assets and other liabilities; changes in capital and reserves; other income and expenses; receivables overdue more than 90 days (non- performing assets) and other overdue assets; credit concentration; credit exposure to insiders; balance sheet maturities; funding concentration; off-balance sheet items; capital base risk-weighted assets; interest rate risk exposure; foreign exchange positions; and pay instruments; and  Annual report - any bank or branch of a foreign bank should submit a copy of its Annual Report to the CBK within 120 days of the end of its financial year. The Annual Report includes its balance sheet, statement of income, supporting notes and schedules, and the auditor's opinion and management letter for the preceding financial year. The CBK may, on an ad hoc basis, increase the frequency of reporting and/or expand reporting requirements, if it considers this necessary to carry out its supervisory Kosovo – ROSC Accounting & Auditing Update Page 12 responsibilities. 37. Insurance companies are governed, as they were during the previous ROSC analysis, by UNMIK Regulation No. 2001/25 (the Law on Insurance) and the CBK's strict regulations. The Law on Insurance requires that insurance companies maintain their books and prepare financial statements "in accordance with International Accounting Standards." However, Rule 7, dated October 18, 2001, amending the Law on Insurance requires that insurance companies set up technical provisions and that, "technical provisions notably include a provision for unearned premiums and a provision for unpaid claims and claims incurred but not reported…. CBK will establish a permanent ratio of incurred losses and a permanent percentage for incurred but not reported losses. The financial statements will record these established amounts or the actual amounts, whichever is greater."26 Rule 7 therefore instructs insurance companies to depart from IFRS. 38. The appointment of the auditor is subject to CBK approval, and the Law on Insurance imposes the "whistle-blowing duty" on an auditor who detects instances of fraud and systematic transgression of CBK rules. Also, each insurance company and insurance intermediary is obliged to prepare quarterly reports for the CBK concerning its administration and insurance operations, liquidity, solvency, and profitability. These reports cover the parent company and its subsidiaries, on an individual and a consolidated basis. Insurance companies also submit each month a balance sheet, income statement, investment report, premium register and claims register using a format prescribed by the CBK. 39. There are plans to liberalize the insurance sector in the near future. Presently, none of the insurance companies publishes a full set of financial statements on their websites. Only fragments, e.g., the balance sheet and auditors' report are readily available to the public. The CBK does not require that insurance organizations publish their audited financial statements; therefore, the publishing requirement of the Law on Business organizations prevails in this sector. 40. The new Law on Banks was adopted in April, 2012. The law provides guidance transforming MFIs into commercial banks. Two major issues involved in such a transformation include capitalization and retroactive taxation. Typically, an NGO was established by a donor-financed grant, i.e., there is no capital, and the founder is usually another, mostly foreign NGO(s). Any MFI wishing to transform itself into a bank must first be transformed into a joint-stock company under the law on business organizations. CBK notes that it is necessary to establish the address of the future bank and, also, to deposit capital into the entity being transformed. Many MFIs have been successful in their activities and their accumulated surpluses have so far been exempt from taxation under their status as an "institute of public benefit." There is now a provision in the new law on banks that, on transformation, when the "public benefit" status expires, both the donated capital and accumulated surplus may be subject to retroactive taxation by the Tax Administration. II.B The Accounting and Auditing Profession 41. The accounting and auditing profession in Kosovo has developed rapidly as a result of significant technical assistance combined with effective leadership and 26 Rule 7 on Amending Rule on Accounting Standards and Record-keeping Requirements for Insurance Companies and Insurance Intermediaries dated as October 18, 2001 Kosovo – ROSC Accounting & Auditing Update Page 13 governance arrangements. UNMIK Regulation 2001/30 (UNMIK Law) was replaced by Law No.04/L–014 on Accounting, Financial Reporting and Audit (Law on Financial Reporting) in 2010. However, the framework created by the UNMIK Law has been left largely intact. The new framework reaffirmed the existence of a "super-regulator," even though its title was changed from the Kosovo Board on Standards for Financial Reporting (KBSFR) to the Kosovo Financial Reporting Council (KFRC). 42. The law does not formally recognize SCAAK as the sole professional association for accountants and auditors. However, the conditions the law sets out for the certification (by the KFRC) of any future association are so strict that it will be difficult for any competition to SCAAK to emerge any time soon. Any new association must demonstrate to the KFRC that it has met all the requirements of the law and complied with all standards, guides and recommendations promulgated by IFAC. 43. The Financial Reporting Law requires licensed auditors to be members of a recognized accounting association. In theory, this might result in a scenario where several professional associations include auditors. However, given the small size and context of Kosovo, one strong professional body should be developed at this time. Indeed, in the light of the proven competence of some SCAAK members, some form of temporary capacity-building assistance from SCAAK to the KFRC should be considered in order to enhance the capacity of the KFRC. 44. The KBSFR had recognized SCAAK as Kosovo's professional accountancy (including auditing) body, and it is assumed that SCAAK's recognition continues under the Law on Financial Reporting. Having been the beneficiary of significant donor support, SCAAK has developed a good certification program for accountants and auditors. The current program is benchmarked to the standards of the International Accountancy Education Standards Board (IAESB) and the requirements of the EU Statutory Audit Directive; it has a three-stage structure that is similar to that of the Association of Certified Chartered Accountants' (ACCA) qualification program. 45. With a membership of about 700, SCAAK is able to generate sufficient revenues and is now self-sustaining. Revenues are derived primarily from professional education (both pre- and post-qualification) activities, which amount to about 80% of its total receipts. SCAAK has not been successful in convincing its members to pay annual membership fees. These are only paid by auditors, who must be members in good standing of a professional association, and by students, who would not be allowed to sit for exams if they had outstanding arrears. Other members pay their fees only sporadically; but, for tactical reasons, SCAAK has chosen not to take a disciplinary action against delinquent members. As noted in the 2006 ROSC Report, "the lack of a tradition of external auditing in Kosovo and the legacy of a culture of control have contributed to a general lack of awareness in the business and wider community of the potential benefits of the audit, and the potential importance of the role of a well qualified accountant in the economic development of Kosovo." This statement remains valid; even though some there have been some improvements. Accounting is still seen by many as a regulatory burden, not as a source of information for decision-making and planning purposes. Both the KFRC and SCAAK should continue working to build awareness of the benefits of accounting and auditing, building on the series of consultations with businesses on the changes in legislation and on the importance of compliance and transparency that were organized in the first half of 2012. Kosovo – ROSC Accounting & Auditing Update Page 14 46. SCAAK successfully met the membership requirements and was admitted as a full member of IFAC in 2009. There were three major recommendations concerning SCAAK in the 2006 ROSC Report. These included the following:  Provide Continuing Professional Development (CPD) and training;  Regulate and monitor its members engaged in public practice; and  Establish procedures for disciplining its members. SCAAK currently operates a CPD program, and it has been developing (with the Dutch professional association, NIVRA) procedures for regulating and monitoring the performance of its members engaged in public practice. However, there is a need to act in coordination with the KFRC on disciplinary procedures, and no such coordinated action has yet taken place. II.C Accounting Education and Training 47. The curriculum at the Faculty of Economics of the University of Pristina (UOP) has been modernized; however, no integration of professional education has taken place, as the universities and SCAAK have not agreed on terms. In 2008, five students from UOP were sent under a USAID-funded program to study for twelve months in the Master of Accounting program at the Arizona State University. The conditions of the funding included a commitment by UOP to retain those individuals on their return to Kosovo as members of the Accounting Department. Upon their return to Kosovo in 2009, these individuals developed a three-year accounting program. However, four of the five individuals have since left UOP. The program was rolled out but discussions to integrate the UOP program and SCAAK's certification program have not yet led to tangible results. 48. It is not clear to what extent the UOP accounting program follows the curriculum created in 2009, and UOP's accounting graduates have not been granted exemptions from SCAAK's certification program. Limited resources and students' effort would be more effectively utilized if these programs were integrated; however, integration should not require that SCAAK compromise its rigorous rules and procedures. All stakeholders should recognize that a failure to bridge the differences between the profession (represented by SCAAK) and UOP damages the prospects for raising the standard of accounting education in Kosovo. 49. The KFRC is responsible for the quality of professional education. The Law on Financial Reporting stipulates that, in order to become an auditor, the individual must be a member of a recognized professional association. Further, the Law requires that professional associations may certify only those individuals who completed a certification program that complies with International Accounting Education Standards (IES).27 The KFRC is responsible for certifying accounting associations, one of the criteria being the quality of the candidate association's certification program; thus the KFRC has a decisive input regarding the quality of professional education. There have previously been efforts by individuals or groups of individuals to meet the requirement to develop a quality certification program by submitting to the KBSFR unauthorized copies of SCAAK materials; the KBSFR rejected all these applications. 27 IESs are issued by IFAC’s International Accounting Education Standards Board (I AESB). Kosovo – ROSC Accounting & Auditing Update Page 15 50. SCAAK has established a program to certify accounting and auditing professionals that complies with the Law on Financial Reporting. The program was upgraded significantly after 2006 to address the restrictions placed on entry into the profession by that law. The current SCAAK certification program meets the requirements of the Statutory Audit Directive and International Education Standards (IESs). The SCAAK curriculum for accounting technicians, certified accountants and auditors was initially established in 2001, and has attracted nearly 4000 applicants since then. This is prima facie evidence of a strong demand for professional training. That program, which relies on translated and regularly updated ACCA training materials, consists of the following three stages: Qualification Entry Experience Exam Requirement and number Requirement Requirement Accounting Same as for  Financial accounting 1 One year of Technician admission to  Cost accounting accounting As of University  Management experience December program information systems 2011 - 368  Commercial law and taxes (135 active) Certified A University  Financial reporting Proof of at least Accountant degree in  Audit three years As of December economics or  Financial Management of 2011, 221 (119 business and  Advanced Management accounting active) completed Accounting experience accounting technician examinations Auditor Completed  Advanced Financial Proof of at least As of December certified Reporting three years 2011, 139 (96 accountant stage  Advanced Audit and of experience active, including Assurance working with 11  Strategic Management auditor grandfathered)  Professional Practice 51. The restriction in the new Law on Financial Reporting limits entry to the profession (as a Certified Accountant) to accounting, business, or economics graduates. Unless adapted, this restriction will have devastating implications for students currently enrolled in the certification program who do not meet this criterion. In October, 2012, the KFRC introduced a transitional arrangement, to enable aspiring professionals who hold university degrees, in other fields, and who enrolled the SCAAK certification program prior to the approval of the new Law, to complete the program and enter the profession. 52. SCAAK's entry requirements for its program of professional education for Kosovo – ROSC Accounting & Auditing Update Page 16 accountants and auditors are in compliance with IES 1, Entry requirements to a program of professional education, and the content of the professional accounting education program complies with IES 2, Content of Professional Education Programs. The program, which is based on a renowned international educator's textbooks, is now aligned with IFRS and ISA; the lack of such alignment was noted in the 2006 ROSC Report and evaluated as "a major weakness." 53. SCAAK has implemented a system of pre-approval, monitoring and effective control of the quality of experience obtained by accountants and auditors, as required by IES 5, Practical Experience Requirements. However, the system is focused on assessing formal compliance with established criteria (e.g., required number of hours spent on auditing, tax and accounting); the qualitative aspect is still missing from the assessment of practical experience. 54. SCAAK's examination policies were modeled on the Examination Administration Advisory document provided by IFAC, and meet the requirements of IES 6, Assessment of Professional Capabilities and Competence. Early in its existence, SCAAK implemented measures to provide anonymity for candidates and to protect the integrity of the examination process. It was more difficult to ensure that persons engaged in providing the courses were not involved in the formulating or administration of examinations; this resulted from SCAAK's very limited capacity at its outset. As the pool of tutors and examiners has grown, SCAAK's procedures for maintaining the anonymity of candidates and the independence of examiners have become more rigorous. 55. Accountants and auditors are required to take part in programs of continuing professional development (CPD). IES 7, Continuing Professional Development regulates the CPD requirement for all accountants and auditors. Since 2008, SCAAK has required that all certified accountants (and, thus, also auditors) participate in 40 hours of CPD every year; certified accountants must have least 18 hours of formal, verifiable CPD annually, and licensed auditors need 24 hours of formal, verifiable CPD. The members are required to assess which CPD content is relevant to them, based on their work and/or specialization. 56. SCAAK has made progress in working towards compliance with the Statements of Membership Obligations (SMO) issued by IFAC. Given that SCAAK has no role in standard setting, SMO 3, 5 and 7 (ISA, IPSAS and IFRS implementation) are not really applicable, even though on an informal basis SCAAK's expertise is regularly sought by the KFRC (and previously by the KBSFR). SCAAK has complied with SMO 2 and 4 (IES and 2010 Code of Ethics). SCAAK needs to improve compliance with SMO 1 and 6 ("Quality Assurance" and "Investigation and Discipline"). A Quality Assurance system has been developed with the help of the Dutch professional association, NIVRA; however, no tangible results were available at the time of this report's completion. As noted above, the issue of investigation and discipline needs to be addressed in coordination with the KFRC, which holds the required legislative authority. Until now, SCAAK has not performed an investigation and discipline procedure, and improvement in this area is needed as a matter of urgency. Kosovo – ROSC Accounting & Auditing Update Page 17 II.D Accounting and Auditing Standard-setting 57. The Law on Financial Reporting requires that the KFRC issue accounting standards that comply with IFRS. As was the case in 2006 with the KBSFR, the current structure and resources of the KFRC are inadequate to enable it to fully discharge this mandate. The KFRC is the standard setter and regulator for non- financial sectors. The wording of the Law on Financial Reporting does not mention Kosovo Accounting Standards (KAS) in Article 5 (applicable accounting standards), although Article 14 makes KFRC responsible for the development of KAS. In March 2012, the KFRC issued an administrative instruction clarifying that KAS are applicable for 2012 to all companies; IFRS should be applied in future periods, starting January 1, 2013. Given the complexity of IFRS, a significant uncertainty exists in the accounting community as to whether this requirement is realistic. The KFRC has been working with the MEF to resolve the issue. 58. The accounting profession is regulated, and the 2006 A&A ROSC Report concluded that, "… the KBSFR has not yet developed the capacity to carry out its mandate." The current ROSC has concluded that, despite the technical assistance provided to KBSFR after 2006, not much has changed in this area; indeed, in some ways, the KFRC is starting anew. Like the UNMIK Law, the Law on Financial Reporting provides for funding of the KFRC through the Kosovo consolidated budget, and, as noted in the previous ROSC Report, the level of funding is insufficient for KFRC to discharge its responsibilities. KFRC's responsibilities include: (i) drafting and approving Kosovo Accounting Standards (KAS), in accordance with IAS/IFRS and relevant EU directives (however, KAS are not mentioned in the section on accounting standards applicable in Kosovo); (ii) supervising and implementing auditing standards, in accordance with ISA and relevant EU directives; (iii) licensing and maintaining the register of auditors as well as of the audit firms, as well as professional associations of accountants and auditors; (iv) stipulating the standards of professional ethics and internal quality to be followed by auditing firms; (v) supervising continuing professional education, quality assurance and disciplinary system for the profession. 59. The KFRC consists of seven members. The Chairman and other members of KFRC are appointed by the Government for three year terms (one consecutive reappointment is allowed) based on nominees advanced by the following institutions: the CBK (1), academia (1), the MEF (1), the profession (1), and the business community (3). In addition to the responsibilities listed above, the Law on Financial Reporting mandates that the KFRC collect and publish the financial statements of those business organizations that are required to make public their financial statements. Currently, KFRC has neither the human nor the technical capacity to discharge this additional responsibility; therefore, it is not clear how this function will be accomplished. Given that the fees and sanctions collected by KFRC are income of the budget, there is a need to reconsider the KFRC "business model;" it is not likely that KFRC can discharge all of its responsibilities within its existing structure. Given the size of the Kosovo economy, it is estimated that five well-qualified and experienced professionals are needed to make KFRC fully functional. 60. As noted above, the KFRC urgently needs to consider whether its "business Kosovo – ROSC Accounting & Auditing Update Page 18 model" is appropriate for the discharge of its responsibilities. Even though four professional committees have been appointed in 2011, it is not likely that the committees will be able to perform all standard setting and regulatory tasks without further significant support, and the support of at least four or five qualified, experienced, in-house experts, i.e., experts employed by the KFRC. At the same time, the KFRC should greatly benefit from the progress of Albania, where IFRS are translated and updated on an annual basis. 28 Albania has also arranged translations of ISA (2010 edition translated) and the IFAC Code of Ethics (the 2006 edition, which has since been superseded, is the only version that has been translated). While there are some differences in terminology, use of these Albanian translations is the optimal solution for Kosovo. 61. The 2006 ROSC report concluded that "current staffing of KBSFR's secretariat is inadequate to allow KBSFR to regulate accounting and auditing effectively." This report comes to the same conclusion. KFRC's office (secretariat) employees do not have the accounting or auditing experience required to provide technical support to the committees and the KFRC. In addition, unless there is a fundamental change in the way that the KFRC operates, this issue is unlikely to be addressed in the short- to medium-term; KFRC's inability to hire (and retain) qualified personnel as a consequence of the applicable government salary scale, which is well below market rates, severely constrains its ability to develop the needed capacity. For the KFRC to discharge fully its responsibilities, alternative sources of financing are necessary – the full range of tasks devolved to the KFRC cannot be funded solely from the budget. Similarly to the experience of the Kosovo Auditor's General Office, the KFRC would greatly benefit from a twinning program or an equivalent arrangement to "import" institutional capacity and to mitigate the risk of regulatory capture. 62. The C BK s e t s accounting requirements for banks and insurance undertakings. The resultant systems meet the CBK's prudential objectives, but they are not fully consistent with "full IFRS." Although differences exist (loan provisioning and technical reserves) between CBK financial reporting rules and IFRS, the differences do not represent a major difficulty even in cases where the amounts are material. The CBK discussed with the ROSC team the possibility of a footnote reconciliation disclosure, which would eliminate the current practice of having to prepare two almost identical sets of financial statements and two auditors' reports; the relevant regulation was subsequently drafted and views of the ROSC team were sought. II.E Enforcing Accounting and Auditing Standards 63. Unlike the UNMIK Regulation, the Law on Financial Reporting contains sanctions for non-compliance. However, the KFRC currently lacks the capacity to enforce the law; and, unless the necessary capacity is developed, this situation is not likely to change in the foreseeable future. This capacity issue is exacerbated by the provision in the Law requiring the transfer of all funds collected by KFRC to the state consolidated budget. As noted in the 2006 ROSC report and also previously in this report, a fundamental increase in KFRC's institutional capacity is necessary for KFRC to fulfill all the requirements of the Law. For the immediate future, a greater involvement of the profession may serve as an interim solution, given SCAAK's rapid development. 28 http://www.kkk.gov.al/faqe.php?id=1&l2=101 Kosovo – ROSC Accounting & Auditing Update Page 19 64. The CBK monitors and enforces compliance with IFRS, as applied in Kosovo, in the financial statements issued by banks, insurance companies MFIs and those Non- Bank Financial Institutions (NBFIs) that apply IFRS. Even though prudential regulation and supervision receives more attention than enforcement of accounting standards in the preparation of general purpose financial statements, the CBK does employ inspectors to review compliance with financial reporting requirements. 65. Although it relies on auditors to flag issues of compliance with IFRS in general purpose financial statements, the CBK has developed some capacity of its own to enforce IFRS. Since the 2006 ROSC, the CBK's capacity to review the statutory financial statements presented by banks and insurance undertakings has increased; in addition, the risk related to non-compliance is offset by the banks' lack of involvement in complex financial transactions. Still, as in the past, CBK relies on audit firms with international affiliations to verify that banks and insurance companies are complying with IFRS. One comment from the 2006 ROSC regarding the reliance of CBK on auditors is still valid: "It is not supported by an adequate system of external quality assurance subject to public oversight. Consequently, audit firms are essentially not monitored and there is little assurance regarding the quality of their audits other than the reliance on their reputation." Kosovo – ROSC Accounting & Auditing Update Page 20 III. Observed Reporting and Auditing Practices III.A Status of IFRS Adoption in Kosovo 66. Two sets of accounting standards have been in effect in Kosovo since 2001: (i) the Kosovo Accounting Standards (a selection of modified "2001 IAS"), or "KAS," and (ii) IFRS. KAS have never been updated. The review of KAS was conducted in 2006 as part of the first A&A ROSC . As was to be expected, it identified significant differences between KAS and IFRS already at that time. Some of the differences, still valid, between KAS and IFRS included:  Impairment of assets may or may not be recognized under KAS.  Liabilities for employment benefits may be understated.  There is no KAS equivalent of IAS 41, Agriculture.  KAS do not deal with consolidated financial statements.  KAS have not been updated for other new and revised IFRS, including revisions to IAS, issued by the IASB since 2001. The KFRC decided to require KAS in 2012 and intends to introduce the IFRS for SMEs in 2013. 67. The Law on Financial Reporting requires the KFRC to issue auditing standards that conform to ISA. As noted above (para. 60), the KFRC should benefit from the Albanian translation of ISA, given that it presently does not have the capacity to introduce its own auditing standards. Further, the use of the Albanian translation is also recommended on account of IFAC's policy to support, where possible, only one translation of its standards in any given language. In September 2012, a memorandum for the use of the Albanian translation of ISA in Kosovo was signed with the Albanian translating body IEKA. 29 68. As in 2006, no mechanism currently exists for monitoring and enforcing auditing standards and other requirements related to the audits of banks. This is further exacerbated by the lack of clarity over who has that enforcement authority. The CBK does not have any enforcement powers in relation to quality assurance (except for approving the banks' auditors); and, no other agency has such powers, given that the Law on Financial Reporting excludes the CBK from enforcing audit standards and the KFCR from regulatory activities in the banking sector. SCAAK has established a quality review scheme for auditors; however, the development of the system is a mid- to long-term effort. 69. Audit quality among entities subject to some form of regulation, e.g., by the CBK or by a foreign parent, has improved substantially. However, the issues resulting from the lack of understanding and proper usage of ISA persist, though to a lesser extent than in 2006. The 2006 report noted that, " … problems with the objective of an audit, audit risk assessment, basic audit procedures, and other such common problems" existed. While SCAAK has made significant progress in introducing and enforcing the CPD requirement, inadequate understanding of audit principles, and the objective, performance 29 http://www.ifac.org/about-ifac/translations-permissions/translations-database Kosovo – ROSC Accounting & Auditing Update Page 21 and documentation of an audit still prevails among many sole practitioners and in many small practices. III.B Review of Financial Statements 70. This ROSC reviewed a sample of 22 sets of audited financial statements:  Fifteen sets were prepared in accordance with IFRS, and seven sets were prepared in accordance with Kosovo Accounting Standards (KAS);  Seven sets of audited financial statements were from the financial sector, including three banks (two domestic and one foreign), three insurance companies (two foreign, one domestic) and one micro finance institution. All of these financial statements were prepared in accordance with IFRS;  Two sets of audited financial statements were from publicly-owned enterprises, prepared in accordance with IFRS;  13 sets of financial statements were from other corporations; six of which were prepared in accordance with IFRS, and seven in accordance with KAS.  Financial statements subject to the review were audited by both member firms of large international networks (Big Four) and by member firms of second-tier international networks. Of 22 audit opinions, ten were clean, two clean with an emphasis of matter, six were qualified, one was qualified with an emphasis of matter, one was qualified with another matter, and two were with disclaimers. 71. Overall, compared with the 2006 ROSC, the quality of financial reporting as well as audits, particularly in the financial sector, has improved. The reviewers did not identify material departures from applicable standards in the financial statements subject to the review, though many deficiencies were noted. Caution is required, however, before drawing broad conclusions from the results of this review. Virtually all of the financial statements reviewed are subject to some form of regulation or enforcement, whether by the CBK or by a foreign parent; as a result, these companies are likely to be financially stronger with better accounting than the norm. The list of comments made by the reviewers is attached in Annex 1. III.C Perceptions of the Quality of Financial Reporting 72. The 2006 ROSC Report concluded that, "Corporate financial reporting in Kosovo is perceived to be of very low quality, with the exception of the audited financial statements of financial institutions, which are perceived to be of relatively higher quality." To obtain an update, the ROSC team organized a workshop in Pristina on April 16, 2012. The workshop was attended by almost 40 professional accountants and auditors, SCAAK members. The participants represented primarily professional accountants in business, about a third of them were licensed auditors. The following is the summary of their views. 73. The low quality of financial reporting persists within the largest segment of Kosovo businesses – micro-entities – and, to a lesser degree, in small- and medium-size Kosovo – ROSC Accounting & Auditing Update Page 22 enterprises. Financial reporting among financial institutions and entities audited by local member firms of international networks is perceived to have improved significantly. 74. There is a perception, particularly among professional accountants, that regulatory capacity in relation to accounting and auditing is not what it should be, despite some improvement over the last two years. Some believe that accounting should be regulated similarly to auditing to ensure quality improvement. There appears to be a perception that financial reporting has generally improved over the last five years. Many accountants believe that the presence of the statutory audit requirement, as well as the increased engagement of SCAAK, have driven the improvements. 75. The issue of requiring different sets of financial statements for various users has, to some extent, subsided and is no longer considered a pervasive problem. Although there has been an increase in the use of financial statements by financial institutions, banks still lend to businesses mainly on the strength of posted collateral. Since a vast majority of companies are owner-managed, owners are not typically users of the financial statements. At the same time, there is a perception that management's perception of the usefulness of financial statements and audit has increased since 2006. However, there is still a need for significant training on the application of both IFRS and ISA. 76. Disclosures are generally perceived as inadequate in that they usually include only a breakdown of balances in the financial statements, without a discussion of policies or additional information that is relevant for users and is required by reporting standards. There is also a perception that the recently issued administrative instruction by the KFRC for all companies to use KAS in 2012 and IFRS thereafter is not realistic; application of IFRS will result in significant additional cost to smaller entities. To resolve this, the KFRC has indicated that it was working with the Ministry of Economy and Finance to amend the law and introduce the IFRS for SMEs in 2013. 77. In relation to accounting education, there is some sense of improvement at the university level since the 2006 ROSC but it is not enough. Many accountants feel that tertiary education is, in general, still attached to the "old way" of doing things and that coordination of efforts between various players (i.e., middle schools, SCAAK, universities) is insufficient. 78. The requirement for an annual renewal of audit licenses by the KFRC and the CBK (for auditors of financial institutions) imposes an unnecessary regulatory burden and should be reconsidered. The renewal procedure is not automatic even in instances where the license should be renewed if certain criteria are met (e.g., CPD hours, professional fees, no disciplinary action, etc.). Instead, both audit firms and auditors must submit a number of documents annually to the KFRC and the CBK; in the case of auditors of financial institutions, the process is duplicative as a result of additional requirements set by the CBK. This process is not likely to foster higher audit quality. Kosovo – ROSC Accounting & Auditing Update Page 23 IV. Recommendations 79. The recommendations of this ROSC Update include the recommendations of the 2006 ROSC that have not yet been adequately addressed, most of which have already been discussed in this report. This report also includes additional recommendations from the analysis carried out in connection with this ROSC. Generall y, the recommendations fall under the six major pillars of the accounting and auditing infrastructure. In many instances, the reforms in each pillar need to be conducted in parallel, as the six pillars reinforce each other. For example, strengthening the standard-setting process without similarly bolstering the monitoring and enforcement mechanism will fail to address non-compliance with accounting standards. Critical success factors for implementation include leadership from the highest levels of government, capitalizing on current desire for change and balancing the incentives and disincentives for compliance with financial reporting requirements. 80. The ROSC team has prepared detailed "concordance tables"30 that provide insight as to the current status of the alignment of Kosovo legislation with the EU's Accounting and Statutory Audit Directives. The tables show that many improvements are required. Examples of areas where alignment has not been achieved include the following:  Enforcement of the requirement to publish financial statements;  Definition, monitoring and enforcement of professional pre-qualification experience for statutory auditors;  Definition of the role of professional associations in the financial reporting system – the Law on Financial Reporting envisages the possibility of more than one accounting association; however, should any such new association comprise both accountants and auditors (like SCAAK), this would likely lead to regulatory inefficiencies and lapses in Kosovo's unsettled regulatory environment;  Establishment of a public register of statutory auditors and audit firms, containing all the information required by the EU's Statutory Audit Directive;  Establishment of a functioning public oversight system for the audit profession. In this context, a working balance between the roles of SCAAK and t h e KFRC should be sought and achieved. A viable option remains, on a temporary basis , giving SCAAK a role in quality assurance review, subject to public oversight by KFRC;  Implementation of the quality assurance program currently being developed with the assistance of NIVRA; and  Review of the current criteria concerning the obligation to have a statutory audit. 81. The legal requirement to publish financial statements should be implemented. This requirement has existed since 2001 but never has been implemented. No financial statements, with the exceptions of financial institutions and some POEs, are publicly available. This needs to be addressed. In particular, a formal legal requirement that is not implemented does not constitute alignment with the European legislation and this will certainly be noted by any future European Commission review. 30 These concordance tables can be found in Annex 3. Kosovo – ROSC Accounting & Auditing Update Page 24 82. With regard to accounting standards, building on the progress achieved since 2006, KFRC should:  Establish or adopt accounting standards applicable to SMEs and micro- enterprises ; under the existing interpretation of the law, these entities are expected to apply full IFRS from 2013 – this is not reasonable and will not succeed. KAS or the IFRS for SMEs should be considered for SMEs, with income tax reporting (e.g., summary of receipts and disbursements) for micro - entities;  Monitor the application of IFRS, in both the financial and non-financial sectors, for financial institutions, this should be carried out in close cooperation with the CBK;  Consider entering into a cooperative arrangement with the Albanian Accounting Council, including consultations on enforcement; 83. The KFRC should deepen its cooperation with the Institute of Authorized Chartered Auditors of Albania (IEKA), on translation and adoption of ISA, including consultations on enforcement; 84. With regard to the Monitoring and Enforcement of Accounting and Auditing Standards, it is recommended that:  The KFRC and the CBK increase their c a p a c i t y by employing more staff members who are familiar with IFRS. In order to fulfill their role as agencies regulating accounting standards, the KFRC and the CBK should recruit additional staff with extensive knowledge and experience of IFRS. The KFRC's embedding within the public sector should be reconsidered, since it may limit the KFRC's ability to increase its professional capacity. Consideration should be given to making the KFRC a self-financing regulatory agency;  As in 2006, it is recommended that all statutory auditors and audit firms should be subject to a system of quality assurance, subject to public oversight. T h e KFRC is formally responsible for quality assurance but it has neither the human nor the professional capacity to perform this task. At present, the only available capacity exists within the profession, i.e., SCAAK. The oversight model should consider which mechanism would function best in Kosovo's current circumstances. For example, the model of supervised self-regulation, where the investigation function is performed by SCAAK, but the evaluation of the findings and sanctions could be made by KFCR might be considered. Such system may not be immediately fully aligned with the acquis, particularly with the Commission's Recommendation of 6 May 2008, (2008/362/EC) on external quality assurance for statutory auditors and audit firms selected to audit public interest entities. However, including professionals would help the KFCR to start with a program of inspections and the involvement of the KFCR could then increase over time, as its own professional capacity develops. Another possibility is to use Albanian inspectors in Kosovo, although even this option would face the financing question. In any case, as the 10- year history of the KBSFR demonstrated, the status quo does not work and the configuration needs a change to make it work. The KFRC has taken first steps in this context, including setting up the Quality Assurance Committee and initiating cooperation with its Croatian counterpart. It is expected that the first Quality Assurance cycle will start in 2015. Kosovo – ROSC Accounting & Auditing Update Page 25  The CBK and the KFRC should revisit their audit license renewal policies with the objective of easing the existing regulatory burden and using criteria such as CPD compliance, quality review results, etc. instead. 85. With regard to the Development of the Accounting and Auditing Profession, it is recommended that:  The KFCR upgrade the register of auditors and audit firms (currently, the register is an Excel spreadsheet with no indication as to the frequency of updates) to align it with the requirements of the Statutory Audit Directive;  SCAAK increase its capacity in relation to quality assurance; as indicated above, this should be done in coordination with the KFCR;  Practical experience requirement be brought into line with IFAC requirements; the present requirements for practical experience have been reviewed and changes are being implemented to bring the practical experience requirement in line with IES 5. 31 86. With regard to Education and Training, it is recommended that:  SCAAK and the University sector re-engage on the issue of enhancing access to and the contents of quality accounting education at universities. It is wasteful for all stakeholders if university accounting graduates receive no exemptions in the SCAAK certification program. At the same time, SCAAK needs to obtain assurances that the university program provides an appropriate foundation for future professional accountants.  SCAAK further enhance its CPD program. There are still many observed deficiencies in the work of sole practitioners and small practices. The focus of enhanced CPD should be on those areas where the deficiencies have been observed, for example: o ISA and IFRS; o Audit documentation and audit file; o Obtaining sufficient appropriate audit evidence; o Audit risk assessment and its impact on audit strategy and planning; o Forming an audit opinion and communication with the client, etc. 31 http://www.ifac.org/sites/default/files/publications/files/ies-5-practical-experienc.pdf Kosovo – ROSC Accounting & Auditing Update Page 26 Annex 1. Summary of the Review of Financial Statements ISA Qualified opinion  In general, audit reports were qualified because the auditors were unable to obtain sufficient appropriate audit evidence. In some instances, however, the basis for the qualification did not appear to be appropriately disclosed and supported. Emphasis of matter  Emphasis of matter paragraphs were the result of uncertainty involving valuation, ownership, future liability and contingent tax liability. IFRS Intangible assets  Two identified instances of departure from the standard involved classification and research and development costs treatment. Functional and presentation currency  Functional and presentation currency was not disclosed (IAS 21.8., "The Effects of Changes in Foreign Exchange Rates") Credit risk  Incomplete disclosure in two sets of financial statements (trade receivables and impaired loans) Going concern  In seven instances, the required management disclosure on going concern was missing. Borrowings  One case of unclear measurement method of the relevant interest rate. Segment reporting  Incomplete disclosures identified relating to revenue streams and segment assets and liabilities. Interest  Inadequate disclosures, in two instances, of effective interest rate and interest revenue recognition. Impairment  Inadequate disclosures, in two instances, of the asset impairment policy and discounting of impaired loans policy. Leases  Incomplete disclosures of operating lease, operating lease income, other lease-related information. Kosovo – ROSC Accounting & Auditing Update Page 27 Adoption of new and revised International Financial Reporting Standards  Incomplete disclosure of the likely effects of IFRS9 ‘Financial Instruments' on classification and measurement. Presentation  Incomplete disclosure of financial instruments, specifically IAS 32.42., IAS 2.36. Related parties  Three instances of incomplete related party disclosures identified Risk management  Incomplete disclosure in the Annual Report identified in one instance Hedging  One instance identified of derivatives used to hedge risks but without hedge accounting. Statement of changes in equity  Described in one instance as "Consolidated statement of cash flows for the period." Borrowings  One instance of incomplete disclosure in relation to covenants breached by the borrower (IFRS 7.18) – no disclosure of amounts involved Deferred Taxes  One instance of failing to present deferred tax Liability Adequacy Tests (LAT) (IFRS 4.15.)  Required disclosure not provided in one instance Concentration of insurance risk  Required disclosure not provided in one instance NATIONAL STANDARDS (KAS) Revenue  One instance of incomplete disclosure, no policy on recognition and measurement. Impairment  One instance of no disclosure on impairment of assets, also no evidence if the entity has assessed whether any asset may be impaired. Leases  No leases disclosed in one instance. The entity rents the office and warehouse space. Financial Instruments  The company has disclosed cash, accounts receivable and payable but NO policy on presentation, recognition or measurement is disclosed. Kosovo – ROSC Accounting & Auditing Update Page 28 Annex 2: Status of the Recommendation of the 2006 ROSC A&A Recommendation Status It is recommended that a multi-disciplinary group of Not established. private and public stakeholders be established. Prepare a "transposition table" showing for each Transposition (concordance) table relevant provision of the acquis communautaire how not completed (Para 80). corresponding Kosovo legal instruments implement the provision. Drawing on this analysis, the group should contribute The new law was prepared without to the proposed amendments to the Law on Financial the concordance table; numerous Reporting in order to align it more closely with the instances of non-alignment with the [Audit] Directive. acquis remain (Para 80). Restructure the institutional framework and achieve a Partially completed (SCAAK is working balance between the roles of SCAAK and developing a quality assurance the KBSFR. review program, Paras 49-56). A requirement for public interest entities to present Completed. IFRS will be required their financial statements in conformity with IFRS. from 2013 (Para 57). A requirement for enterprises that are not public Partially Completed. According to interest entities other than micro enterprises to the present law, the non-PIE present their financial statements in conformity with companies will be required to apply KAS. IFRS, IFRS for SMEs are being considered (Para 57). A requirement for legal entity and/or consolidated Partially completed; the new law financial statements to be audited only when there is narrowed the mandatory audit a public interest for such an audit, irrespective of the requirement (Para 27, 30). entity's legal form. A requirement for all statutory audits to be conducted Completed (Para 58). in compliance with ISA. A requirement for public interest entities (short term) Not completed (Para 81). and other corporations (longer term) to make their audited legal entity (and consolidated) financial statements, including the notes to the financial statements, readily available to the public within a reasonable period after the balance sheet date. Reach agreement with the International Accounting No longer applicable (both Standards Committee Foundation (IASCF) and the Albanian and Serbian translations Kosovo – ROSC Accounting & Auditing Update Page 29 Recommendation Status institutions responsible for the translation of the exist in Albania and Serbia, para 84). Albanian and Serbian language versions of the standards. The KBSFR maintain KAS as a simplified financial Not completed; the law does not reporting system for application in entities that do not consider KAS as accounting meet the definition of a public interest entity. standards applicable in Kosovo, even Alternatively, Kosovo could review the ongoing though still requires the KFRC to project of the International Accounting Standards maintain it. The IFRS for SMEs is Board (IASB) on "Accounting Standards for SMEs." not currently applicable in Kosovo (Para 84). BPK [should] revisit the relationship between Completed (Para 62). prudential and general purpose financial reporting in the financial sector. BPK should develop prudential filters for regulatory capital. Reach agreement with IFAC and the institutions No longer applicable as both responsible for the translation of the Albanian and Albanian and Serbian translations Serbian language versions of the standards (…). exist in Albania and Serbia (Para 82,83). More direct action [should] be taken with regard to Not completed (Para 24, 25) the monitoring and enforcement of accounting and reporting standards by public interest entities. The KBSFR and BPK should increase their human Partially completed by the CBK resources by employing more staff members who are (Para 64). familiar with IFRS. The BPK should seek to strengthen its relationship Partially completed (Para 65). with statutory auditors to mutual advantage. While the objectives of supervisors and auditors are different, there are many areas where the work of the supervisors and of the external auditor can be useful to each other. (...) BPK may contemplate requiring the statutory Not completed; not considered a auditor to carry out specific assignments or to issue priority. special reports to assist the supervisors in discharging their supervisory functions (…). All statutory auditors and audit firms should be Partially completed – the law subject to a system of quality assurance subject to provides for oversight of auditors; public oversight. however, it has not been implemented (Para 41, 46). Kosovo should establish an effective system of Partially completed – the law investigations and sanctions to detect, correct and provides for oversight of auditors; Kosovo – ROSC Accounting & Auditing Update Page 30 Recommendation Status prevent inadequate execution of the statutory audit. however, it has not been implemented (Para 41, 46). Also, every measure taken or sanction imposed on Not completed (Para 41, 46). statutory auditors and audit firms should be appropriately disclosed to the public. As for the quality assurance system, the system may draw upon existing practices in EU Member States and IFAC SMO 6, Investigation and Discipline (…). All statutory auditors and audit firms should be Partially completed (Para 43; firm members of SCAAK. membership not required, only license by the KFRC). SCAAK (or the KBSFR) should establish a public Partially completed; the register electronic register of statutory auditors and audit exists and is public but is not firms so that interested parties can determine rapidly regularly updated and does not whether a statutory auditor or an audit firm has been contain the information required by approved, etc. This will be facilitated through the Audit Directive (Para 80). registration in a public electronic register. The capacity of SCAAK should be increased so as to Partially completed; SCAAK offers enable it to make a more effective contribution to the some advice to its members; some audit profession in Kosovo. guidance for small audit firms has been developed. Practical experience should be brought in line with Partially completed; mentorship and IFAC requirements. Mentorship and supervision have supervision have not been to be promoted. It is necessary to review the present implemented (Para 53, 86). requirements for practical experience and to bring them in line with IES 5. Emphasis should be given to developing an Partially completed; SCAAK educational continuum from university through to the program complies with IES but no continuing professional development of A&A integration with university education professionals (…). has taken place (Para 47, 48, 86). The university curriculum and educational material Partially completed, although it is should be updated. not clear to what extent the new materials are used (Para 47, 48). Universities will need to work closely with the Not completed (Para, 47, 48, 86). KBSFR, SCAAK, and the business community to develop degree programs appropriate to the developing needs of the economy. SCAAK should also ensure that candidates for the Partially completed; content of the audit qualification receive sufficient and relevant practical experience requirement not practical experience prior to the award of the established (Para 53, 86). Kosovo – ROSC Accounting & Auditing Update Page 31 Recommendation Status qualification. Having established a robust basis for qualification it Completed (Para 55). is essential that continued membership of SCAAK and retaining the right to conduct audits (i.e., the license issued by the KBSFR) is dependent upon completing a minimum level of CPD. Such CPD needs to be monitored by SCAAK (…). Kosovo – ROSC Accounting & Auditing Update Page 32 Annex 3: Concordance Tables (DRAFT) Draft Concordance Table - the Fourth Directive Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Preamble Whereas annual accounts must give a No enunciation of this in the AA Law but There is no reference in the true and fair view of a company's assets article 5 of the law states compliance obligatory law to the need for financial and liabilities, financial position and with international standards. Articles 14 and 15 statements to provide a true profit or loss refer to compliance with EU Acquis as part of and fair value. the KFRC and its commissions' mandates. Preamble Whereas, however, derogations may be Article 5 of the law states that types of business granted for certain companies of minor organizations regulated under the law i.e. large, economic or social importance; Certain medium and small organizations registered as derogations may likewise be granted in limited liability and shareholders companies this area for small and medium-sized shall comply with IFRS which is not required companies for companies registered under different types i.e. Personal Enterprises and General Partnership. For Micro Enterprises, the law states that "Criteria for accounting and reporting applicable to micro enterprises will be regulated by KKRF in order to minimize administrative burden on the micro enterprises. Kosovo – ROSC Accounting & Auditing Update Page 33 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment No audits are required for small and micro business organizations as defined under article 4 of this law. Article 1 The coordination measures prescribed by Law on business companies 02/L-123. There is No specific mentioning in the this Directive shall apply to the laws, no reference in this law to public companies Law of types of companies regulations and administrative provisions limited or unlimited. Types of organizations as under the AAL. Reference of the Member States relating to the per article 4 of the law are personal business made in article five of the law following types of companies: public enterprise, a general partnership, a limited is only to limited liability companies limited by shares or by partnership, a limited liability company or a companies and shareholders guarantee, private companies limited by joint stock company. companies. shares or by guarantee; partnerships, limited partnerships, unlimited companies. Article 1 Pending subsequent coordination, the No reference in the Law to this matter No reference in the Law to Member States need not apply the this matter. provisions of this Directive to banks and other financial institutions or to insurance companies Kosovo – ROSC Accounting & Auditing Update Page 34 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 2 1. The annual accounts shall comprise the Kosovo Law on Accounting Financial The current law refers to balance sheet, the profit and loss account Reporting and Audit states in article that annual "Statement of Revenue" as and the notes on the accounts. These financial statements shall contain a)Balance part of the annual financial documents shall constitute a composite Sheet, b) Statement of Revenue, c) Statement of statements as opposed to whole. capital changes (equity), d) statement of cash "profit and loss account" as flow and e) accompanying document of required by the forth directive. Member States may permit or require the financial statements. inclusion of other statements in the annual accounts in addition to the documents The law also states that the structure and referred to in the first subparagraph. content shall be regulated by a sub-normative The law doesn't state clearly act. that the financial statements 2. They shall be drawn up clearly and in must give a true and fair value accordance with the provisions of this of the company's assets, Directive. liabilities, financial position and profit and loss as required 3. The annual accounts shall give a true by the forth directive. and fair view of the company's assets, liabilities, financial position and profit or loss. 4. Where the application of the provision of this Directive would not be sufficient to give a true and fair view within the meaning of paragraph 3, additional information must be given. 5. Where in exceptional cases the Kosovo – ROSC Accounting & Auditing Update Page 35 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment application of a provision of this Directive is incompatible with the obligation laid down in paragraph 3, that provision must be departed from in order to give a true and fair view within the meaning of paragraph 3. Any such departure must be disclosed in the notes on the accounts together with an explanation of the reasons for it and a statement of its effect on the assets, liabilities, financial position and profit or loss. The Member States may define the exceptional cases in question and lay down the relevant special rules. 6. The Member States may authorize or require the disclosure in the annual accounts of other information as well as that which must be disclosed Article 3 The layout of the balance sheet and of the Article 9 of the Law states that the structure and Kosovo Accounting and profit and loss account, particularly as content shall be regulated by a sub-normative Financial Reporting Law regards the form adopted for their act but it doesn't explicitly refer to the layout of doesn't refer to the layout of presentation, may not be changed from financial statements required. financial statements. Kosovo – ROSC Accounting & Auditing Update Page 36 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment one financial year to the next. Departures from this principle shall be permitted in exceptional cases. Any such departure must be disclosed in the notes on the accounts together with an explanation of the reasons therefore Article 4 1. In the balance sheet and in the profit No reference in the Law to this matter and loss account the items prescribed in Articles 9, 10 and 23 to 26 must be shown separately in the order indicated. A more detailed subdivision of the items shall be authorized provided that the layouts are complied with. New items may be added provided that their contents are not covered by any of the items prescribed by the layouts. Such subdivision or new items may be required by the Member States. 2. The layout, nomenclature and terminology of items in the balance sheet and profit and loss account that are preceded by Arabic numerals must be Kosovo – ROSC Accounting & Auditing Update Page 37 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment adapted where the special nature of an undertaking so requires. Such adaptations may be required by the Member States of undertakings forming part of a particular economic sector. 3. The balance sheet and profit and loss account items that are preceded by Arabic numerals may be, combined where: (a) they are immaterial in amount for the purposes of Article 2 (3); or (b) such combination makes for greater clarity, provided that the items so combined are dealt with separately in the notes on the accounts. Such combination may be required by the Member States. 4. In respect of each balance sheet and profit and loss account item the figure relating to the corresponding item for the preceding financial year must be shown. The Member States may provide that, where these figures are not comparable, the figure for the preceding financial year Kosovo – ROSC Accounting & Auditing Update Page 38 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment must be adjusted. In any case, non- comparability and any adjustment of the figures must be disclosed in the notes on the accounts, with relevant comments. 5. Save where there is a corresponding item for the preceding financial year within the meaning of paragraph 4, a balance sheet or profit and loss account item for which there is no amount shall not be shown. 6. Member States may permit or require the presentation of amounts within items in the profit and loss account and balance sheet to have regard to the substance of the reported transaction or arrangement. Such permission or requirement may be restricted to certain classes of company and/or to consolidated accounts as defined in the Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts (1) Kosovo – ROSC Accounting & Auditing Update Page 39 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 5 1. By way of derogation from Article 4 No reference in the Law to this matter (1) and (2), the Member States may prescribe special layouts for the annual accounts of investment companies and of financial holding companies provided that these layouts give a view of these companies equivalent to that provided for in Article 2 (3). 2. For the purposes of this Directive, ‘investment companies' shall mean only: (a) those companies the sole object of which is to invest their funds in various securities, real property and other assets with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets; (b) those companies associated with investment companies with fixed capital if the sole object of the companies so associated is to acquire fully paid shares issued by those investment companies without prejudice to the provisions of Kosovo – ROSC Accounting & Auditing Update Page 40 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 20 (1) (h) of Directive 77/91/EEC (2). 3. For the purposes of this Directive, ‘financial holding companies' shall mean only those companies the sole object of which is to acquire holdings in other undertakings, and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, the aforegoing without prejudice to their rights as shareholders. The limitations imposed on the activities of these companies must be such that compliance with them can be supervised by an administrative or judicial authority. Article 6 The Member States may authorize or No reference in the Law to this matter require adaptation of the layout of the balance sheet and profit and loss account in order to include the appropriation of profit or the treatment of loss. Kosovo – ROSC Accounting & Auditing Update Page 41 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 7 Any set-off between asset and liability No reference in the Law to this matter The law doesn't make a clear items, or between income and expenditure reference that set offs are items, shall be prohibited prohibited. Articles 8-10 In these articles suggested layouts for the According to article 5 of the Law financial There are no suggested balance sheet are set out statements shall be prepared in accordance with layouts referred to in the Law IFRS Article 11 The Member States may permit No reference in the law to this matter. There is no specific reference companies which on their balance sheet in the Law to this matter. dates do not exceed the limits of two of the following criteria: — balance sheet total: EUR 4 400 000, — net turnover: EUR 8 800 000, — average number of employees during the financial year: 50 to draw up abridged balance sheets showing only those items preceded by letters and roman numerals in Articles 9 and 10, disclosing separately the information required in brackets in D (II) Kosovo – ROSC Accounting & Auditing Update Page 42 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment under ‘Assets' and C under ‘Liabilities' in Article 9 and in D (II) in Article 10, but in total for each Article 12 1. Where on its balance sheet date, a No reference in the law to this matter. The Law on Accounting, company exceeds or ceases to exceed the Financial Reporting and Audit limits of two of the three criteria indicated doesn't stipulate that the in Article 11, that fact shall affect the evaluation of company size application of the derogation provided for should be based on relevant in that Article only if it occurs in two indicators in two consecutive consecutive financial years. periods. 2. For the purposes of translation into national currencies, the amounts in European units of account specified in Article 11 may be increased by not more than 10 %. 3. The balance sheet total referred to in Article 11 shall consist of the assets in A to E under ‘Assets' in the layout prescribed in Article 9 or those in A to E in the layout in Article 10 Kosovo – ROSC Accounting & Auditing Update Page 43 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 13 1. Where an asset or liability relates to No reference in the law to this matter. The Law doesn't explicitly more than one layout item, its relationship refer to this matter. However, to other items must be disclosed either IFRS endorsed by the law under the item where it appears or in the resolves disclosure issues. notes on the accounts, if such disclosure is essential to the comprehension of the annual accounts. 2. Own shares and shares in affiliated undertakings may be shown only under the items prescribed for that purpose Article 14 All commitments by way of guarantee of No reference in the law to this matter. The Law doesn't explicitly any kind must, if there is no obligation to refer to this matter. However, show them as liabilities, be clearly set out IFRS endorsed by the law at the foot of the balance sheet or in the resolves disclosure issues. notes on the accounts, and a distinction made between the various types of guarantee which national law recognizes; specific disclosure must be made of any valuable security which has been provided. Commitments of this kind existing in respect of affiliated undertakings must be Kosovo – ROSC Accounting & Auditing Update Page 44 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment shown separately Article 15 1. Whether particular assets are to be No reference in the law to this matter. There is no reference in the shown as fixed assets or current assets law to this matter. shall depend upon the purpose for which they are intended. 2. Fixed assets shall comprise those assets which are intended for use on a continuing basis for the purposes of the undertaking's activities. 3. (a) Movements in the various fixed asset items shall be shown in the balance sheet or in the notes on the accounts. To this end there shall be shown separately, starting with the purchase price or production cost, for each fixed asset item, on the one hand, the additions, disposals and transfers during the financial year and, on the other, the cumulative value adjustments at the balance sheet date and the rectifications made during the financial year to the value adjustments of previous financial years. Value Kosovo – ROSC Accounting & Auditing Update Page 45 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment adjustments shall be shown either in the balance sheet, as clear deductions from the relevant items, or in the notes on the accounts. Article 16 Rights to immovables and other similar No reference in the law to this matter. There is no reference in the rights as defined by national law must be law to this matter. shown under ‘Land and buildings' Article 17 For the purposes of this Directive, No reference in the law to this matter. No reference in the law to this participating interest shall mean rights in matter. the capital of other undertakings, whether or not represented by certificates, which, The provisions included in by creating a durable link with those this article are dealt with in undertakings, are intended to contribute to the IFRSs. the company's activities. The holding of part of the capital of another company shall be presumed to constitute a participating interest where it exceeds a percentage fixed by the Member States which may not exceed 20 % Article 18 Expenditure incurred during the financial No reference in the law to this matter. There is no reference in the year but relating to a subsequent financial Kosovo – ROSC Accounting & Auditing Update Page 46 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment year, together with any income which, law to this matter. though relating to the financial year in question, is not due until after its expiry must be shown under ‘Prepayments and accrued income'. The Member States may, however, provide that such income shall be included in ‘Debtors'. Where such income is material, it must be disclosed in the notes on the accounts Article 19 Value adjustments shall comprise all No reference in the law to this matter. No reference in the law to this adjustments intended to take account of matter. reductions in the values of individual assets established at the balance sheet date The provisions included in whether that reduction is final or not this article are dealt with in the IFRSs. Article 20 1. Provisions are intended to cover No reference in the law to this matter. No reference in the law to this liabilities the nature of which is clearly matter. defined and which at the date of the balance sheet are either likely to be incurred, or certain to be incurred but The provisions included in uncertain as to amount or as to the date on this article are dealt with in which they will arise. Kosovo – ROSC Accounting & Auditing Update Page 47 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment 2. The Member States may also authorize the IFRSs. the creation of provisions intended to cover charges which have their origin in the financial year under review or in a previous financial year, the nature of which is clearly defined and which at the date of the balance sheet are either likely to be incurred, or certain to be incurred but uncertain as to amount or timing. 3. Provisions may not be used to adjust the values of assets Article 21 Income receivable before the balance No reference in the law to this matter. No reference in the law to this sheet date but relating to a subsequent matter. financial year, together with any charges which, though relating to the financial There is no reference in the year in question, will be paid only in the law to this matter. course of a subsequent financial year, must be shown under ‘Accruals and deferred income'. The Member States may, however, provide that such charges shall be included in ‘Creditors'. Where such charges are material, they must be Kosovo – ROSC Accounting & Auditing Update Page 48 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment disclosed in the notes on the accounts Articles 23- In these articles the suggested layouts for No reference in the law to this matter. There is no reference in the 26 the income statement are set out law to the layouts of income statements. However, the law refers under article 9 that the structure and contents of financial statements shall be regulated by sub-normative act issued by the minister of finance. Article 27 The Member States may permit No reference in the law to this matter. There is no reference in the companies which on their balance sheet law to this matter. dates do not exceed the limits of two of the three following criteria: — balance sheet total: EUR 17 500 000, — net turnover: EUR 35 000 000, — average number of employees during the financial year: 250 to adopt layouts different from those Kosovo – ROSC Accounting & Auditing Update Page 49 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment prescribed in Articles 23 to 26 within the following limits: (a) in Article 23: 1 to 5 inclusive may be combined under one item called ‘Gross profit or loss'; (b) in Article 24: A (1), A (2) and B (1) to B (4) inclusive may be combined under one item called ‘Gross profit or loss'; (c) in Article 25: (1), (2), (3) and (6) may be combined under one item called ‘Gross profit or loss'; (d) in Article 26, A (1), B (1) and B (2) may be combined under one item called ‘Gross profit or loss'. Article 12 shall apply Article 28 The net turnover shall comprise the No reference in the law to this matter. There is no reference in the amounts derived from the sale of law to this matter. products and the provision of services falling within the company's ordinary activities, after deduction of sales rebates Kosovo – ROSC Accounting & Auditing Update Page 50 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment and of value added tax and other taxes directly linked to the turnover Article 29 1. Income and charges that arise No reference in the law to this matter. There is no reference in the otherwise than in the course of the law to this matter. company's ordinary activities must be shown under ‘Extraordinary income and extraordinary charges'. 2. Unless the income and charges referred to in paragraph 1 are immaterial for the assessment of the results, explanations of their amount and nature must be given in the notes on the accounts. The same shall apply to income and charges relating to another financial year Article 30 The Member States may permit taxes on No reference in the law to this matter. There is no reference in the the profit or loss on ordinary activities law to this matter. and taxes on the extraordinary profit or loss to be shown in total as one item in the profit and loss account before ‘Other taxes not shown under the above items'. In that case, ‘Profit or loss on ordinary Kosovo – ROSC Accounting & Auditing Update Page 51 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment activities after taxation' shall be omitted from the layouts prescribed in Articles 23 to 26. Where this derogation is applied, companies must disclose in the notes on the accounts the extent to which the taxes on the profit or loss affect the profit or loss on ordinary activities and the ‘Extraordinary profit or loss' Article 31 Valuation Rules Other that what is stated under Article 7 of the There is no reference in the law "Business organizations, subject to this law to valuation rules. 1. The Member States shall ensure that law, must verify at least once a year the the items shown in the annual accounts existence and evaluation of assets, liabilities, are valued in accordance with the and capital through the stocktaking of these following general principles: elements and their supporting evidence through (a) the company must be presumed to be the stocktaking process." There is no reference carrying on its business as a going in the Law to valuation rules. concern; (b) the methods of valuation must be applied consistently from one financial year to another; Kosovo – ROSC Accounting & Auditing Update Page 52 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment (c) valuation must be made on a prudent basis, and in particular: (aa) only profits made at the balance sheet date may be included, (bb) account must be taken of all liabilities arising in the course of the financial year concerned or of a previous one, even if such liabilities become apparent only between the date of the balance sheet and the date on which it is drawn up, (cc) account must be taken of all depreciation, whether the result of the financial year is a loss or a profit; (d) account must be taken of income and charges relating to the financial year, irrespective of the date of receipt or payment of such income or charges; (e) the components of asset and liability items must be valued separately; (f) the opening balance sheet for each Kosovo – ROSC Accounting & Auditing Update Page 53 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment financial year must correspond to the closing balance sheet for the preceding financial year. 1a. In addition to those amounts recorded pursuant to paragraph (1) (c)(bb), Member States may permit or require account to be taken of all foreseeable liabilities and potential losses arising in the course of the financial year concerned or of a previous one, even if such liabilities or losses become apparent only between the date of the balance sheet and publication date; 2. Departures from these general principles shall be permitted in exceptional cases. Any such departures must be disclosed in the notes on the accounts and the reasons for them given together with an assessment of their effect on the assets, liabilities, financial position and profit or loss Kosovo – ROSC Accounting & Auditing Update Page 54 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Articles 33- Valuation articles NA There is no reference in the 39 law to how countries should value their current and non- current assets. Article 40 1. The Member States may permit the No reference in the law to this matter. There is no reference to this purchase price or production cost of matter stocks of goods of the same category and all fungible items including investments to be calculated either on the basis of weighted average prices or by the ‘first in, first out' (FIFO) method, the ‘last in, first out' (LIFO) method, or some similar method. 2. Where the value shown in the balance sheet, following application of the methods of calculation specified in paragraph 1, differs materially, at the balance sheet date, from the value on the basis of the last known market value prior to the balance sheet date, the amount of that difference must be disclosed in total by category in the notes on the accounts Kosovo – ROSC Accounting & Auditing Update Page 55 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 41 1. Where the amount repayable on No reference in the law to this matter. There is no reference to this account of any debt is greater than the matter amount received, the difference may be shown as an asset. It must be shown separately in the balance sheet or in the notes on the accounts. 2. The amount of this difference must be written off by a reasonable amount each year and completely written off no later than the time of repayment of the debt Article 42 Provisions may not exceed in amount the No reference in the law to this matter. There is no reference to this sums which are necessary. The provisions matter shown in the balance sheet under ‘Other provisions' must be disclosed in the notes on the accounts if they are material Article 43 Contents of the notes on the accounts No reference in the law to this matter. There is no reference to this matter 1. In addition to the information required under other provisions of this Directive, the notes on the accounts must set out information in respect Kosovo – ROSC Accounting & Auditing Update Page 56 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment of the following matters at least: (1) the valuation methods applied to the various items in the annual accounts, and the methods employed in calculating the value adjustments. For items included in the annual accounts which are or were originally expressed in foreign currency, the bases of conversion used to express them in local currency must be disclosed; (2) the name and registered office of each of the undertakings in which the company, either itself or through a person acting in his own name but on the company's behalf, holds at least a percentage of the capital which the Member States cannot fix at more than 20 %, showing the proportion of the capital held, the amount of capital and reserves, and the profit or loss for the latest financial year of the undertaking concerned for which accounts have been adopted. This information may be omitted where for the purposes of Article 2 (3) it Kosovo – ROSC Accounting & Auditing Update Page 57 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment is of negligible importance only. (3) the number and the nominal value or, in the absence of a nominal value, the accounting par value of the shares subscribed during the financial year within the limits of an authorized capital, without prejudice as far as the amount of this capital is concerned to Article 2 (1) (e) of Directive 68/151/EEC or to Article 2 (c) of Directive 77/91/EEC; (4) where there is more than one class of shares, the number and the nominal value or, in the absence of a nominal value, the accounting par value for each class; (5) the existence of any participation certificates, convertible debentures or similar securities or rights, with an indication of their number and the rights they confer; (6) amounts owed by the company becoming due and payable after more Kosovo – ROSC Accounting & Auditing Update Page 58 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment than five years as well as the company's entire debts covered by valuable security furnished by the company with an indication of the nature and form of the security. This information must be disclosed separately for each creditors item, as provided for in the layouts prescribed in Articles 9, 10 and 10a Article 43 (7) the total amount of any financial No reference in the law to this matter. There is no reference to this commitments that are not included in the matter balance sheet, in so far as this information is of assistance in assessing the financial position. Any commitments concerning pensions and affiliated undertakings must be disclosed separately; (7a) the nature and business purpose of the company's arrangements that are not included in the balance sheet and the financial impact on the company of those arrangements, provided that the risks or benefits arising from such arrangements are material and in so far as the disclosure of such risks or benefits is necessary for Kosovo – ROSC Accounting & Auditing Update Page 59 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment assessing the financial position of the company. Member States may permit the companies referred to in Articleicle 27 to limit the information required to be disclosed by this point to the nature and business purpose of such arrangements; (7b) transactions which have been entered into with related parties by the company, including the amount of such transactions, the nature of the related party relationship and other information about the transactions necessary for an understanding of the financial position of the company, if such transactions are material and have not been concluded under normal market conditions. Information about individual transactions may be aggregated according to their nature except where separate information is necessary for an understanding of the effects of related party transactions on the financial position of the company. Kosovo – ROSC Accounting & Auditing Update Page 60 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Member States may permit the companies referred to in Article 27 to omit the disclosures prescribed in this point unless those companies are of a type referred to in Article 1(1) of Directive 77/91/EEC, in which case Member States may limit disclosure to, as a minimum, transactions entered into directly or indirectly between: (i) the company and its major shareholders, And (ii) the company and the members of the administrative, management and supervisory bodies. Member States may exempt transactions entered into between two or more members of a group provided that subsidiaries which are party to the transaction are wholly owned by such a member. ‘Related party' has the same meaning as in international accounting Kosovo – ROSC Accounting & Auditing Update Page 61 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment standards adopted in accordance with Regulation (EC) No 1606/2002 Article 44 1. Member States may permit the No reference in the law to this matter. There is no reference to this companies referred to in Article 11 to matter draw up abridged notes on their accounts without the information required in Article 43(1)(5) to (12), (14)(a) and (15). However, the notes must disclose the information specified in Article 43(1)(6) in total for all the items concerned. 2. Member States may also permit the companies referred to in paragraph 1 to be exempted from the obligation to disclose in the notes on their accounts the information prescribed in Article 15 (3) (a) and (4), Articles 18, 21 and 29 (2), the second subparagraph of Article 30, Article 34 (2), Article 40 (2) and the second subparagraph of Article 42. 3. Article 12 shall apply. Kosovo – ROSC Accounting & Auditing Update Page 62 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Article 45 1. The Member States may allow the No reference in the law to this matter. There is no reference to this disclosures prescribed in Article 43 (1) matter (2): (a) to take the form of a statement deposited in accordance with Article 3 (1) and (2) of Directive 68/151/EEC; this must be disclosed in the notes on the accounts; (b) to be omitted when their nature is such that they would be seriously prejudicial to any of the undertakings to which Article 43 (1) (2) relates. The Member States may make such omissions subject to prior administrative or judicial authorization. Any such omission must be disclosed in the notes on the accounts. 2. Paragraph 1(b) shall also apply to the information specified in Article 43(1)(8). The Member States may permit the Kosovo – ROSC Accounting & Auditing Update Page 63 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment companies referred to in Article 27 to omit disclosure of the information specified in Article 43(1)(8). The Member States may also permit the companies referred to in Article 27 to omit disclosure of the information specified in Article 43(1)(15), provided that such information is delivered to the public oversight system referred to in Article 32 of Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audit of annual accounts and consolidated accounts (1) when requested by such a public oversight system. Article 46 Contents of the annual report Article 9 of the AAL states that The structure There is no reference to this and content of annual financial statements shall matter 1. (a) The annual report shall include at be regulated by a sub-normative act issued by least a fair review of the development the Minister of Finance upon proposal of and performance of the company's KCFR. business and of its position, together with a description of the principal risks and uncertainties that it faces. The review shall be a balanced and Kosovo – ROSC Accounting & Auditing Update Page 64 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment comprehensive analysis of the development and performance of the company's business and of its position, consistent with the size and complexity of the business; (b) To the extent necessary for an understanding of the company's development, performance or position, the analysis shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters; (c) In providing its analysis, the annual report shall, where appropriate, include references to and additional explanations of amounts reported in the annual accounts. 2. The report shall also give an indication of: Kosovo – ROSC Accounting & Auditing Update Page 65 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment (a) any important events since the end of the financial year; (b) the company's likely future development; (c) activities in the field of research and development; (d) the information concerning acquisitions of own shares prescribed by Article 22 (2) of Directive 77/91/EEC. (e) the existence of branches of the company; (f) in relation to the company's use of financial instruments and where material for the assessment of its assets, liabilities, financial position and profit or loss, — the company's financial risk management objectives and policies, including its policy for hedging each major type of forecasted transaction for Kosovo – ROSC Accounting & Auditing Update Page 66 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment which hedge accounting is used, and — the company's exposure to price risk, credit risk, liquidity risk and cash flow risk. 3. Member States may waive the obligation on companies covered by Article 11 to prepare annual reports, provided that the information referred to in Article 22 (2) of Directive 77/91/EEC concerning the acquisition by a company of its own shares is given in the notes to their accounts. 4. Member States may choose to exempt companies covered by Article 27 from the obligation in paragraph 1(b) above in so far as it relates to non-financial information. Article 46a 1. A company whose securities are Article 9 of the Law states that The structure No reference to corporate admitted to trading on a regulated market and content of annual financial statements shall governance is made in the within the meaning of Article 4(1), point be regulated by a sub-normative act issued by law. (14) of Directive 2004/39/EC of the the Minister of Finance upon proposal of Kosovo – ROSC Accounting & Auditing Update Page 67 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment European Parliament and of the Council KCFR. of 21 April 2004 on markets in financial instruments (1) shall include a corporate governance statement in its annual report. That statement shall be included as a specific section of the annual report and shall contain at least the following information: (a) a reference to: (i) the corporate governance code to which the company is subject, and/or (ii) the corporate governance code which the company may have voluntarily decided to apply, and/or (iii) all relevant information about the corporate governance practices applied beyond the requirements under national law. Where points (i) and (ii) apply, the company shall also indicate where the Kosovo – ROSC Accounting & Auditing Update Page 68 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment relevant texts are publicly available; where point (iii)applies, the company shall make its corporate governance practices publicly available; (b) to the extent to which a company, in accordance with national law, departs from a corporate governance code referred to under points (a)(i) or (ii), an explanation by the company as to which parts of the corporate governance code it departs from and the reasons for doing so. Where the company has decided not to apply any provisions of a corporate governance code referred to under points (a)(i) or (ii), it shall explain its reasons for doing so; (c) a description of the main features of the company's internal control and risk management systems in relation to the financial reporting process; (d) the information required by Article 10(1), points (c), (d), (f), (h) and (i) of Directive 2004/25/EC of the European Kosovo – ROSC Accounting & Auditing Update Page 69 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment Parliament and of the Council of 21 April 2004 on takeover bids (1), where the company is subject to that Directive; (e) unless the information is already fully provided for in national laws or regulations, the operation of the shareholder meeting and its key powers, and a description of shareholders' rights and how they can be exercised; (f) the composition and operation of the administrative, management and supervisory bodies and their committees. 2. Member States may permit the information required by this Article to be set out in a separate report published together with the annual report in the manner set out in Article 47 or by means of a reference in the annual report where such document is publicly available on the company's website. In the event of a separate report, the corporate governance statement may contain a reference to the annual report where the information Kosovo – ROSC Accounting & Auditing Update Page 70 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment required in paragraph 1, point (d) is made available. Article 51(1), second subparagraph shall apply to the provisions of paragraph 1, points (c) and (d) of this Article. For the remaining information, the statutory auditor shall check that the corporate governance statement has been produced. 3. Member States may exempt companies which have only issued securities other than shares admitted to trading on a regulated market, within the meaning of Article 4(1), point (14) of Directive 2004/39/EC, from the application of the provisions of paragraph 1, points (a), (b), (e) and (f), unless such companies have issued shares which are traded in a multilateral trading facility, within the meaning of Article 4(1), point (15) of Directive 2004/39/EC. Article 47 Publication Article 11 of the AA law states that 1. The There is no reference in the financial statement of the Business Law to these points. 1. The annual accounts, duly approved, Organizations have to be audited in accordance Kosovo – ROSC Accounting & Auditing Update Page 71 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment and the annual report, together with the with International standards on auditing and in opinion submitted by the person accordance with Article 5 paragraph 1. of this responsible for auditing the accounts, law, submitted and published in KCRF and a shall be published as laid down by the copy submitted to MTI, no later than 30 April laws of each Member State in accordance of the following year. with Article 3 of Directive 68/151/EEC. The laws of a Member State may, however, permit the annual report not to 2. Consolidated financial statements have to be be published as stipulated above. It must audited in accordance with International be possible to obtain a copy of all or part standards on auditing and in accordance with of any such report upon request. The price Article 5. paragraph 3 of the law shall be of such a copy must not exceed its submitted to KCFR and a copy in MTI, and no administrative cost. later than 30 of June of the following year. 1a. The Member State of a company or firm referred to in Article 1 (1), second and third subparagraphs (entity concerned) may exempt that entity from publishing its accounts in accordance with Article 3 of Directive 68/151/EEC, provided that those accounts are available to the public at its head office, where: (a) all the members having unlimited liability of the entity concerned are the Kosovo – ROSC Accounting & Auditing Update Page 72 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment companies referred to in the first subparagraph of Article 1 (1) governed by the laws of Member States other than the Member State whose law governs that entity and none of those companies publishes the accounts of the entity concerned with its own accounts; or (b) all the members having unlimited liability are companies which are not governed by the laws of a Member State but which have a legal form comparable to those referred to in Directive 68/151/EEC. Copies of the accounts must be obtainable upon request. The price of such a copy may not exceed its administrative cost. Appropriate sanctions must be provided for failure to comply with the publication obligation imposed in this paragraph. 2. By way of derogation from paragraph 1, the Member States may permit the companies referred to in Article 11 to Kosovo – ROSC Accounting & Auditing Update Page 73 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment publish: (a) abridged balance sheets showing only those items preceded by letters and roman numerals in Articles 9 and 10, disclosing separately the information required in brackets in D (II) under ‘Assets' and C under ‘Liabilities' in Article 9 and in D (11) in Article 10, but in total for all the items concerned; and (b) abridged notes on their accounts in accordance with Article 44. Article 12 shall apply. In addition, the Member States may relieve such companies from the obligation to publish their profit and loss accounts and annual reports and the opinions of the persons responsible for auditing the accounts. 3. The Member States may permit the companies mentioned in Article 27 to publish: (a) abridged balance sheets showing only those items preceded by letters and roman Kosovo – ROSC Accounting & Auditing Update Page 74 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment numerals in Articles 9 and 10 disclosing separately, either in the balance sheet or in the notes on the accounts: — C (I) (3), C (II) (1), (2), (3) and (4), C (III) (1), (2), (3), (4) and (7), D (II) (2), (3) and (6) and D (III) (1) and (2) under ‘Assets' and C, (1), (2), (6), (7) and (9) under 'Liabilities in Article 9, — C (I) (3), C (II) (1), (2), (3) and (4), C (III) (1), (2), (3), (4) and (7), D (II) (2), (3) and (6), D (III) (1) and (2), F (1), (2), (6), (7) and (9) and (I) (1), (2), (6), (7) and (9) in Article 10, — the information required in brackets in D (II) under ‘Assets' and C under ‘Liabilities' in Article 9, in total for all the items concerned and separately for D (II) (2) and (3) under ‘Assets' and C (1), (2), (6), (7) and (9) under ‘Liabilities', the information required in brackets in D (11) in Article 10, in total for all the items concerned, and separately for D (II) (2) and (3); Kosovo – ROSC Accounting & Auditing Update Page 75 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment (b) abridged notes on their accounts without the information required in Article 43 (1) (5), (6), (8), (10) and (11). However, the notes on the accounts must give the information specified in Article 43 (1) (6) in total for all the items concerned. This paragraph shall be without prejudice to paragraph 1 in so far as it relates to the profit and loss account, the annual report and the opinion of the person responsible for auditing the accounts. Article 12 shall apply Article 48 Whenever the annual accounts and the No reference in the law to this matter. No specific reference in the annual report are published in full, they law to this matter must be reproduced in the form and text on the basis of which the person responsible for auditing the accounts has drawn up his opinion. They must be accompanied by the full text of his report Article 49 If the annual accounts are not published in No reference in the law to this matter. No specific reference in the full, it must be indicated that the version law to this matter published is abridged and reference must Kosovo – ROSC Accounting & Auditing Update Page 76 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment be made to the register in which the accounts have been filed in accordance with Article 47 (1). Where such filing has not yet been effected, the fact must be disclosed. The report of the person or persons responsible for auditing the annual accounts (hereinafter: the statutory auditors) shall not accompany this publication, but it shall be disclosed whether an unqualified, qualified or adverse audit opinion was expressed, or whether the statutory auditors were unable to express an audit opinion. It shall also be disclosed whether the report of the statutory auditors included a reference to any matters to which the statutory auditors drew attention by way of emphasis without qualifying the audit opinion. Article 50 The following must be published No reference in the law to this matter. No specific reference in the together with the annual accounts, and law to this matter in like manner: — the treatment of the profit or the Kosovo – ROSC Accounting & Auditing Update Page 77 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment loss, — the appropriation of the profit or treatment of the loss, where these items do not appear in the annual accounts. Article 50b Duty and liability for publishing the No reference in the law to this matter. No specific reference in the annual accounts and the annual report law to this matter Member States shall ensure that the members of the administrative, management and supervisory bodies of the company have collectively the duty to ensure that the annual accounts, the annual report and, when provided separately, the corporate governance statement to be provided pursuant to Article 46a are drawn up and published in accordance with the requirements of this Directive and, where applicable, in accordance with the international accounting standards adopted in accordance with Regulation (EC) No 1606/2002. Such bodies shall act within the competences assigned to them by Kosovo – ROSC Accounting & Auditing Update Page 78 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment national law. Article 50c Member States shall ensure that their No reference in the law to this matter. No specific reference in the laws, regulations and administrative law to this matter provisions on liability apply to the members of the administrative, management and supervisory bodies referred to in Article 50b, at least towards the company, for breach of the duty referred to in Article 50b Article 51a Content of Statutory Audit Report No reference in the law to this matter. No reference in the law to this matter. 1. The report of the statutory auditors shall include: (a) an introduction which shall at least identify the annual accounts that are the subject of the statutory audit, together with the financial reporting framework that has been applied in their preparation; (b) a description of the scope of the statutory audit which shall at least Kosovo – ROSC Accounting & Auditing Update Page 79 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment identify the auditing standards in accordance with which the statutory audit was conducted; (c) an audit opinion which shall state clearly the opinion of the statutory auditors as to whether the annual accounts give a true and fair view in accordance with the relevant financial reporting framework and, where appropriate, whether the annual accounts comply with statutory requirements; the audit opinion shall be either unqualified, qualified, an adverse opinion or, if the statutory auditors are unable to express an audit opinion, a disclaimer of opinion; (d) a reference to any matters to which the statutory auditors draw attention by way of emphasis without qualifying the audit opinion; (e) an opinion concerning the consistency or otherwise of the annual report with the annual accounts for the Kosovo – ROSC Accounting & Auditing Update Page 80 Ref. Article from the Fourth Directive Relevant Law in Kosovo Comment same financial year. 2. The report shall be signed and dated by the statutory auditors. Kosovo – ROSC Accounting & Auditing Update Page 81 Concordance Table - the Eighth Directive Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual EU accounts and consolidated accounts Directive 2008/30/EC of the European Parliament and of the Council of 11 March 2008 KOSOVO LAW ON ACCOUNTING, FINANCIAL REPORTING AND AUDITING (Law No./L-014 ) Article from the Eighth Directive Relevant Law in Kosovo Comment Article 1 Article 1 The Law covers accounting, financial Subject matter Goal reporting and audit. This Directive establishes rules concerning the This law shall regulate the accounting and statutory audit of annual and consolidated accounts financial reporting system of business organizations, competences and responsibilities of Kosovo Council for Financial Reporting, audit requirements, qualifications for professional accountant, licensing of auditors, as well as foreign and local audit firms. Kosovo – ROSC Accounting & Auditing Update Page 82 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 2 Article 2 No definition of the statutory audit, Definitions Definitions group auditor, network, affiliate of an audit firm, audit report, non-practitioner, For the purpose of this Directive, the following 1. Terms used in this law shall have the third country auditor, third country audit definitions shall apply: following meaning: entity 1) "statutory audit" means an audit of annual accounts or consolidated accounts insofar as 1.4. Audit firm- a legal person or any other required by Community law; entity notwithstanding its legal status that is 2) "statutory auditor" means a natural person licensed to conduct statutory audit activities who is approved in accordance with this Directive in accordance with this law. by the competent authorities of a Member State to 1.15. IAS - International Accounting carry out statutory audits; Standards (IAS), International Financial 3) "audit firm" means a legal person or any other Reporting Standards (IFRS), and related entity, regardless of its legal form, that is approved interpretations (SIC-IFRIC interpretations), in accordance with this Directive by the competent subsequent amendments to these standards authorities of a Member State to carry out statutory and related interpretations, and standards audits; related in the future, as well as 4) "third-country audit entity" means an entity, interpretations issued and adopted by the regardless of its legal form, which carries out audits International Accounting Standards Board of the annual or consolidated accounts of a (IASB). company incorporated in a third country; 5) "third-country auditor" means a natural 1.16. ISA - the International Standards on person who carries out audits of the annual or Auditing issued by IAS. consolidated accounts of a company incorporated in a third country; 1.23. Auditor- the natural person licensed in 6) "group auditor" means the statutory auditor(s) accordance with this law. or audit firm(s) carrying out the statutory audit of 1.24. Key Audit Partners - means consolidated accounts; 7) "network" means the larger structure: 1.24.1. licensed auditor nominated by an Kosovo – ROSC Accounting & Auditing Update Page 83 Article from the Eighth Directive Relevant Law in Kosovo Comment – which is aimed at cooperation and to which a audit firm for a particular audit engagement, statutory auditor or an audit firm belongs, and who is main supervisor for conducting audit – which is clearly aimed at profit- or cost-sharing on behalf of the audit firm; or shares common ownership, control or management, common quality-control policies and 1.24.2. in case of a group of auditors, audit procedures, a common business strategy, the use of firm shall nominate responsible auditors to a common brand-name or a significant part of conduct auditing at the level of a group; or professional resources; 8) "affiliate of an audit firm" means any 1.24.3. auditors who sign the audit report. undertaking, regardless of its legal form, which is 1.26. Professional Accounting and connected to an audit firm by means of common Auditing Association- a non-profit ownership, control or management; organization established to promote and 9) "audit report" means the report referred to in advance the position, efficiency and Article 51a of Directive 78/660/EEC and Article 37 usefulness of public accounting profession as of Directive 83/349/EEC issued by the statutory general interest. auditor or audit firm; 10) "competent authorities" means the authorities or bodies designated by law that are in charge of the regulation and/or oversight of statutory auditors and audit firms or of specific aspects thereof; the reference to "competent authority" in a specific article means a reference to the authority or body(ies) responsible for the functions referred to in that Article; 11) "international auditing standards" means International Standards on Auditing (ISA) and related Statements and Standards, insofar as relevant to the statutory audit; 12) "international accounting standards" means Kosovo – ROSC Accounting & Auditing Update Page 84 Article from the Eighth Directive Relevant Law in Kosovo Comment International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related Interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, and future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB); 13) "public-interest entities" means entities governed by the law of a Member State whose transferable securities are admitted to trading on a regulated market of any Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC, credit institutions as defined in point 1 of Article 1of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and insurance undertakings within the meaning of Article 2(1) of Directive 91/674/EEC. Member States may also designate other entities as public-interest entities, for instance entities that are of significant public relevance because of the nature of their business, their size or the number of their employees; 14) "cooperative" means a European Cooperative Society as defined in Article 1 of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), or any other cooperative for which a Kosovo – ROSC Accounting & Auditing Update Page 85 Article from the Eighth Directive Relevant Law in Kosovo Comment statutory audit is required under Community law, such as credit institutions as defined in point 1 of Article 1 of Directive 2000/12/EC and insurance undertakings within the meaning of Article 2(1) of Directive 91/674/EEC; 15) "non-practitioner" means any natural person who, for at least 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; 16) "key audit partner(s)" mean(s): (a) the statutory auditor(s) 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; or (b) in the case of a group audit, at least the statutory auditor(s) designated by an audit firm as being primarily responsible for carrying out the statutory audit at the level of the group and the statutory auditor(s) designated as being primarily responsible at the level of material subsidiaries; or (c) the statutory auditor(s) who sign(s) the audit report. Kosovo – ROSC Accounting & Auditing Update Page 86 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 3 Article 5 Approval of statutory auditors and audit firms Application of IFRS, IAS, KAS, ISA and The Law states that a statutory audit 1. A statutory audit shall be carried out only by other requirements in drafting and shall be performed only by auditors statutory auditors or audit firms which are auditing of financial statements approved to carryout statutory audits by approved by the Member State requiring the the competent authority (no referral to statutory audit. 6. All statutory audits in Kosovo, which audit firms in the article). 2. Each Member State shall designate competent include all audits required under this law, One of the responsibilities of the authorities which shall be responsible for approving and external independent audits of other Kosovo Financial Reporting Council statutory auditors and audit firms. The competent business or not-for-profit, socially owned or (KFRC) is approving statutory auditors authorities may be professional associations, publicly owned enterprises or other entities and audit firms. provided that they are subject to a system of public as mandated by other applicable laws in oversight as provided for in Chapter VIII. Kosovo shall be carried out in accordance The Law stipulates that, in order to 3. Without prejudice to Article 11, the competent with the International Standards of Auditing become an auditor, the individual must authorities of the Member States may approve as (ISAs), and related interpretations, guidance be a member of a recognized statutory auditors only natural persons who satisfy and pronouncements of the IAASB, and by professional association. Further, the at least the conditions laid down in Articles 4 and 6 Auditors that are approved to carry out Law requires that professional to 10. statutory audits by the competent authorities associations may certify only those 4. The competent authorities of the Member States as defined in this law. individuals who completed a may approve as audit firms only those entities certification program that complies with which satisfy the following conditions: Article 14 International Accounting Education (a) the natural persons who carry out statutory KCFR functions and responsibilities Standards (IES). KFRC is responsible for audits on behalf of an audit firm must satisfy at 1.3. licensing and keeping register of certifying accounting associations, one of least the conditions imposed by Articles 4 and 6 to auditors as well as of the audit firms and the criteria being the quality of the 12 and must be approved as statutory auditors in professional associations of accounting and candidate association's certification the Member State concerned; auditing; program; (b) a majority of the voting rights in an entity Article 15 must be held by audit firms which are approved in KFRC Commissions Article 4 b) and c) of the 8th Directive any Member State or by natural persons who re members of the administrative or satisfy at least the conditions imposed by Articles 4 1. KFRC shall appoint committees as needed management body is not covered by the Kosovo – ROSC Accounting & Auditing Update Page 87 Article from the Eighth Directive Relevant Law in Kosovo Comment and 6 to 12. Member States may provide that such to ensure implementation of the International Law natural persons must also have been approved in Standards and relevant EU "Acquis another Member State. For the purpose of the Communautaire" including Directive no. statutory audit of cooperatives and similar entities 78/660/EEC, Directive no. 83/349/EEC and as referred to in Article 45 of Directive Directive no. 84/253/EEC of EU. 86/635/EEC, Member States may establish other specific provisions in relation to voting rights; 2. KFRC must have the following (c) a majority — up to a maximum of 75 % — of commissions: the members of the administrative or management 2.3. licensing of the Auditors, audit firms body of the entity must be audit firms which are and professional accounting and audit approved in any Member State or natural persons associations; who satisfy at least the conditions imposed by Articles 4 and 6 to 12. Member States may provide that such natural persons must also have been approved in another Member State. Where such a body has no more than two members, one of those members must satisfy at least the conditions in this point; (d) the firm must satisfy the condition imposed by Article 4. Member States may set additional conditions only in relation to point (c). Such conditions shall be proportionate to the objectives pursued and shall not go beyond what is strictly necessary. Article 4 Article 21 Good repute Conditions Good repute provision for auditors in The competent authorities of a Member State may 1. Individuals who meet the following the Law but not for the audit firms. grant approval only to natural persons or firms of criteria shall be licensed by KCFR as Kosovo – ROSC Accounting & Auditing Update Page 88 Article from the Eighth Directive Relevant Law in Kosovo Comment good repute. Auditors: 1.5. those that meet the highest standards of professional integrity and competency and have a good reputation. Article 5 Article 21 There is no specific reference in the Withdrawal of approval Conditions Law 1. Approval of a statutory auditor or an audit firm 8. KCFR, will revoke the license of a foreign to these three instances that could shall be withdrawn if the good repute of that person or local audit firm, or auditor licensed in trigger or firm has been seriously compromised. Member accordance with this law at any time if the withdrawal of an audit license. States may, however, provide for a reasonable audit firm or Auditor would not be any period of time for the purpose of meeting the longer member of a licensed professional The Law also does not provide for requirements of good repute. accounting and auditing association in reasonable period of time for the 2. Approval of an audit firm shall be withdrawn if Kosovo, or if violates the auditor purpose of meeting the requirements any of the conditions imposed in Article 3(4), independence, ethics and quality assurance necessary for fulfilling the conditions points (b) and (c) is no longer fulfilled. Member requirements set out by KCFR. for license. States may, however, provide for a reasonable period of time for the purpose of fulfilling those conditions. 3. Where the approval of a statutory auditor or of an audit firm is withdrawn for any reason, the competent authority of the Member State where the approval is withdrawn shall communicate that fact and the reasons for the withdrawal to the relevant competent authorities of Member States where the statutory auditor or audit firm is also approved which are entered in the first-named Member State's register in accordance with Article 16(1), Kosovo – ROSC Accounting & Auditing Update Page 89 Article from the Eighth Directive Relevant Law in Kosovo Comment point (c). Article 6 Article 20 Educational qualifications Qualification The law stipulates the requirements of a Without prejudice to Article 11, a natural person University degree in economy and may be approved to carry out a statutory audit only 3. Candidates applying for certified business, professional training and after having attained university entrance or accountant should have university diploma experience and an examination. equivalent level, then completed a course of in the field of economy and business, should However, the Law does not theoretical instruction, undergone practical training have three (3) years of work experience in stipulate that the qualification itself and passed an examination of professional the field of accounting, and should have must competence of university final or equivalent passed the certification exam for this be "of university final or equivalent examination level, organized or recognized by the purpose. examination level" and entry into Member State concerned. profession is now only possible only for 4. Professional education for certified economics or business graduates. accountant should be in compliance with International Accounting Education Standards IFAC as well as with relevant directives of the European Commission for this purpose. Kosovo – ROSC Accounting & Auditing Update Page 90 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 7 Article 20 The Law stipulates that professional Examination of professional competence Qualification education must be in compliance with 4. Professional education for certified the IESs and relevant Directives. The examination of professional competence accountant should be in compliance with referred to in Article 6 shall guarantee the International Accounting Education necessary level of theoretical knowledge of Standards IFAC as well as with relevant subjects relevant to statutory audit and the ability to directives of the European Commission for apply such knowledge in practice. Part at least of this purpose. that examination shall be written. Article 8 Test of theoretical knowledge The Law does not specify the scope of 1. The test of theoretical knowledge included in the subjects included in the auditor's test of examination shall cover the following subjects in theoretical knowledge however it does particular: require being in compliance with the (a) general accounting theory and principles; relevant Directives as well as IESs. (b) legal requirements and standards relating to the preparation of annual and consolidated accounts; The KBSFR recognised SCAAK as (c) international accounting standards; Kosovo's professional accountancy (d) financial analysis; (including auditing) body, and it is (e) cost and management accounting; assumed that the recognition holds (f) risk management and internal control; under the current Law. (g) auditing and professional skills; (h) legal requirements and professional standards SCAAK has established a certification relating to program that meets the requirements of statutory audit and statutory auditors; the Statutory Audit Directive and (i) international auditing standards; International Education Standards. (j) professional ethics and independence. Kosovo – ROSC Accounting & Auditing Update Page 91 Article from the Eighth Directive Relevant Law in Kosovo Comment 2. It shall also cover at least the following subjects The SCAAK certification program, insofar as they are relevant to auditing: which uses translated and regularly (a) company law and corporate governance; updated ACCA training materials, (b) the law of insolvency and similar procedures; consists of three stages as follows: (c) tax law; (d) civil and commercial law; Accounting technician: financial (e) social security law and employment law; accounting 1, cost accounting, (f) information technology and computer systems; management information systems, (g) business, general and financial economics; commercial law and taxes (h) mathematics and statistics; (i) basic principles of the financial management of Certified accountant: financial undertakings. reporting, audit, financial management, advanced management accounting 3. The Commission may, in accordance with the procedure referred to in Article 48(2), adapt the list Auditor: advanced financial reporting, of subjects to be included in the test of theoretical advanced audit and assurance, strategic knowledge referred to in paragraph 1. When management, professional practice adopting those implementing measures the Commission shall take into account developments in auditing and the audit profession. Article 9 The Law does not mention the Exemptions possibility of derogation from the 1. By way of derogation from Articles 7 and 8, a prescribed subjects Member State may provide that a person who has passed a university or equivalent examination or holds a university degree or equivalent qualification in one or more of the subjects referred to in Article 8 may be exempted from the test of Kosovo – ROSC Accounting & Auditing Update Page 92 Article from the Eighth Directive Relevant Law in Kosovo Comment theoretical knowledge in the subjects covered by that examination or degree. 2. By way of derogation from Article 7, a Member State may provide that a holder of a university degree or equivalent qualification in one or more of the subjects referred to in Article 8 may be exempted from the test of the ability to apply in practice his or her theoretical knowledge of such subjects if he or she has received practical training in those subjects attested by an examination or diploma recognized by the State Article 10 Article 21 The Law does not stipulate the context Practical training Conditions (e.g. approved audit firm) in which the 1. In order to ensure the ability to apply theoretical practical experience shall be gained nor knowledge in practice, a test of which is included 1. Individuals who meet the following that trainers need to provide adequate in the examination, a trainee shall complete a criteria shall be licensed by KCFR as guarantees of competence minimum of three years' practical training in, inter Auditors: alia, the auditing of annual accounts, consolidated accounts or similar financial statements. At least 1.3. those who have a three (3) year work two thirds of such practical training shall be experience under the supervision of a completed with a statutory auditor or audit firm Auditor; approved in any Member State. 2. Member States shall ensure that all training is carried out with persons providing adequate guarantees regarding their ability to provide practical training. Article 11 There are no such derogations in the Kosovo – ROSC Accounting & Auditing Update Page 93 Article from the Eighth Directive Relevant Law in Kosovo Comment Qualification through long-term practical Law experience A Member State may approve a person who does not satisfy the conditions laid down in Article 6 as a statutory auditor, if he or she can show either: that he or she has, for 15 years, engaged in professional activities which have enabled him or her to acquire sufficient experience in the fields of finance, law and accountancy, and has passed the examination of professional competence referred to in Article 7, or (b) that he or she has, for seven years, engaged in professional activities in those fields and has, in addition, undergone the practical training referred to in Article 10 and passed the examination of professional competence referred to in Article 7. Article 12 There is no such option in the Law Combination of practical training and theoretical instruction Member States may provide that periods of theoretical instruction in the fields referred to in Article 8 shall count towards the periods of professional activity referred to in Article 11, provided that such instruction is attested by an examination recognized by the State. Such instruction shall not last less than one year, nor may it reduce the period of professional activity by more than four years. Kosovo – ROSC Accounting & Auditing Update Page 94 Article from the Eighth Directive Relevant Law in Kosovo Comment 2. The period of professional activity and practical training shall not be shorter than the course of theoretical instruction together with the practical training required in Article 10. Article 13 Article 14 The Law stipulates that one of the Continuing education KCFR functions and responsibilities KFRC responsibilities is to supervise Member States shall ensure that statutory auditors 1.5. supervise continuous education, quality CPD. However, there is no reference in are required to take part in appropriate programmes assurance and disciplinary system; the Law, that auditors are required to of continuing education in order to maintain their take part in appropriate programmes of theoretical knowledge, professional skills and CPD. values at a sufficiently high level, and that failure to respect the continuing education requirements is All accountants and auditors, in order to subject to appropriate penalties as referred to in have and keep the licence, are required Article 30 by the Law, to be members of professional accountancy body, SCAAK in this case, and are required by SCAAK to take part in programs of continuing professional development. SCAAK requires that all certified accountants (and therefore, also auditors) participate in 40 hours of CPD every year; certified accountants must have least 18 hours of formal, verifiable CPD annually, licensed auditors 24 hours thereof. The members are required to assess which CPD content is relevant to them based on their work Kosovo – ROSC Accounting & Auditing Update Page 95 Article from the Eighth Directive Relevant Law in Kosovo Comment and/or specialization. However there is no reference to disciplinary procedures and penalties in case of failure to respect the continuing education requirements. Article 14 Article 14 The procedure for approval of Approval of statutory auditors from other KCFR functions and responsibilities international certificates of auditors and Member States accountants is established. However, the The competent authorities of the Member States 2. KCFR verifies international certificates of Law does not stipulate that those shall establish procedures for the approval of auditors and accountants. procedures shall not go beyond a statutory auditors who have been approved in other requirement to pass an aptitude test. Member States. Those procedures shall not go 3. Candidates who have titles and other beyond a requirement to pass an aptitude test in qualifications are entitled in recognition of accordance with Article 4 of Council Directive such titles and qualifications pursuant to the 89/48/EEC of 21 December 1988 on a general request for recognition to the approved system for the recognition of higher-education association in Kosovo. Any approved diplomas awarded on completion of professional association should have approved scheme education and training of at least three years' from KCFR, for recognition of qualifications duration (1). The aptitude test, which shall be and other titles from the offered ones by the conducted in one of the languages permitted by the association in order to enable the interested language rules applicable in the Member State candidates to exercise the right prescribed in concerned, shall cover only the statutory auditor's this paragraph. adequate knowledge of the laws and regulations of that Member State in so far as relevant to statutory audits. Kosovo – ROSC Accounting & Auditing Update Page 96 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 15 Article 14 1. There is a requirement in the Law that Public register KCFR functions and responsibilities the KCFR maintains a public register of 1. Each Member State shall ensure that statutory all legal auditors and statutory audit auditors and audit firms are entered in a public 1. KCFR functions are: firms but there are no requirements what register in accordance with Articles 16 and 17. In 1.3. licensing and keeping register of the public register shall contain. exceptional circumstances, Member States may auditors as well as of the audit firms and 2. Statutory auditors and audit firms are disapply the requirements laid down in this Article professional associations of accounting and not identified in the public register by an and Article 16 regarding disclosure only to the auditing individual number. There is the register extent necessary to mitigate an imminent and in electronic form, which can be significant threat to the personal security of any Article 17 publicly accessed through the MoF person. KFRC reporting webpage, but currently the register is an 2. Member States shall ensure that each statutory 7. KCFR maintains a public register of all Excel spreadsheet with no indication as auditor and audit firm is identified in the public legal auditors and statutory auditing firms. to the frequency of update. register by an individual number. Registration 3. Paragraph 3 of Article 15 of the information shall be stored in the register in Directive is not covered by the law. electronic form and shall be electronically accessible to the public. 3. The public register shall also contain the name and address of the competent authorities responsible for approval as referred to in Article 3, for quality assurance as referred to in Article 29, for investigations and penalties on statutory auditors and audit firms as referred to in Article 30, and for public oversight as referred to in Article 32. 4. Member States shall ensure that the public register is fully operational by 29 June 2009. Kosovo – ROSC Accounting & Auditing Update Page 97 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 16 1. There is no provision in the Law Registration of statutory auditors specifying which information shall be 1. As regards statutory auditors, the public register included in the register. The excel shall contain at least the following information: spreadsheet that is publicly available (a) name, address and registration number; indicates the name of the auditor, issue (b) if applicable, the name, address, website date of licence, date of re-licensing, address and registration number of the audit firm(s) expiry date of the licence, telephone by which the statutory auditor is employed, or with number and email address. whom he or she is associated as a partner or 2. No such provision. The excel otherwise; spreadsheet that is publicly available (c) all other registration(s) as statutory auditor with indicates the foreign auditors as the competent authorities of other Member States statutory auditors with the following and as auditor with third countries, including the details: the name of the auditor, issue name(s) of the registration authority(ies), and, if date of licence, date of re-licensing, applicable, the registration number(s). expiry date of the licence, telephone 2. Third-country auditors registered in accordance number and email address. with Article 45 shall be clearly indicated in the register as such and not as statutory auditors. Article 17 1. There is no provision in the Law Registration of audit firms specifying which information shall be 1. As regards audit firms, the public register shall included in the register. The excel contain at least the following information: spreadsheet that is publicly available (a) name, address and registration number; indicates the name of the audit firm, (b) legal form; issue date of licence, date of re- (c) contact information, the primary contact person licensing, expiry date of the licence, and, where applicable, the website address; telephone number and email address. (d) address of each office in the Member State; 2. No such provision. The excel Kosovo – ROSC Accounting & Auditing Update Page 98 Article from the Eighth Directive Relevant Law in Kosovo Comment (e) name and registration number of all statutory spreadsheet that is publicly available auditors employed by or associated as partners or indicates the foreign audit companies as otherwise with the audit firm; audit companies with the following (f) names and business addresses of all owners and details: the name of the auditor, issue shareholders; date of licence, date of re-licensing, (g) names and business addresses of all members of expiry date of the licence, telephone the administrative or management body; number and email address. (h) if applicable, the membership of a network and a list of the names and addresses of member firms and affiliates or an indication of the place where such information is publicly available; (i) all other registration(s) as audit firm with the competent authorities of other Member States and as audit entity with third countries, including the name(s) of the registration authority(ies), and, if applicable, the registration number(s). 2. Third-country audit entities registered in accordance with Article 45 shall be clearly indicated in the register as such and not as audit firms. Kosovo – ROSC Accounting & Auditing Update Page 99 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 18 No such provision in the Law Updating of registration information Member States shall ensure that statutory auditors and audit firms notify the competent authorities in charge of the public register without undue delay of any change of information contained in the public register. The register shall be updated without undue delay after notification. Article 19 No such provision in the Law Responsibility for registration information The information provided to the relevant competent authorities in accordance with Articles 16, 17 and 18 shall be signed by the statutory auditor or audit firm. Where the competent authority provides for the information to be made available electronically, that can, for example, be done by means of an electronic signature as defined in point 1 of Article 2 of Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a Community framework for electronic signatures Article 20 No such provision in the Law Language Kosovo – ROSC Accounting & Auditing Update Page 100 Article from the Eighth Directive Relevant Law in Kosovo Comment 1. The information entered in the public register shall be drawn up in one of the languages permitted by the language rules applicable in the Member State concerned. 2. Member States may additionally allow the information to be entered in the public register in any other official languages of the Community. Member States may require the translation of the information to be certified. In all cases, the Member State concerned shall ensure that the register indicates whether or not the translation is certified. Article 21 Article 14 KFRC responsibilities include Professional ethics KCFR functions and responsibilities stipulating the standards of professional 1. Member States shall ensure that all statutory ethics and internal quality to be auditors and audit firms are subject to principles of 1. KCFR functions are: followed by audit firms professional ethics, covering at least their public- 1.4. Adoption of the standards of The Law requires licensed auditors to be interest function, their integrity and objectivity and professional ethics, internal quality of audit members of a recognized accounting their professional competence and due care. firms association. IFAC Code of Ethics is 2. In order to ensure confidence in the audit mandatory. function and to ensure uniform application of Article 16 paragraph 1 of this Article, the Commission may, KCFR reporting in accordance with the procedure referred to in Article 48(2), adopt principle-based implementing 1. KCFR demands from the licensed measures governing professional ethics. professional accountant and auditors' associations to present the following documents: 1.1. a copy of the Code of Ethics Kosovo – ROSC Accounting & Auditing Update Page 101 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 22 Status of Associations 1. A professional accounting and auditing associations shall be licensed by KCFR, by meeting these conditions: 1.1. KCFR should be ensured that the association has fulfilled all requested according to this law and has fulfilled all the standards, directions and recommendations issued by IFAC, for its member associations; 1.2. KCFR should be ensured that members of any association act in compliance with Code of professional conduct and with Code of Ethics of IFAC; Article 22 Article 17 There is no direct reference to Independence and objectivity KFRC reporting independence and objectivity in the 1. Member States shall ensure that when carrying Law. out a statutory audit, the statutory auditor and/or the audit firm is independent of the audited entity One of the KFRC responsibilities is to and is not involved in the decision-taking of the 3. KCFR publishes written statements on issue written requirements for auditors' audited entity. policies, sub-legal acts which will assist in independence. This has not been 2. Member States shall ensure that a statutory enforcing accounting and auditing standards completed to date. auditor or an audit firm shall not carry out a in Kosovo, professional and educational Kosovo – ROSC Accounting & Auditing Update Page 102 Article from the Eighth Directive Relevant Law in Kosovo Comment statutory audit if there is any direct or indirect standards, requirements for auditor financial, business, employment or other independence, including external quality relationship assurance reviews and disciplinary — including the provision of additional non-audit procedures. services — between the statutory auditor, audit firm or network and the audited entity from which an objective, reasonable and informed third party would conclude that the statutory auditor's or audit firm's independence is compromised. If the statutory auditor's or audit firm's independence is affected by threats, such as self-review, self- interest, advocacy, familiarity or trust or intimidation, the statutory auditor or audit firm must apply safeguards in order to mitigate those threats. If the significance of the threats compared to the safeguards applied is such that his, her or its independence is compromised, the statutory auditor or audit firm shall not carry out the statutory audit. Member States shall in addition ensure that, where statutory audits of public-interest entities are concerned and where appropriate to safeguard the statutory auditor's or audit firm's independence, a statutory auditor or an audit firm shall not carry out a statutory audit in cases of self-review or self- interest. 3. Member States shall ensure that a statutory auditor or audit firm documents in the audit working papers all significant threats to his, her or its independence as well as the safeguards applied Kosovo – ROSC Accounting & Auditing Update Page 103 Article from the Eighth Directive Relevant Law in Kosovo Comment to mitigate those threats. 4. In order to ensure confidence in the audit function and to ensure uniform application of paragraphs 1 and 2 of this Article, the Commission may, in accordance with the procedure referred to in Article 48(2), adopt principle-based implementing measures concerning: (a) the threats and safeguards referred to in paragraph 2; (b) the situations in which the significance of the threats, as referred to in paragraph 2, is such that the independence of the statutory auditor or audit firm is compromised; (c) the cases of self-review and self-interest referred to in the second subparagraph of paragraph 2, in which statutory audits may or may not be carried out Article 23 Article 18 There are no similar references to Confidentiality and professional secrecy Preserving data confidentiality confidentiality and professional secrecy 1. Member States shall ensure that all information in and documents to which a statutory auditor or 1. KCFR and all staff must take all necessary the Law. audit firm has access when carrying out a measures to prevent unauthorized use and statutory audit are protected by adequate rules disclosure of data that are given in good There is an article in the Law relating to on confidentiality and professional secrecy. faith. confidentiality but it relates only to 2. Confidentiality and professional secrecy rules KFCR. relating to statutory auditors or audit firms shall 2. In relation to paragraph 1. of this Article, not impede enforcement of the provisions of disclosure of data is permitted if: Kosovo – ROSC Accounting & Auditing Update Page 104 Article from the Eighth Directive Relevant Law in Kosovo Comment this Directive. 3. Where a statutory auditor or audit firm is 2.1. it is required by law in Kosovo; replaced by another statutory auditor or audit firm, the former statutory auditor or audit firm 2.2. it is done in order to enable an authority shall provide the incoming statutory auditor or or a person in a place outside Kosovo, to audit firm with access to all relevant perform a function, duty that corresponds to information concerning the audited entity. that of KCFR; and 4. A statutory auditor or audit firm who has ceased to be engaged in a particular audit 2.3. it is allowed a licensed professional assignment and a former statutory auditor or accounting and auditing society in order to audit firm shall remain subject to the provisions exercise its functions. of paragraphs 1 and 2 with respect to that audit assignment. Article 24 No reference in the Law Independence and objectivity of the statutory auditors carrying out the statutory audit on behalf of audit firms Member states shall ensure that 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, do not intervene in the execution of a statutory audit in any way which jeopardise the independence and objectivity of the statutory auditor who carries out the statutory audit on behalf of the audit firm. Kosovo – ROSC Accounting & Auditing Update Page 105 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 25 No reference in the Law Audit fees Member States shall ensure that adequate rules are in place which provide that fees for statutory audits: 1. Are not influenced or determined by the provision of additional services to the audited entity; 2. Cannot be based on any form of contingency Article 26 Article 5 The Law requires audit to be carried out Auditing standards Application of IFRS, IAS, KAS, ISA and in accordance with ISAs. 1. Member States shall require statutory auditors other requirements in drafting and The option to apply national auditing and audit firms to carry out statutory audits in auditing of financial statements standards if not covered by ISA is not compliance with international auditing standards 6. All statutory audits in Kosovo, which exercised. adopted by the Commission in accordance with the include all audits required under this law, The Law prescribes the publication of procedure referred to in Article 48(2). and external independent audits of other ISAs on the webpage of the KFRC. Member States may apply a national auditing business or not-for-profit, socially owned or standard as long as the Commission has not publicly owned enterprises or other entities Option allowed in Paragraph 3 of the adopted an international auditing standard covering as mandated by other applicable laws in Article 26 of the Directive is not the same subject-matter. Adopted international Kosovo shall be carried out in accordance exercised. auditing standards shall be published in full in each with the International Standards of Auditing of the official languages of the Community in the (ISAs), and related interpretations, guidance Official Journal of the European Union. and pronouncements of the IAASB, and by 2. The Commission may decide, in accordance with Auditors that are approved to carry out the procedure referred to in Article 48(2), on the statutory audits by the competent authorities applicability of international auditing standards as defined in this law. within the Community. The Commission shall 7. The competent authority for the adopt international auditing standards for transposition of International Standards of Kosovo – ROSC Accounting & Auditing Update Page 106 Article from the Eighth Directive Relevant Law in Kosovo Comment application in the Community only if they: Auditing and related interpretations, (a) have been developed with proper due process, guidance and pronouncements of the IAASB public oversight and transparency, and are shall be the KFRC. generally accepted internationally; (b) contribute a high level of credibility and quality Article 17 to the annual or consolidated accounts in KFRC reporting conformity with the principles set out in Article 6. Accounting and auditing standards and 2(3) of Directive 78/660/EEC and in Article 16(3) sub-legal acts and other documents issued by of Directive 83/349/EEC; and KCFR shall be published on the KCFR (c) are conducive to the European public good. website, according to the Law No. 02/L-37 3. Member States may impose audit procedures or on Use of Languages. requirements in addition to — or, in exceptional cases, by carving out parts of — the international auditing standards only if these stem from specific national legal requirements relating to the scope of statutory audits. Member States shall ensure that these audit procedures or requirements comply with the provisions laid down in points (b) and (c) of paragraph 2 and shall communicate them to the Commission and Member States before their adoption. In the exceptional case of the carving out of parts of an international auditing standard, Member States shall communicate their specific national legal requirements, as well as the grounds for maintaining them, to the Commission and the other Member States at least six months before their national adoption or, in the case of requirements already existing at the time of adoption of an international auditing standard, at Kosovo – ROSC Accounting & Auditing Update Page 107 Article from the Eighth Directive Relevant Law in Kosovo Comment the latest within three months of the adoption of the relevant international auditing standard. 4. Member States may impose additional requirements relating to the statutory audits of annual and consolidated accounts for a period expiring on 29 June 2010. Article 27 Article 11 The Law does not mention the duties of Statutory audits of consolidated accounts Submission and publication of financial auditors in respect of statutory audit of Member States shall ensure that in the case of a statements the consolidated accounts but it does statutory audit of the consolidated accounts of a require to be done in accordance to ISAs group of undertakings: 2. Consolidated financial statements have to (a) the group auditor bears the full responsibility be audited in accordance with International for the audit report in relation with the consolidated standards on auditing and in accordance with accounts; Article 5. paragraph 3 of this law shall be (b) the group auditor carries out a review and submitted to KCFR and a copy in MTI, and maintains documentation of his or her review of the no later than 30 of June of the following audit work performed by third-country auditor(s), year. statutory auditor(s), third country audit entity(ies) or audit firm(s) 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; (c) when a component of a group of undertakings is audited by auditor(s) or audit entity(ies) from a third country that has no working arrangement as Kosovo – ROSC Accounting & Auditing Update Page 108 Article from the Eighth Directive Relevant Law in Kosovo Comment referred to in Article 47, the group auditor is responsible for ensuring proper delivery, when requested, to the public oversight authorities of the documentation of the audit work performed by the third-country auditor(s) or audit entity(ies), including the working papers relevant to the group audit. To ensure such delivery, the group auditor shall retain a copy of such documentation, or alternatively agree with the third-country auditor(s) or audit entity(ies) his proper and unrestricted access upon request, or take any other appropriate action. If legal or other impediments prevent audit working papers from being passed from a third country to the group auditor, the documentation retained by the group auditor shall include evidence that he or she has undertaken the appropriate procedures in order to gain access to the audit documentation, and in the case of impediments other than legal ones arising from country legislation, evidence supporting such an impediment. Kosovo – ROSC Accounting & Auditing Update Page 109 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 28 Audit reporting There is no provision regarding audit 1. Where an audit firm carries out the statutory reporting in the Law. However, the Law audit, the audit report shall be signed by at least the prescribes the mandatory use of ISAs statutory auditor(s) carrying out the statutory audit and ISA 700 provides for the form and on behalf of the audit firm. content of an audit report. In exceptional circumstances Member States may provide that this signature need not be disclosed to the public if such disclosure could lead to an No such reference in the Law to the imminent and significant threat to the personal signing of the audit report security of any person. In any case the name(s) of the person(s) involved shall be known to the relevant competent authorities. 2. Notwithstanding Article 51a(1) of Directive 78/660/EEC, if the Commission has not adopted a common standard for audit reports in accordance with Article 26(1) of this Directive, it may, in accordance with the procedure referred to in Article 48(2) of this Directive, adopt a common standard for audit reports for annual or consolidated accounts which have been prepared in accordance with approved international accounting standards, in order to enhance public confidence in the audit function. Kosovo – ROSC Accounting & Auditing Update Page 110 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 29 Article 14 The Law does not directly stipulate the Quality assurance systems KCFR functions and responsibilities requirements that must be met by the 1. Each Member State shall ensure that all statutory quality assurance. KFRC is formally auditors and audit firms are subject to a system of 1. KCFR functions are: responsible for quality assurance and quality assurance which meets at least the 1.5. supervise continuous education, quality requires the professional association to following criteria: assurance and disciplinary system; set up and report on how the QA (a) the quality assurance system shall be organised program meets the requirements of the in such a manner that it is independent of the Article 16 statutory audit directive of the reviewed statutory auditors and audit firms and Supervision of Accountants and Auditors European Union. subject to public oversight as provided for in Associations Chapter VIII; (b) the funding for the quality assurance system 1. KCFR, demands from the licensed shall be secure and free from any possible undue professional accountant and auditors influence by statutory auditors or audit firms; associations to present the following (c) the quality assurance system shall have documents: adequate resources; (d) the persons who carry out quality assurance 1.2. report on the association proving the reviews shall have appropriate professional quality assurance programme; education and relevant experience in statutory audit and financial reporting combined with specific 1.3. report in relation to the results of the training on quality assurance reviews; investigation and discipline in the (e) the selection of reviewers for specific quality association including the disciplinary assurance review assignments shall be effected in procedures and accordance with an objective procedure designed to ensure that there are no conflicts of interest 1.4. report on how the programme on quality between the reviewers and the statutory auditor or of the association fulfills the requirements of audit firm under review; the directives of the statutory audit of the (f) the scope of the quality assurance review, European Union. supported by adequate testing of selected audit Kosovo – ROSC Accounting & Auditing Update Page 111 Article from the Eighth Directive Relevant Law in Kosovo Comment files, shall include an assessment of compliance with applicable auditing standards and independence requirements, of the quantity and quality of resources spent, of the audit fees charged and of the internal quality control system of the audit firm; (g) the quality assurance review shall be the subject of a report which shall contain the main conclusions of the quality assurance review; (h) quality assurance reviews shall take place at least every six years; (i) the overall results of the quality assurance system shall be published annually; (j) recommendations of quality reviews shall be followed up by the statutory auditor or audit firm within a reasonable period. If the recommendations referred to in point (j) are not followed up, the statutory auditor or audit firm shall, if applicable, be subject to the system of disciplinary actions or penalties referred to in Article 30. 2. The Commission may, in accordance with the procedure referred to in Article 48(2), adopt implementing measures in order to enhance public confidence in the audit function and to ensure uniform application of points (a), (b) and (e) to (j) of paragraph 1. Kosovo – ROSC Accounting & Auditing Update Page 112 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 30 Article 14 There is no provision in the Law for Systems of investigations and penalties KCFR functions and responsibilities applying penalties against inadequate 1. Member States shall ensure that there are 1.5. supervise continuous education, quality execution of statutory audits. There is effective systems of investigations and penalties to assurance and disciplinary system the provision that the license could be detect, correct and prevent inadequate execution of revoked in case of violation of the statutory audit. independence, ethics and quality 2. Without prejudice to Member States' civil Article 15 assurance requirements. liability regimes, Member States shall provide for KFRC Commissions There is no provision for the public effective, proportionate and dissuasive penalties in disclosure of these measures taken respect of statutory auditors and audit firms, where 1. KFRC shall appoint committees as needed against auditors for poor work statutory audits are not carried out in Conformity to ensure implementation of the International with the provisions adopted in the implementation Standards and relevant EU "Acquis of this Directive. Communautaire" including Directive no. 3. Member States shall provide that measures taken 78/660/EEC, Directive no. 83/349/EEC and and penalties imposed on statutory auditors and Directive no. 84/253/EEC of EU. audit firms are appropriately disclosed to the 2.4. on investigations and discipline; public. Penalties shall include the possibility of the withdrawal of approval. Article 16 Supervision of Accountants and Auditors Associations 1. KCFR, demands from the licensed professional accountant and auditors associations to present the following documents: 1.3. report in relation to the results of the investigation and discipline in the association including the disciplinary procedures and Kosovo – ROSC Accounting & Auditing Update Page 113 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 17 KFRC reporting 3. KCFR publishes written statements on policies, sub-legal acts which will assist in enforcing accounting and auditing standards in Kosovo, professional and educational standards, requirements for auditor independence, including external quality assurance reviews and disciplinary procedures. Article 21 Conditions 8. KCFR, will revoke the license of a foreign or local audit firm, or auditor licensed in accordance with this law at any time if the audit firm or Auditor would not be any longer member of a licensed professional accounting and auditing association in Kosovo, or if violates the auditor independence, ethics and quality assurance requirements set out by KCFR. Kosovo – ROSC Accounting & Auditing Update Page 114 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 32 Article 13 The Law indicates that the KFRC is in Principles of public oversight Composition charge of public oversight. 1. Member States shall organise an effective system of public oversight for statutory auditors and audit 1. KCFR is an independent professional The Law does not clearly indicate that firms based on the principles set out in paragraphs body, as set by provisions of this Law. the system of public oversight shall be 2 to 7. 2. KCFR consists of seven (7) members. The governed by nonpratitioners. (for 2. All statutory auditors and audit firms shall be Chairman and other members of KCFR, example the professor from University subject to public oversight. upon proposal of the institution, shall be can also be practicing auditor). 3. The system of public oversight shall be governed appointed by the Government and represent by nonpractitioners who are knowledgeable in the the following institutions: The Directive requires that the members areas relevant to statutory audit. Member States 2.1. one (1) member from the Central Bank of public oversight system are may, however, allow a minority of practitioners to of the Republic of Kosovo; knowledgeable in the areas relevant to be involved in the governance of the public 2.2. one (1) member from Universities statutory audit. The Law requires oversight system. Persons involved in the providing higher education in accounting members of KFRC possess the governance of the public oversight system shall be and auditing; university degree in accounting, finance, selected in accordance with an independent and 2.3. one (1) member from the Ministry of business administration or law and at transparent nomination procedure. Finance; least eight (8) years of work experience 4. The system of public oversight shall have the 2.4. one (1) member from the professional in the field of accounting, finance and ultimate responsibility for the oversight of: associations licensed by the KCFR; audit. (How does the Law degree fit into (a) the approval and registration of statutory 2.5. three (3) members from the business these requirements, particularly now auditors and audit firms; community that are familiar with finances that the Law requires the degree in (b) the adoption of standards on professional ethics, and business administration; accounting, finance and business internal quality control of audit firms and auditing, 3. Neither the Chairman of KCFR nor its administration to enter the profession)? and members shall hold public office or be a Three of the members of the Council are (c) continuing education, quality assurance and political appointee. members of the business community investigative and disciplinary systems. 4. The KCFR members shall be appointed that are familiar with finances and 5. The system of public oversight shall have the for a three (3) year period with the right of business administration but the question right, where necessary, to conduct investigations in reappointment but, shall not serve more than is how are they going to fulfil the 8 relation to statutory auditors and audit firms and the two mandates. years work experience in accounting, Kosovo – ROSC Accounting & Auditing Update Page 115 Article from the Eighth Directive Relevant Law in Kosovo Comment right to take appropriate action. 5. The appointed persons in the KCFR must finance and audit requirement. 6. The system of public oversight shall be meet the following qualification criteria: No referral to the option of practitioners transparent. This shall include the publication of 5.1. University Degree in Accounting, in the system in the Law. annual work programmes and activity reports. Finance, Business Administration, or Law; 7. The system of public oversight shall be 5.2. at least eight (8) years of work There is no reference in the Law that adequately funded. The funding for the public experience in the field of accounting, finance KFCR shall have the right, where oversight system shall be secure and free from any and audit; necessary, to conduct investigations in undue influence by statutory auditors or audit 5.3. a good reputation and relevant relation to statutory auditors and audit firms. professional skills; firms and the right to take appropriate 6. The Government may, upon proposal of action. the institutions, according to paragraph 2. of this Article discharge the Chairman and The Law requires the KFRC to publish members of KCFR on the grounds of: its annual work report but activity 6.1. having gravely infringed the Law, or bad reports are only submitted to the performance; Government with no requirement of 6.2. being sentenced for a criminal offence publication. for more than six (6) months by a plenipotentiary verdict; The KFCR financed by the budget of 6.3. legal administration, bankruptcy, or Kosovo, its own income as well as compulsory liquidation, from the Court or donations. This may open the door for any competent authority, of each company statutory auditors or audit firms as under the ownership, or being ran directly or donations can also come from them. indirectly, of the member; "Own income" has not been interpreted 6.4. being married to, or having second to date, i.e., can KFCR impose levies on degree family relationship with another the firms and auditors it regulates? member or official of KCFR; 7. The Chairman, or member, of KCFR shall submit to the Government a Letter of Resignation for further procedures. Kosovo – ROSC Accounting & Auditing Update Page 116 Article from the Eighth Directive Relevant Law in Kosovo Comment 8. In the event of discharge, death, or resignation from KCFR, the Government shall appoint a new member no later than sixty (60) days. The member appointed on such occasion shall serve in lieu of the member being replaced and may get reappointed. 9. The meetings of KCFR shall be held if five (5) members at least are present. The Council shall make a decision upon the majority of votes of the member being present. In the event of equal votes, the Chairman's vote shall be decisive. 10. KCFR shall convene when it is necessary. 11. KCFR shall be supported by a sufficient number of personnel in carrying out its duties as stipulated in Articles 14 paragraph 3. and Article 15 of this Law. 12. Each KCFR member shall receive an honorarium for the meetings held and shall be compensated on the reasonable expenditures as a result of meetings and deeds of KCFR. Procedure of the compensation is determined by the sub- legal act issued by the minister. 13. KCFR is financed by the Budget of Republic of Kosovo, its own income as well as donations. Kosovo – ROSC Accounting & Auditing Update Page 117 Article from the Eighth Directive Relevant Law in Kosovo Comment 14. KCFR issues its own regulation of duties and work. Article 14 KCFR functions and responsibilities 1. KCFR functions are: 1.1. to draft and approve Kosovo Accounting Standards in accordance with International Accounting Standards IAS/IFRS and relevant EU directives; 1.2. supervise and implement Auditing Standards in accordance with ISA and relevant EU directives; 1.3. licensing and keeping register of auditors as well as of the audit firms and professional associations of accounting and auditing; 1.4. adoption of the standards of professional ethics, internal quality of auditing firms; 1.5. supervise continuous education, quality assurance and disciplinary system; 2. KCFR verifies international certificates of auditors and accountants. 4. The Council shall be supported by an Administrative Secretariat (hereinafter the "Secretariat"), composed of managers and other administrative officers, in performing its functions and responsibilities under this Kosovo – ROSC Accounting & Auditing Update Page 118 Article from the Eighth Directive Relevant Law in Kosovo Comment Law. 5. The head and the employees of the Secretariat will be appointed and dismissed based on the Law on Civil Service. 6. KCRF is obliged to present financial statements for business organizations if it is required by the Tax Administration of Kosovo. Article 16 Supervision of Accountants and Auditors Associations 1. KCFR, demands from the licensed professional accountant and auditors associations to present the following documents: 1.1. a copy of the "Code of Ethics"; 1.2. report on the association proving the quality assurance programme; 1.3. report in relation to the results of the investigation and discipline in the association including the disciplinary procedures and 1.4. report on how the programme on quality of the association fulfils the requirements of the directives of the statutory audit of the European Union. Kosovo – ROSC Accounting & Auditing Update Page 119 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 17 KFRC reporting 1. KFRC, after December 31 of each year and up to June 30, must submit a report to the Government regarding the: 1.1. performance of KFRC and its commissions; 1.2. achievement of objectives set out for the ended fiscal year; 2. KFRC publishes the annual work report. 3. KCFR publishes written statements on policies, sub-legal acts which will assist in enforcing accounting and auditing standards in Kosovo, professional and educational standards, requirements for auditor independence, including external quality assurance reviews and disciplinary procedures. 4. KFRC may publish instructions to business organizations to implement certain standards (IAS/IFRS) appropriate for business organizations. 5. Standards, policies and sub-legal acts that are already issued by the Kosovo Board on Standards for Financial Reporting will be in effect pending KCFR amendments. 6. Accounting and auditing standards and sub-legal acts and other documents issued by Kosovo – ROSC Accounting & Auditing Update Page 120 Article from the Eighth Directive Relevant Law in Kosovo Comment KCFR shall be published on the KCFR website, according to the Law No. 02/L-37 on Use of Languages. 7. KCFR maintains a public register of all legal auditors and statutory auditing firms. Article 33 No reference in the Law Cooperation between public oversight systems at Community level Member States shall ensure that regulatory arrangements for public oversight systems permit effective cooperation at Community level in respect of Member States' oversight activities. To that end, each Member State shall make one entity specifically responsible for ensuring that cooperation. Article 34 No reference in the Law Mutual recognition of regulatory arrangements between Member States 1. Regulatory arrangements of Member States shall respect the principle of home-country regulation and oversight by the Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office. 2. In the case of a statutory audit of consolidated Kosovo – ROSC Accounting & Auditing Update Page 121 Article from the Eighth Directive Relevant Law in Kosovo Comment accounts, the Member State requiring the statutory audit of the consolidated accounts may not impose additional requirements in relation to the statutory audit concerning registration, quality assurance review, auditing standards, professional ethics and independence on a statutory auditor or audit firm carrying out a statutory audit of a subsidiary established in another Member State. 3. In the case of a company whose securities are traded on a regulated market in a Member State other than that in which that company has its registered office, the Member State in which the securities are traded may not impose any additional requirements in relation to the statutory audit concerning registration, quality assurance review, auditing standards, professional ethics and independence on a statutory auditor or audit firm carrying out the statutory audit of the annual or consolidated accounts of that company. Kosovo – ROSC Accounting & Auditing Update Page 122 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 35 The KFRC is competent authority for Designation of competent authorities the purpose of the tasks provided by the Law. Members of the Council cannot 1. Member states shall designate one or more hold public office nor be a political competent authorities for the purpose of the appointee tasks provided for in this Directive. Member States shall inform the Commission of their designation. 2. The competent authorities shall be organized in such a manner that conflict of interests are avoided. Article 36 There is no reference to professional Professional secrecy and regulatory cooperation secrecy and regulatory cooperation between Member States between Member States. The competent authorities of Member States responsible for approval, registration, quality assurance, inspection and discipline shall cooperate with each other whenever necessary for the purpose of carrying out their respective responsibilities under this Directive. The competent authorities in a Member State responsible for approval, registration, quality assurance, inspection and discipline shall render assistance to competent authorities in other Member States. In particular, competent authorities shall exchange information and cooperate in investigations related to the Kosovo – ROSC Accounting & Auditing Update Page 123 Article from the Eighth Directive Relevant Law in Kosovo Comment carrying-out of statutory audits. 2. The obligation of professional secrecy shall apply to all persons who are employed or who have been employed by competent authorities. Information covered by professional secrecy may not be disclosed to any other person or authority except by virtue of the laws, regulations or administrative procedures of a Member State. 3. Paragraph 2 shall not prevent competent authorities from exchanging confidential information. Information thus exchanged shall be covered by the obligation of professional secrecy, to which persons employed or formerly employed by competent authorities are subject. 4. Competent authorities shall, on request, and without undue delay, supply any information required for the purpose referred to in paragraph 1. Where necessary, the competent authorities receiving any such request shall, without undue delay, take the necessary measures to gather the required information. Information thus supplied shall be covered by the obligation of professional secrecy to which the persons employed or formerly employed by the competent authorities that received the information are subject. If the requested competent authority is not able to supply the required information without undue delay, it shall notify the requesting competent Kosovo – ROSC Accounting & Auditing Update Page 124 Article from the Eighth Directive Relevant Law in Kosovo Comment authority of the reasons therefor. The competent authorities may refuse to act on a request for information where: (a) supplying information might adversely affect the sovereignty, security or public order of the requested Member State or breach national security rules; or (b) judicial proceedings have already been initiated in respect of the same actions and against the same statutory auditors or audit firms before the authorities of the requested Member State; or final judgment has already been passed in respect of the same actions and on the same statutory auditors or audit firms by the competent authorities of the requested Member State. Without prejudice to the obligations to which they are subject in judicial proceedings, competent authorities which receive information pursuant to paragraph 1 may use it only for the exercise of their functions within the scope of this Directive and in the context of administrative or judicial proceedings specifically related to the exercise of those functions. 5. Where a competent authority concludes that activities contrary to the provisions of this Directive are being or have been carried out on the territory of another Member State, it shall notify the competent authority of the other Member State of that conclusion in as specific a manner as Kosovo – ROSC Accounting & Auditing Update Page 125 Article from the Eighth Directive Relevant Law in Kosovo Comment possible. The competent authority of the other Member State shall take appropriate action. It shall inform the notifying competent authority of the outcome and, to the extent possible, of significant interim developments. 6. A competent authority of one Member State may also request that an investigation be carried out by the competent authority of another Member State on the latter's territory. It may further request that some of its own personnel be allowed to accompany the personnel of the competent authority of that other Member State in the course of the investigation. The investigation shall be subject throughout to the overall control of the Member State on whose territory it is conducted. The competent authorities may refuse to act on a request for an investigation to be carried out as provided for in the first subparagraph, or on a request for its personnel to be accompanied by personnel of a competent authority of another Member State as provided for in the second subparagraph, where: (a) such an investigation might adversely affect the sovereignty, security or public order of the requested Member State; or (b) judicial proceedings have already been initiated in respect of the same actions and against the same persons before the authorities of the requested Member State; or final judgment has already been Kosovo – ROSC Accounting & Auditing Update Page 126 Article from the Eighth Directive Relevant Law in Kosovo Comment passed in respect of the same actions on such persons by the competent authorities of the requested Member State. 7. The Commission may adopt implementing measures in order to facilitate cooperation between competent authorities on the procedures for the exchange of information and modalities for cross-border investigations provided for in paragraphs 2 to 4 of this Article. Those measures, designed to amend nonessential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 48(2a). Article 37 There is no referral to this provision in Appointment of statutory auditors or audit the Law on accounting, financial firms reporting and audit. 1. The statutory auditor or audit firm shall be The Law on banks, microfinance appointed by the general meeting of shareholders institiotions and non-bank financial or members of the audited entity. institutions requires that the external 2. Member States may allow alternative systems or auditor of the banks be appointed by the modalities for the appointment of the statutory general meeting if shareholders auditor or audit firm, provided that those systems The Law on Business Organizations or modalities are designed to ensure the requires shareholders of the joint stock independence of the statutory auditor or audit firm companies to approve auditors. from the executive members of the administrative body or from the managerial body of the audited entity. Kosovo – ROSC Accounting & Auditing Update Page 127 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 38 No reference in the Law Dismissal and resignation of statutory auditors or audit firms 1. Member States shall ensure that statutory auditors or audit firms may be dismissed only where there are proper grounds. Divergence of opinions on accounting treatments or audit procedures shall not be proper grounds for dismissal. 2. Member States shall ensure that the audited entity and the statutory auditor or audit firm inform the authority or authorities responsible for public oversight concerning the dismissal or resignation of the statutory auditor or audit firm during the term of appointment and give an adequate explanation of the reasons therefor. Kosovo – ROSC Accounting & Auditing Update Page 128 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 39 N/A Application to non-listed public interest entities Member States may exempt public-interest entities which have not issued transferable securities admitted to trading on a regulated market within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC and their statutory auditor(s) or audit firm(s) from one or more of the requirements in this Chapter. Article 40 No reference in the Law Transparency report 1. Member States shall ensure that statutory auditors and audit firms that carry out statutory audit(s) of public-interest entities publish on their websites, within three months of the end of each financial year annual transparency reports that include at least the following: a) A description of the legal structure and ownership b) Where the audit firm belongs to a network , a description of the network and the legal and structural arrangements in the network c) A description of the governance structure of the audit firm d) A description of the internal quality control system of the audit firm and a statement by the administrative or management body on the Kosovo – ROSC Accounting & Auditing Update Page 129 Article from the Eighth Directive Relevant Law in Kosovo Comment effectiveness of its functioning e) An indication of when the last quality assurance review referred to in Article 29 took place f) A list of public-interest entities for which the audit firm has carried out statutory audits during the preceding financial year g) A statement concerning the audit firm's independence practices which also confirms that an internal review of independence compliance has been conducted h) A statement on the policy followed by the audit firm concerning the continuing education of statutory auditors referred to in Article 13 i) Financial information showing the importance of the audit firm, such as the total turnover divided into fees from the statutory audit of annual and consolidated accounts, and fees charged for other assurance services, tax advisory services and other non-audit services j) Information concerning the basis for the partners' remuneration Member States may in exceptional circumstances disapply the requirement in point (f) to the extent necessary to mitigate an imminent and significant threat to the personal security of any person. 2. The transparency report shall be signed by the statutory auditor or audit firm, as the case may be. This can be done, for example, by means of an electronic signature as defined in Article Kosovo – ROSC Accounting & Auditing Update Page 130 Article from the Eighth Directive Relevant Law in Kosovo Comment 2(1) of Directive 1999/93/EC Article 41 Article 181 (joint stock comany) of the Law No reference in the Law on accounting, Audit committee on Business Organizations financial reporting and auditing. 1. Each public-interest entity shall have an audit Committees of the Board committee. The charter or bylaws may establish, or the The Law on Business organizations The Member State shall determine whether audit directors may adopt a resolution establishing, provides an option for joint stock committees are to be composed of non-executive one or more committees, such as an audit or company to have audit committee (not members of the administrative body and/or a remuneration committee review, study, mandatory). No requirement that at least members of the supervisory body of the audited make recommendations on, or take other one of the members of the committee entity and/or members appointed by the general non-binding action with respect to matters shall be independent and shall have meeting of shareholders of the audited entity. At which are within the competence of the competence in accounting and or least one member of the audit committee shall be board. auditing. No referral to the duties of the independent and shall have competence in These committees may include members committee. accounting and/or auditing. from the Board of Directors and company In public-interest entities which meet the criteria of employees as well as persons outside the The Law on banks, microfinance Article 2(1), point (f) of Directive 2003/71/EC (1), company. institutions and non-bank financial Member States may permit the functions assigned institutions requires the board of to the audit committee to be performed by the directors of banks to establish an audit administrative or supervisory body as a whole, commite the members of which are provided at least that when the chairman of such a selected from among the non-executive body is an executive member, he or she is not the directors and external experts. A Kosovo – ROSC Accounting & Auditing Update Page 131 Article from the Eighth Directive Relevant Law in Kosovo Comment chairman of the audit committee. majority of the members of the Audit 2. Without prejudice to the responsibility of the Committee shall be non-executive members of the administrative, management or directors. At least one member of the supervisory bodies, or of other members who are Audit Committee shall be an outside appointed by the general meeting of shareholders expert in the field of accounting or audit of the audited entity, the audit committee shall, who meets the criteria for independence inter alia: of directors in Article 26, Paragraph 3. (a) monitor the financial reporting process; of this law. The Audit Committee shall: (b) monitor the effectiveness of the company's 1.1. meet at least quarterly and at such internal control, internal audit where applicable, other times as provided for in the by- and risk management systems; laws; 21 (c) monitor the statutory audit of the annual and consolidated accounts; 1.2. recommend appropriate accounting, (d) review and monitor the independence of the operational and administrative internal statutory auditor or audit firm and in particular the controls; provision of additional services to the audited 1.3. supervise the bank's compliance entity. with policies and procedures; 3. In a public-interest entity, the proposal of the 1.4. request and review reports from the administrative or supervisory body for the bank's chief internal auditor; appointment of a statutory auditor or audit firm 1.5. recommend compensation for the shall be based on a recommendation made by the chief internal auditor; audit committee. 1.6. monitor compliance with this Law 4. The statutory auditor or audit firm shall report to and applicable regulations or orders; the audit committee on key matters arising from the 1.7. recommend the appointment of an statutory audit, and in particular on material external auditor pursuant to Article 54 weaknesses in internal control in relation to the of this law; financial reporting process. 1.8. monitor the performance of the 5. Member States may allow or decide that the external auditor, review the external provisions laid down in paragraphs 1 to 4 shall not auditor's report on the bank's financial Kosovo – ROSC Accounting & Auditing Update Page 132 Article from the Eighth Directive Relevant Law in Kosovo Comment apply to any public interest entity that has a body statements and report any findings to the performing equivalent functions to an audit Board of Directors; and committee, established and functioning according 1.9. deliver opinions to the Board of to provisions in place in the Member State in which Directors on any matters submitted to it the entity to be audited is registered. In such a case by the Board of Directors, or that the the entity shall disclose which body carries out committee wishes to address. these functions and how it is composed. 6. Member States may exempt from the obligation The Law on banks, microfinance to have an audit committee: institutions and non bank financial (a) any public-interest entity which is a subsidiary institutions also requires microfinance undertaking within the meaning of Article 1 of institutions to have an audit committee Directive 83/349/EEC if the entity complies with which includes and is chaired by a non the requirements in paragraphs 1 to 4 of this Article executive member of the Board of at group level; Directors, and at least one member of (b) any public-interest entity which is a collective the committee may be an outside exert investment undertaking as defined in Article 1(2) in the field of accounting or audit of Directive 85/611/EEC. Member States may also exempt public-interest entities the sole object of which is the collective investment of capital provided by the public, which operate on the principle of risk spreading and which do not seek to take legal or management control over any of the issuers of its underlying investments, provided that those collective investment undertakings are authorised and subject to supervision by competent authorities and that they have a depositary exercising functions equivalent to those under Directive 85/611/EEC; (c) any public-interest entity the sole business of Kosovo – ROSC Accounting & Auditing Update Page 133 Article from the Eighth Directive Relevant Law in Kosovo Comment which is to act as issuer of asset-backed securities as defined in Article 2(5) of Commission Regulation (EC) No 809/ 2004 (2). In such instances, the Member State shall require the entity to explain to the public the reasons for which it considers it not appropriate to have either an audit committee or an administrative or supervisory body entrusted to carry out the functions of an audit committee; (d) any credit institution within the meaning of Article 1(1) of Directive 2000/12/EC whose shares are not admitted to trading on a regulated market of any Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC and which has, in a continuous or repeated manner, issued only debt securities, provided that the total nominal amount of all such debt securities remains below EUR 100 000 000 and that it has not published a prospectus under Directive 2003/71/EC. Article 42 No reference in the Law Independence 1. In addition to the provisions laid down in Articles 22 and 24, Member States shall ensure that The Law on Banks, microfinance statutory auditors or audit firms that carry out the institutions and non bank financial statutory audit of a public-interest entity: institutions prescribes that the Central (a) confirm annually in writing to the audit Bank may prescribe by regulation a committee their independence from the audited requirement for rotation of auditors or public-interest entity; engagement partners of audit firms after Kosovo – ROSC Accounting & Auditing Update Page 134 Article from the Eighth Directive Relevant Law in Kosovo Comment (b) disclose annually to the audit committee any a specified period of time to ensure additional services provided to the audited entity; continued independence. The CBK shall and have authority to require the removal or (c) discuss with the audit committee the threats to replacement of an auditor, or to directly their independence and the safeguards applied to appoint, remove, or replace an auditor, mitigate those threats as documented by them at the expense of the bank to do a re- pursuant to Article 22(3). audit, if the bank or the auditor fails to 2. Member States shall ensure that the key audit meet the requirements of this Article or partner(s) responsible for carrying out a statutory where the CBK is not reasonably audit rotate(s) from the audit engagement within a satisfied with the auditor's performance. maximum period of seven years from the date of appointment and is/are allowed to participate in the audit of the audited entity again after a period of at least two years. 3. The statutory auditor or the key audit partner who carries out a statutory audit on behalf of an audit firm shall not be allowed to take up a key management position in the audited entity before a 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. Article 43 There is no reference to quality Quality assurance assurance review in the Law for The quality assurance review referred to in Article statutory auditors or audit firms that 29 shall be carried out at least every three years for carry out statutory audits of public- statutory auditors or audit firms that carry out interest entities. statutory audits of public-interest entities. Kosovo – ROSC Accounting & Auditing Update Page 135 Article from the Eighth Directive Relevant Law in Kosovo Comment Article 44 Article 21 Council, as a competent authority, may Approval of auditors from third countries Conditions issue an audit licence to foreign auditors 1. Subject to reciprocity, the competent authorities 4. KCFR may license foreign auditors to if they fulfil the requirements of a Member State may approve a third-country undertake statutory auditing in Kosovo; auditor as statutory auditor if that person has however they must comply with the furnished proof that he or she complies with minimum requirements set out in paragraph requirements equivalent to those laid down in 1 of this Article. Articles 4 and 6 to 13. 2. The competent authorities of a Member State shall, before granting approval to a third-country auditor who meets the requirements of paragraph 1, apply the requirements laid down in Article 14. Article 45 No such provision in the Law Registration and oversight of third-country auditors and audit entities 1. The competent authorities of a Member State shall, in accordance with Articles 15 to 17, register every third-country auditor and audit entity that provides an audit report concerning the annual or consolidated accounts of a company incorporated outwith the Community whose transferable securities are admitted to trading on a regulated market of that Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC, except when the company is an issuer exclusively Kosovo – ROSC Accounting & Auditing Update Page 136 Article from the Eighth Directive Relevant Law in Kosovo Comment of debt securities admitted to trading on a regulated market in a Member State within the meaning of Article 2(1)(b) of Directive 2004/109/EC (1), the denomination per unit of which is at least EUR 50 000 or, in case of debt securities denominated in another currency, equivalent, at the date of issue, to at least EUR 50 000. 2. Articles 18 and 19 shall apply. 3. Member States shall subject registered third- country auditors and audit entities to their systems of oversight, their quality assurance systems and their systems of investigation and penalties. A Member State may exempt a registered third- country auditor or audit entity from being subject to its quality assurance system if another Member State's or third country's system of quality assurance that has been assessed as equivalent in accordance with Article 46 has carried out a quality review of the third-country auditor or audit entity concerned during the previous three years. 4. Without prejudice to Article 46, audit reports concerning annual accounts or consolidated accounts referred to in paragraph 1 of this Article issued by third-country auditors or audit entities that are not registered in the Member State shall Article 21 KFRC may register a foreign audit firm have no legal effect in that Member State. Conditions if it fulfils the requirements laid down 5. A Member State may register a third-country 5. KCFR licenses local and foreign audit by the Law. The Law does not require audit entity only if: firms if they: firm to publish transparency report. (a) it meets requirements which are equivalent to 5.1. have an office in Kosovo; (also see comments for article 3 of the Kosovo – ROSC Accounting & Auditing Update Page 137 Article from the Eighth Directive Relevant Law in Kosovo Comment those laid down in Article 3(3); 5.2.establish a business organization Directive) (b) the majority of the members of the registered in Kosovo, with at least two (2) administrative or management body of the third- licensed Auditors, under this law; country audit entity meet requirements which are 5.3. it is managed by Auditors, members of a equivalent to those laid down in Articles 4 to 10; licensed professional accounting and (c) the third-country auditor carrying out the audit auditing association in Kosovo. on behalf of the third-country audit entity meets 6. KCFR approves a foreign or local auditing requirements which are equivalent to those laid firm only if it complies with the Law on down in Articles 4 to 10; Business Organizations and the business is (d) the audits of the annual or consolidated registered as: accounts referred to in paragraph 1 are carried out 6.1. an individual business with a Auditor as in accordance with international auditing standards manager; as referred to in Article 26, as well as the 6.2. a general or limited liability partnership requirements laid down in Articles 22, 24 and 25, with all managing partners; or with equivalent standards and requirements; 6.3. a limited liability company with the (e) it publishes on its website an annual majority of voting rights retained by the transparency report which includes the information manager in such a way that, under the firm referred to in Article 40 or it complies with charter, the key partners are enabled to equivalent disclosure requirements. administer their general policies or to amend 6. In order to ensure uniform application of its charter. paragraph 5(d), the equivalence referred to therein 7. Persons who are licensed by KCFR as shall be assessed by the Commission in cooperation foreign Auditors can become managers of an with Member States and shall be decided upon by audit firm registered in Kosovo, if they hold the Commission in accordance with the regulatory at least the majority of voting rights in the procedure referred to in Article 48(2). Member management board or to retain such rights States may assess the equivalence referred to in which, under the charter of the firm, enable paragraph 5(d) of this Article as long as the them to manage their general policies or to Commission has not taken such a decision. In this amend its charter. context, the Commission may adopt measures Kosovo – ROSC Accounting & Auditing Update Page 138 Article from the Eighth Directive Relevant Law in Kosovo Comment aimed at establishing general equivalence criteria in accordance with the requirements laid down in Articles 22, 24, 25 and 26 which are applicable to all third countries and which shall be used by Member States when assessing equivalence at national level. The criteria may not exceed the requirements laid down in Articles 22, 24, 25 and 26. Those measures, designed to amend non- essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 48(2a). Article 46 No such provision in the Law Derogation in the case of equivalence 1. Member States may disapply or modify the requirements in Article 45(1) and (3) on the basis of reciprocity only if the third country auditors or audit entities are subject to systems of public oversight, quality assurance and investigations and penalties in the third country that meet requirements equivalent to those of Articles 29, 30 and 32. 2. In order to ensure uniform application of paragraph 1, the equivalence referred to therein shall be assessed by the Commission in cooperation with Member States and shall be decided upon by the Commission in accordance with the regulatory procedure referred to in Article 48(2). Member Kosovo – ROSC Accounting & Auditing Update Page 139 Article from the Eighth Directive Relevant Law in Kosovo Comment States may assess the equivalence referred to in paragraph 1 of this Article or rely on the assessments carried out by other Member States as long as the Commission has not taken such a decision. If the Commission decides that the requirement of equivalence referred to in paragraph 1 of this Article is not complied with, it may allow the auditors and audit entities concerned to continue their audit activities in accordance with the requirements of the relevant Member State during an appropriate transitional period. In this context, the Commission may adopt measures aimed at establishing general equivalence criteria in accordance with the requirements laid down in Articles 29, 30 and 32 which are applicable to all third countries and which shall be used by Member States when assessing equivalence at national level. The criteria may not exceed the requirements laid down in Articles 29, 30 and 32. Those measures, designed to amend non essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 48(2a). 3. Member States shall communicate to the Commission: (a) their assessments of the equivalence referred to in paragraph 2; and (b) the main elements of their cooperative arrangements with third country systems of public Kosovo – ROSC Accounting & Auditing Update Page 140 Article from the Eighth Directive Relevant Law in Kosovo Comment oversight, quality assurance and investigations and penalties, on the basis of paragraph 1. Article 47 No such provision in the Law Cooperation with competent authorities from third countries 1. Member States may allow the transfer to the competent authorities of a third country of audit working papers or other documents held by statutory auditors or audit firms approved by them, provided that: (a) those audit working papers or other documents relate to audits of companies which have issued securities in that third country or which form part of a group issuing statutory consolidated accounts in that third country; (b) the transfer takes place via the home competent authorities to the competent authorities of that third country and at their request; (c) the competent authorities of the third country concerned meet requirements which have been declared adequate in accordance with paragraph 3; (d) there are working arrangements on the basis of Kosovo – ROSC Accounting & Auditing Update Page 141 Article from the Eighth Directive Relevant Law in Kosovo Comment reciprocity agreed between the competent authorities concerned; (e) the transfer of personal data to the third country is in accordance with Chapter IV of Directive 95/46/EC. 2. The working arrangements referred to in paragraph 1(d) shall ensure that: (a) justification as to the purpose of the request for audit working papers and other documents is provided by the competent authorities; (b) the persons employed or formerly employed by the competent authorities of the third country that receive the information are subject to obligations of professional secrecy; (c) the competent authorities of the third country may use audit working papers and other documents only for the exercise of their functions of public oversight, quality assurance and investigations that meet requirements equivalent to those of Articles 29, 30 and 32; (d) the request from a competent authority of a third country for audit working papers or other documents held by a statutory auditor or audit firm can be refused: — where the provision of those working papers or documents would adversely affect the sovereignty, security or public order of the Community or of the requested Member State, or — where judicial proceedings have already been Kosovo – ROSC Accounting & Auditing Update Page 142 Article from the Eighth Directive Relevant Law in Kosovo Comment initiated in respect of the same actions and against the same persons before the authorities of the requested Member State. 3. In order to ensure uniform application of paragraph 1(c), the adequacy referred to therein shall be assessed by the Commission in cooperation with Member States and shall be decided upon by the Commission in accordance with the regulatory procedure referred to in Article 48(2). Member States shall take the measures necessary to comply with the Commission's Decision. Such assessment of adequacy shall be based on the requirements of Article 36 or essentially equivalent functional results. Any measures taken in this context, designed to amend non essential elements of this Directive by supplementing it and aiming at facilitating cooperation between competent authorities shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 48(2a). 4. In exceptional cases and by way of derogation from paragraph 1, Member States may allow statutory auditors and audit firms approved by them to transfer audit working papers and other documents directly to the competent authorities of a third country, provided that: (a) investigations have been initiated by the competent authorities in that third country; (b) the transfer does not conflict with the Kosovo – ROSC Accounting & Auditing Update Page 143 Article from the Eighth Directive Relevant Law in Kosovo Comment obligations with which statutory auditors and audit firms are required to comply in relation to the transfer of audit working papers and other documents to their home competent authority; (c) there are working arrangements with the competent authorities of that third country that allow the competent authorities in the Member State reciprocal direct access to audit working papers and other documents of that third country's audit entities; (d) the requesting competent authority of the third country informs in advance the home competent authority of the statutory auditor or audit firm of each direct request for information, indicating the reasons there for; (e) the conditions referred to in paragraph 2 are respected. 5. The Commission may specify the exceptional cases referred to in paragraph 4 of this Article in order to facilitate cooperation between competent authorities and to ensure the uniform application of paragraph 4 of this Article. That measure, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 48(2a). 6. Member States shall communicate to the Commission the working arrangements referred to in paragraphs 1 and 4. Kosovo – ROSC Accounting & Auditing Update Page 144