Kyiv – 14 October 2011 Petr Šobotník – President KAČR

1. Kyiv – 14 October 2011Petr Šobotník – President KAČR Czech Audit Market Current Topics and Challenges

2. Petr Šobotník - Introduction • Born in 1954 • Accounting background ( 1980 – 1990 ) • Joined C&Lin 1991, Partner since 1995 • Partner in PwC – 1998-2010 • Independent consultant/auditor since 2010 • President of the Czech Chamber since 2007, reelected in 2010 • FEE – member of Ethics Working party since 2004

3. Czech Economy • Population of 10.5 mio • Major privatisations completed (VW, RWE,E.ON, TPCA, Huyndai, O2, Vodafone, TMO, Philip Moris, Erste, SG, Generali, SAB Miler, Arcelor, Evraz, Siemens Skanska, Veolia ) only limited number of state owned companies ( energy, post, railways, airlines) • Modest GDP growth in 2010, further reduction of growth in 2011, growth prediction for 2012 between 1-2 %

4. Czech Audit profession • The Czech Chamber of Auditors established by law in 1993 – 18 years of operation ( amended by law in 2000) – active member of IFAC and FEE • New Act on Auditors since April 2009 – implementation of the European Directive on Statutory Audit approved in May 2006 • Self-regulatory status still in place, however Public Oversight ( not state oversight !! ) established in 2009 • Limited involvement of Ministry of Finance and Czech National Bank • Only one Chamber of Auditors in Czech Republic

5. Audit Requirements • 3 criteria – turnover ( 4 mio EUR), assets ( 2mio EUR), employees ( 50 ) • Joint stock companies – 2 criteria • Limited liabilities companies – 3 criteria • ISA ( International Standards on Auditing ) obligatory since 2006 • Accounting framework – Czech Standards, however all Public Interest Entities under IFRS since 2010, new option for multinationals to use IFRS since 2011 • IFAC Code of Ethics obligatory since 2004

6. Czech Auditors – Age structure June 2011

7. Czech Auditors – Age Structure • New auditors only exceptionally start as sole practitioners • 80 % of auditors in category 31 – 40 are employed • Sole practitioners only dominate in categories over 70 (85%) and 60 – 70 (60%) • Number of auditors stabilized – new auditors replace older generation (turnover about 40 annually)

8. Size of the Czech Market • Czech Auditors and Audit firms pay( in addition to fixed contributions ) to Chamber 0,45 % of their audit and audit related revenues – major source of income for our Chamber • Czech audit market – CZK 4bn – EUR 160 mio • However actual 2011 figure lower by 10 % - extreme pressure on our fees due to worsening of economic situation of our clients and tough competition

9. Size of the Czech Market • Fixed contributions amount for 40% of fees paid – stabilised • Variables – change in trend – after several years of growth – 2010 is the first year of decline • Big 4 dominates in variables – 70% of all variables paid by firms • Nr.5 generates only 30 % of income of Nr.4

10. New Act on Auditors - Leadership • Composition of Board –50 % rotation every 2 years • Consensus of various players • 6 members – Big 4 • 2 members – small firms (ex Big 4) • 3 members – Academicians • 2 members – small firms • 1 member – sole practitioner • Supervision + Disciplinary Committees – no changes (elected for 4 years)

11. New Act on Auditors - Leadership • Several Committees under Board • Audit • Accounting • Continuous education • Entrance to profession • SMP/SME • Public sector ( municipalities ) • Membership • Only voluntary membership in committees

12. New Act on Auditors- Chamber Office • 20 employees • Strong quality control department – 8 staff • Methodology group – 4 people • Other support functions – membership, entry to profession, continuous education

13. New Act On Auditors–Admittance to Profession • Significant liberalisation • Acceptance of various exams under given conditions increased interest to admittance • Up to 7 exams (11 in total) – Prague School of Economics • Up to 6 exams (12 in total) - ACCA • Oral exam no longer in place – hot topic • (7+3) concept to be replaced by (5+5) concept • Number of years – exams recognised • Number of years – exams to be completed • Appeal to Public Oversight possible

14. Continuous education • 40 hours annually required – each member • Priority themes under Chamber umbrella – clarified ISA´s in 2010 and 2011 • Compliance carefully monitored • Important role of Academicians in accounting and Professionals in auditing

15. New Act on Auditors – Public Oversight Supervising role • RVDA (Czech Public Oversight Board- POB) • 2 years of experience in place • supervising and appealing role namely • Presidium (6 members) in charge with 2/4/6 years of mandate – partial rotation every 2 years • Only one auditor in Presidium • nominations made by Ministry of Finance (in agreement with Czech National Bank) • Nominations proposed by various institutions (MF, CNB, Chamber of Trade, Industry Chamber, Academicians, KACR)

16. New Act on Auditors – Public Oversight Supervising role • Supervising role closely linked to quality control inspection programme • Inspections performed namely by inspectors employed by Chamber plus auditors elected into Supervision Committee, no inspections performed by POB only, POB can join any inspection and initiate new ones • Number of inspections growing • 2009 – 148 • 2010 - 191

17. New Act on Auditors – Public Oversight Supervising role • POB quality control commitee thoroughly supervises the whole process • KACR must submit to POB performance report semiannually • Historically – not all auditors inspected • Everyone must be inspected by end of 2013 • Inspection rating implies potential disciplinary treatment • Size of penalties is a topic • Both 2009 and 2010 – penalties in a range CZK 500 th. – 600 th. collected in total • 2011 over CZK 1mio (EUR 40,000)

18. New Act on Auditors – Public Oversight Supervising role • Auditors of PIE ( Public Interest Entities )inspected every 3 years; others every 6 years • C,D result – inspection in period of 2 years to be repeated • Quality in centre of inspections • Special focus on auditors of PIE • Public Interest Entity –all publicly traded entities, all financial institutions, big companies with employees over 4000

19. Conclusion • Keyaspectsofauditor´sworkstillvalid • Independence,Objectivity,Confidentiality,Professional care • Protectionofthe public interest Strongapplicationofself-regulatorymechanismsisvital, oversight role important, but qualityworkmustbedelivered by auditors

20. Czech Audit Market Questions ? Interested more? Attend www.kacr.cz ( in Czech end English )