Implementation of IAS in Macedonia Verica Hadzi Vasileva-Markovska

1. Implementation of IAS in MacedoniaVerica Hadzi Vasileva-Markovska ERNST & YOUNGOECD Roundtable, OhridJune 9-10, 2004

2. Ownership structure • Difuse ownership structure (insiders) • Principal agent problem in Macedonia • Management shareholders • Higher information asymmetries: insiders have a complete grasp of information: proper regulation is needed • Obvious need for internationally recognized accounting language: IFRS

3. IAS in Macedonia • Nominal acceptance of IFRS by laws • Several studies on factual incompliance • Macedonian transparency and disclosure framework best described as inconclusive

4. Legislative framework • Law on Trade Companies: IFRS • Banking Law • Law on Supervision of Insurance • Reference to GAAP • Law on National Bank: IFRS • Securities Law: no reference • Law on Accounting for Budgets and Budgetary Users: IFRS • Law on Audits and Law on State Law: ISA

5. Legislative framework - continue • Laws covering the accounting, audit and reporting requirements are nominally converging towards the adoption of IFRS as national standards. • Several things can be observed: • Laws use different terminologies, not always in compliance with the IFRS, • Not always in full compliance to one another, • There are some redundant forms of over-regulations, • Some other deficiencies, which need refinement. • Still, a noticeable progress is visible: • Trade Company Law: IFRS as national standards with yearly updating of the published IFRS.

6. Legislative framework - conclusion • It seems that what is in the Laws may be not perfectly and consistently spelled out, but the intention is clear and it allows the professional bodies in the country to act and fine-tune the additional regulation and the institutional set-up, in order for the international financial reporting standards to be fully embraced and truly become the main reporting framework in the country.

7. Accounting Profession in Macedonia • The weakest link in the institutional framework for the accountng, auditing and reporting structures. • Absence of an appropriately organized professional organization of accountants and auditors, although three times efforts have been made: • The first and the oldest organization: Association of Accountants, Financial Workers, and Auditors. • Macedonian Association of Certified Auditors and • Council of Certified Auditors. • For the time being, none of the organizations seems to work and the process of organizing the profession seems to be at a worst stage than ever. Professionals have not proved so far to be either willing or able to put sufficient effort in building the professional quality assurance process and any novel processes in this respect will have to be backed fully and openly either by the Government or the international community (or both). Embarassing acknowledgment for the profession.

8. Ministry of Finance - regulator • Ministry of Finance acts as the main agent regulating the auditing profession: • legislation drafting activity, • regulation of professional performance of the audit professionals and audit companies, • organization and conduct of professional examinations • licensing of auditors. • Most recent developments: the new draft law on audit has entered the Government procedure. Main novelty: it insists on the establishment of a self-regulatory body – Institute of professional accountants and auditors, which will take over the common activities of such an Institute: licensing, quality control, care about permanent training of accountants, auditors, but also regulators, adherence to professional code of ethics etc.

9. Auditors in Macedonia • For the time being there are around 15 licensed audit firms in Macedonia. • All the big four are present in the country. • There are also not more than 150 licensed auditors, but not all of them are in public practice. • They don’t seem to be sufficient to efficiently respond to the massive requirement for audit of what is estimated to be a pool of 900 companies that need to be audited • Fundamental improvement: the first young holders of internationally recognized certificates are emerging in Macedonia and they are expected to be the major proponents for adherence to quality standards. Still, there is not yet a system of recognizing their certificates nationally and transferring them into national certification.

10. Enforcing Accounting Standards • There are practically no effective mechanisms enforcing the implementation of the international financial reporting standards. • Institutions: • Ministry of Finance, • The Central Registry • Securities and Exchange Commission and the Stock Exchange • National Bank of the Republic of Macedonia • Insurance Supervision Department of the Ministry of Finance • The real enforcement agent for enforcing the financial reporting standards should be the professiomal association of auditors. No external quality assurance process, this needs immediate address and action.

11. Areas of Difference • Conceptual Framework. • Interpretations of IFRS. • Investment property. IFRS 40 had not been adopted in Macedonia, because of the implementation of the 1999 translation of IFRS. Fixed assets and intangiblke assets. Provisions. • Bank regulatory reporting requirements dominate over the standards prescribed for the general-purpose reporting. • Studies found reports including only balance sheet and income statements, without cash flow statement, statement of changes of equity, accounting policies and notes disclosures. • General purpose financial statements are often influenced more by taxation rules, rather than by the IFRS requirements. • Several variations were noticed in the reviewed of a sample of IFRS based financial statements.

12. Policy implications • Legal framework is not the major hindrance to embracing the IFRS. • The weakest link in the institutional framework is the absence of an appropriately organized professional organization of accountants and auditors. Once the Institute is in place and operational, a project of refreshing and harmonizing all legislation. • A system of recognizing the international certificates nationally. • Larger authority for monitoring and enforcement of the general-purpose reporting should be given to the SEC, SE, Central Bank, Insurance Supervisory Department in the Ministry of Finance and especially to the professional association. • More profound and permanent professional education and training: University curricula, professional education and training of accountants and auditors, training of regulators. • A well-designed and implemented public awareness program that would increase the public demand for good corporate disclosure and transparency.